Incoterms: Frequently Asked Questions

In this article we look at all the frequently asked questions about Incoterms. You may also like our comprehensive article and relevant diagrams explaining the 2020 version of the terms here. Let us know in the comments if you need any more questions about the Incoterms answered by our experts and check in again from time to time as we expand on this list.

1. Where are Incoterms used?

Incoterms are used in almost every international trade transaction. The terms define several aspects of cross border movements of cargo such as describing the obligations of sellers and buyers in terms of who is required to arrange for carriage, who is required to purchase insurance and to what level of coverage, who is required to prepare shipping documents and execute import or export activities. The terms also define delivery points and where risk transfers from seller to buyer. Finally the terms also list out the cost allocations between sellers and buyers.

2. What are the Incoterms?

In the 2020 version of the terms, there are 11 terms to choose from. These are EXW (Ex-Works), DDP (Delivered Duty Paid), DPU (Delivered at Place Unloaded), DAP (Delivered at Place), CIF (Cost Insurance and Freight), CIP (Carriage and Insurance Paid To), CPT (Carriage Paid To), FCA (Free Carrier), FAS (Free Alongside Ship), FOB (Free on Board), CFR ( Cost and Freight).

3. Where to buy book on Incoterms 2020 ?

The book can be purchased from the ICC website. Link here. (No affiliation). An e-book is also available. The ICC or International Chamber of Commerce also offers courses on Incoterms that sometimes come with free copy of the e-book.

4. Who publishes the Incoterms?

The terms are published by the International Chamber of Commerce. The terms are updated roughly about once every 5 years.

5. Do Incoterms apply to contracts for services?

In general, the terms apply to trade in goods. They do not lend themselves very well to trade in services. However, if the trade in services includes some element in trade in goods, then the terms may still be relevant to the discussion. For example, a company may have purchased a package for face to face training to be conducted by a foreign trainer. For the purposes of the training, some demonstration sets may need to be imported. In this case, the Incoterms may be important.

6. How do Incoterms work?

The terms set out the conditions for the commonly negotiated aspects of cross border trade such as cost allocations, ownership of risk and liability and general obligations related to arranging for shipments to take place. When buyers and sellers agree to do business on any of the terms, they simplify the process of international trade, as they no longer have to negotiate many of these points from scratch. Customs authorities can also use the terms to determine the basis of taxation on imports.

7. How Incoterms affect price?

The terms determine what aspects of transportation and insurance will be borne by seller and buyer. In the EXW term, the seller has to leave the shipment ready for collection at his/her own warehouse. In DDP terms the seller has to present the shipment ready for unloading at the buyer’s warehouse. Logically, in EXW terms the invoice price will be the lowest and in DDP terms the invoice price will be the highest.

8. What Incoterms should I use for domestic shipments?

There is no restriction on the use of the terms for domestic shipments. However, the sales contract should clearly stipulate which aspects of the terms do not apply to the transaction, for example – the obligations for import and export activity.

9. What Incoterms to use for air freight?

The following terms can be used for air cargo: EXW, DDP, DPU, CIP, DAP, FCA, CPT

10. What Incoterms to use for ocean freight?

All the terms can be used for ocean transportation.

11. What do the Incoterms not cover?

The terms do not cover many aspects of trade such as revenue recognition, title transfer, conflict resolution, jurisdiction of trade law, currency of payment, method and mode of payment, exchange rates, liability on post clearance audits.

12. Which Incoterms is the most favorable for the seller?

EXW terms are the most favorable for the seller.

13. Which Incoterms is the most favorable for the buyer?

DDP is the most favorable for the buyer. Although DPU terms requires the seller to also unload the cargo at the point of delivery, DDP is the only term that requires the seller to act the importer of record in the destination country.

14. Which Incoterms are most used?

Depending on who you ask, the most commonly used terms can be CIF, FOB or FCA.

15. When does title transfer in Incoterms?

The terms do not deal with title transfer. However, they do deal with the point of delivery. Many businesses treat these terms interchangeably.

16. When do Incoterms apply?

The terms do not apply by default to any shipment. Both buyer and seller must agree to abide by the text of the terms when they wish to do trade, and only then do the terms apply.

17. Can Incoterms be modified by contract?

Yes, they can. The terms are not law or regulations. They can hence be modified as much as the traders wish. However, the more significant the alterations done, the more difficult it becomes to refer to case law or precedents in case of claims.

18. Can Incoterms 2010 still be used?

Yes they can. However, both buyer and seller must agree to the version of the terms that they want to use and this should be made clear in the sales contract.

19. Are Incoterms legally binding?

The terms are legally binding as far as the sales contract is legally binding. On their own, the terms are not legally binding as they are not the agreement or contract in themselves.

20. Are Incoterms required on a commercial invoice?

No, they are not. However, Customs may use a specific term as the basis of valuation and hence it would be prudent to indicate the term used for the transaction to minimize valuation challenges.