The structure of Incoterms® and their impact on the cost and risks of transportations: four golden rules to operate in security

An economic operator who seeks to use the Incoterms® 2020 may make the key effort in attempting to memorize the content of each delivery term.

In order to avoid such a thing, it is suggested to compare the most important duties of the vendor with those of the buyer, following the procedure suggested by ICC.

The object of this comparison is to detect what would the repartition between the vendor and buyer duties be, into each delivery term, trying to respond to the following questions:

i) Who pays the major transport?
ii) How and where does the delivery take place?
iii) Where and when does the transfer of risk occur?
iv) Who sustains the costs and risks of the rest of it (including for instance: customs document, goods control, packaging, tagging)?

In order to respond to these questions in the most feasible manner, it would be useful to divide the Incoterms® according to the traditional system in the following four major categories:
-E Terms: Ex works (EXW)
– F Terms: Free Carrier (FCA), Free Alongside Ship (FAS), Free On Board (FOB)
– C Terms: Cost and Freight (CFR), Cost Insurance and Freight (CIF), Carriage Paid To (CPT), Carriage and Insurance Paid to (CIP)
– D Terms: Delivery At Place (DAP), Delivery At Place Unloaded (DPU), Delivery Duty Paid (DDP).

Having made such distinction, it will be easier to remember that the duties and the risks charged to the vendor increase moving from Group E towards Group D, in particular:

-Group E foresees the minimum dues for the vendor, including making the goods available to the buyer in the latter’s location without loading them on board, with transport costs charged on the buyer and the transfer of risk to the moment of delivery to the buyer;

-Group F provides that the vendor fulfills, at its own delivery charge, leaving the goods to the land or maritime transporter which operates the major transportation with costs at the buyer’s expense and the transfer of risk to the delivery moment to the carrier;

-Group C guarantees that the vendor should be responsible for the main transport to an agreed location, with the costs charged upon them but with transfer of risk to the buyer upon the delivery of goods to the custody of the final carrier (for CPT and CIP) or when the goods pass the ship’s rail in the port of shipment (for CFR and CIF);

-Group D foresees the highest duties upon the vendor, who accepts the costs and the risks until the final destination of the goods.

From the operative point of the view, in order to be able to control the effects of the Incoterms® delivery terms and to benefit from the mentioned advantages, the Italian exporters must follow the four golden rules:

1. Verify their own knowledge about the content and the rules expressed by the Incoterms® not only about the transport costs, but also about the delivery of the goods;

2. Verify the contractual texts adopted by the company, in terms of international sales, and generally the international distribution of the products in absence of a correct references to the Incoterms®. This verification is in order to understand if there are certain norms about the delivery location, costs and the transportation risks;

3. Verify the chance to use the Incoterms® delivery term in order to insert valid agreements about the delivery in the contract; moreover, this can help detect the competent court in case of conflicts.

Except for when decided differently, insert the chosen Incoterms® in the contract and, paying close attention, not only in the commercial invoices and in transport documents.

Luca Davini
Attorney in Milan and Turin







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