Study Guide

International Commercial Terms (Incoterms®)

Learning Objectives Identify the 11 Incoterms® 2020 rules and classify each by transport mode and seller/buyer obligation. Describe how Incoterms® determine the point at which risk and responsibility transfer from seller to buyer. Explain how the choice of Incoterm affects insurance obligations for the seller and buyer.

Possibly the most important clause in an international contract of sale is the one that defines the agreed trade terms between the seller and the buyer. These terms establish three things for each party:

• Which responsibilities apply to the seller, the buyer, and their respective service providers?
• How risks are divided between seller and buyer
• How costs are divided between seller and buyer

Note At every point in the supply chain, legal responsibility for the goods rests with either the seller or the buyer. Responsibility covers carriage, risk, and costs.

International Supply Chain

In commodity trade, standard contract forms have developed to meet the specific requirements of different goods — oil, timber, grain — each with distinct handling, shipping, and payment conditions. These are often performed under charterparties[1], with detailed provisions for loading, unloading, inspection, and payment. Manufactured goods follow similar conventions, with parties either using industry-standard terms or negotiating bespoke contracts.

Because the CISG applies only between parties in different States, an international sale usually involves goods crossing at least one border. It is therefore necessary to clearly define how functions, costs, and risks are allocated between the buyer and the seller.

The key questions are:

• Who arranges carriage?
• Who handles customs formalities?
• Who bears the risk if goods are lost or damaged in transit?

These issues are addressed by trade terms. The most widely used are those developed by the International Chamber of Commerce, known as Incoterms® — a standardized shorthand that divides responsibility clearly between seller and buyer.

Incoterms® were first introduced in 1936. The current version, Incoterms® 2020, took effect in January 2020. There are 11 terms, organized into four Groups and two categories based on obligations, risk, and costs. The table below lists all 11 terms by Group and mode of transport.