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Freight resource

Choosing an Incoterms rule

Eleven rules, and most shippers use three of them out of habit. Four questions narrow the field properly, and asking them is faster than reading eleven pages.

In short

The answer before the detail.

  • Containerised or multimodal movements need the any-mode rules, not the maritime four
  • Risk and cost are separate questions and several rules split them on purpose
  • Agreeing a rule that a party cannot actually perform is a common and expensive error
  • Only two rules require insurance, and under the rest nobody is obliged to buy any
  • Name the place precisely, and name both points where the rule has two

First: is this movement containerised or multimodal?

Four of the eleven rules are written for sea and inland waterway transport, around the moment goods are loaded aboard a vessel. Containerised cargo does not have that moment in any observable sense — it passes into the carrier's system at a terminal days earlier.

So for containers and for anything moving by more than one mode, the seven any-mode rules are the appropriate family, and the maritime four are not. This single question eliminates more wrong answers than any other, and it is the question most often skipped because the maritime rules are the ones everybody has heard of.

Second: where does each side want risk to pass?

Risk and cost are separate questions, and several rules deliberately split them: the seller pays carriage a long way past the point where the goods stop being their problem. That is not a defect, it is the design, and it is where most disputes about Incoterms actually originate.

The practical version of the question is: if the goods are destroyed halfway through the journey, who has lost money? Answering that plainly, before agreeing anything, tends to change which rule the parties want.

Third: who is able to clear customs at each end?

Export clearance is generally handled by the party in the country of departure and import clearance by the party in the country of arrival, because those are the parties who can. Two rules deviate: one puts export clearance on the buyer, and one puts import clearance on the seller.

Both deviations are workable and both are frequently agreed by parties who cannot actually perform them — a seller undertaking import clearance in a country where they have no registration, or a buyer undertaking export clearance where they have no presence. Establishing capability before agreeing the rule prevents a specific and expensive kind of stuck consignment.

Fourth: does anybody have to insure it?

Only two of the eleven rules require insurance, and they require different levels of cover. Under every other rule, whoever holds the risk is uninsured unless they have bought a policy themselves.

The failure mode is quiet: both parties assume the other has cover, neither does, and nobody discovers it until there is a claim. The question is worth asking explicitly in the negotiation rather than inferring from the three-letter code.

Then name the place properly

Every rule is agreed with a named place, and several have two distinct points — one where delivery happens and one where carriage is paid to. A contract that names only a city, or only the destination, has left the operative point unstated.

Where it matters, name an address rather than a city, and name both points where the rule has two. This costs one line in a contract and removes a large share of the arguments that arise later.

Check the assumption

Common misunderstandings.

"EXW is the simplest option for a seller"

It places export formalities on the buyer, in a country where the buyer may have no presence and no ability to make a declaration. In practice the seller often ends up doing the work anyway, without the contractual position that would reflect it.

Where the intention is minimal seller involvement with a functioning export, the rule that puts the goods on the buyer's collecting vehicle with the seller handling export clearance is usually a better expression of it.

"DDP means the seller handles everything, so it is safest for a buyer"

It obliges the seller to clear the goods for import and pay the duties and taxes in the buyer's country. Doing that may require a registration the seller does not hold and cannot easily obtain, and in some jurisdictions a non-established seller cannot recover the import taxes they have paid.

It is the rule with the largest gap between how simple it sounds and what it requires, and it is agreed far more often than it is checked.