In international trade, even the smallest mistake in interpreting or selecting contract terms can lead to irreparable financial losses.
Many importers and exporters fall into hidden costs, legal disputes, or costly delays due to an incomplete understanding of Incoterms. Mastery of these rules is a cornerstone of professional global trade management.
What Are Incoterms and Why Do They Matter?
Incoterms (International Commercial Terms) are a set of globally recognized rules developed by the International Chamber of Commerce (ICC) to define responsibilities, costs, and risks in international contracts.
Simply put, Incoterms specify who does what, when the risk of goods transfers, and who bears shipping, insurance, and customs costs.
Without a precise understanding, parties may have differing interpretations of responsibilities, which is exactly where heavy losses occur.
Overview of Incoterms 2020
The latest Incoterms 2020 edition includes 11 rules divided into two main categories:
Maritime-specific terms: FAS, FOB, CFR, CIF
Applicable to all modes of transport: EXW, FCA, CPT, CIP, DAP, DPU, DDP
Each rule defines the scope of responsibility and costs. For example:
EXW (Ex Works): The seller only makes the goods available at their premises, and the buyer assumes all subsequent steps.
DDP (Delivered Duty Paid): The seller bears full responsibility until the goods are delivered to the destination.
Common Mistakes in Using Incoterms
Most international financial and legal disputes stem from a few simple errors:
Choosing the wrong term for the mode of transport
Using FOB for air or land shipments is incorrect, as FOB only applies to sea transport. This misalignment can result in unclear risk transfer or insurance responsibilities.Failing to specify the delivery location
Phrases like “FCA Tehran” or “CIF Bandar Abbas” without detailed clarification can lead to different interpretations. Contracts should clearly define the delivery point.Neglecting insurance and transport risk
Some assume CIF or CIP terms provide full insurance coverage, while in reality, the seller only provides minimum coverage unless otherwise specified. This oversight can leave buyers underinsured.Ignoring risk transfer timing
In many terms, risk transfers to the buyer upon delivery—even if goods are still in transit. For example, in FOB, risk passes when the goods cross the ship’s rail. Companies unaware of this may bear the full cost of transport damages.Using outdated versions
Some still rely on Incoterms 2010 or 2000. Since many responsibilities and definitions have changed, using older versions without specifying the edition can cause disputes in international arbitration.
How to Avoid Costly Mistakes
Always specify the exact version in contracts (e.g., Incoterms 2020).
Clearly define the delivery location.
Explicitly state insurance and customs responsibilities.
Consult trade or legal experts for complex agreements.
Train staff to understand the differences among terms accurately.
Role of Trading Companies in International Contracts
Professional trading companies not only manage import-export operations but also act as advisors for contract interpretation and drafting. Proper understanding of Incoterms helps companies to:
Identify potential risks before signing.
Prevent international disputes.
Reduce shipping and insurance costs by choosing the appropriate term.
Companies that proceed without relying on legal or trade consultants are effectively making major financial decisions based on guesswork—a costly error in global trade.
Conclusion
Incoterms are the universal language of international trade.
Understanding them precisely prevents disputes and forms the foundation for stable, reliable business relationships. No professional trade contract should be signed without careful analysis of Incoterms clauses. Ignoring these principles is the simplest way to lose profit and invite international conflicts.
