Incoterms rules (Incoterms 2020) are international terms of sale that facilitate trade between counterparties from different countries. What exactly are they and how can they help you in business? You will find the answers in our article.
Incoterms Rules – What are They?
Incoterms refer to International Commercial Terms. It is a set of rules developed by the International Chamber of Commerce (ICC). They define the responsibilities of sellers and buyers in international trade transactions. They address the following issues:
- Who is responsible for transporting the goods,
- When the risk and responsibility for the goods are transferred from the seller to the buyer,
- Who pays for transport insurance,
- Who is responsible for handling customs formalities.
Incoterms Rules – benefits
Incoterms make international trade simpler. They offer several advantages, such as:
| Reducing the risk of misunderstandings | Incoterms 2020 clearly define the responsibilities of both parties. This helps to avoid disputes. |
| Saving time and money | The use of standard rules facilitates negotiations and the conclusion of contracts. |
| Simpler risk management | Incoterms 2020 define who is responsible for the risk of loss or damage to goods during transport |
Types of Incoterms Rules
There are 11 basic rules of Incoterms 2020, divided into four groups (C, D, E, F). They differ in terms of:
- Scope of charges. Who bears the costs of transport, insurance, and loading of the goods?
- Risk. Who bears the risk of loss or damage to the goods during transport?
- Responsibility for formalities. Who is responsible for export and import customs clearance?
- Import and export duties. Who delivers the goods and to what location?
Groups of Incoterms Rules
The individual rules address:
- Transport of goods,
- Insurance of goods,
- Unloading.
They constitute four categories:
| Group C | – referred to as “Main Carriage Paid”, – the seller takes responsibility for organizing and paying for the transport, – the seller is also obliged to take care of export formalities, – the risk related to the goods is transferred to the buyer at the moment when the goods are handed over to the carrier; – from this point on, the buyer assumes responsibility for any additional costs and possible problems that may occur during further transport; – this group includes four Incoterms rules: CFR (Cost and Freight), CIF (Cost, Insurance and Freight), CPT (Carriage Paid To), CIP (Carriage and Insurance Paid To) |
| Group D | – also known as “Arrival” – impose the widest range of obligations on the seller, – the seller bears full responsibility for the transport of the goods, – delivery must be made to a specifically indicated location or port, – risks and costs remain with the seller until delivery of goods, – this group includes the following Incoterms 2020 rules: DAP (Delivered at Place), DPU (Delivered at Place Unloaded), DDP (Delivered Duty Paid) |
| Group E | – known as “Departure“ – characterized by the least scope of the seller’s liability, – the seller only makes the goods available to the buyer, – the place of making the goods available is determined by the sellerthe seller is not obliged to organize transport or loading, – the seller is not obligated to perform export customs clearance – the risk and costs associated with loading are not on the seller’s side, – only one Incoterms 2020 rule belongs to this group: EXW (Ex Works) – departure from warehouse. |
| Group F | – referred to as ‘Main Carriage Unpaid’ – it is characterised by a specific division of responsibilities between the seller and the buyer, – the seller is responsible for export customs clearance, – the seller prepares the goods for shipment, – the costs of the main carriage are not covered by the seller, – the seller is not obliged to pay for insurance of the goods during transport, – this group includes three Incoterms rules: FCA (Free Carrier) – delivered to the carrier, FAS (Free Alongside Ship) – delivered along the side of the ship, FOB (Free on Board) – delivered to the ship |
How to Choose the Right Incoterms Rules?
Choosing the right rules for a particular transaction depends on several factors. They include:
| Type of goods | Some Incoterms are more suitable for specific types of goods. For example EXW for large items, and DAP for low-value goods. |
| Transport conditions | You should consider the mode and length of transport (road, sea, air). |
| Division of Costs and Risks | Incoterms specify at what point in transport the risk of loss or damage to the goods and the obligations related to transport, insurance and customs clearance costs are transferred. |
| Trust between the parties | In cases where there is no trust between the transaction parties, it is advisable to use Incoterms that clearly define responsibilities and minimise the risk of disputes. For example CIF/CFR, FOB. |
Incoterms Rules – summary
Incoterms 2020 is a set of rules that facilitate international trade. They clearly define the obligations of the seller and the buyer. Thanks to them, the parties to the transaction can avoid misunderstandings and disputes. Moreover, Incoterms improve the logistics process.
If you need to learn more about Incoterms rules, feel free to contact us. Our experts will answer all your questions!
FAQ – Questions and Answers
What are Incoterms 2020?
Incoterms 2020 is a set of rules developed by the International Chamber of Commerce (ICC). They define the obligations of the seller and buyer in an international commercial transaction.
What are the benefits of using Incoterms Rules?
The use of Incoterms 2020 brings many benefits, e.g. :
– Clear division of responsibilities. The rules clearly define who is responsible for transport, insurance, customs clearance, and the risk of loss or damage.
– Avoiding misunderstandings. Incoterms 2020 minimize the risk of misunderstandings and disputes between the parties to the transaction. They are based on defined standard terms and conditions.
– Facilitating the logistics process. Using Incoterms 2020 makes the logistics process simpler and more efficient, as the parties know each other’s obligations and expectations.
– Increased legal security. Incoterms 2020 are legally binding. This provides both parties with legal certainty in the event of disputes.
When to use Incoterms Rules?
The use of Incoterms 2020 is highly recommended for all international trade transactions. In some cases, the use of Incoterms 2020 is required by law. This concerns e.g. exports from Poland.
Where can I find more information about Incoterms Rules?
For more information, please visit the official website of the International Chamber Of Commerce.
Do I need to know Incoterms Rules if I deal with international trade?
Knowledge of Incoterms 2020 is essential for any entrepreneur who conducts international trade. This helps avoid costly mistakes, misunderstandings, and disputes. Moreover, it improves logistics processes and increases the legal certainty of transactions.