Incoterms — a companion to your international trade agreements

A version of this article was published in the August/September 2025 edition of The DCN.

International Commercial Terms (Incoterms) are a set of eleven standardised contractual terms published by the International Chamber of Commerce.

They can be incorporated into international trade agreements, but do not constitute a complete contract on their own. In our experience, a common misconception of the parties to a trade agreement is that reference to an Incoterm is sufficient.

Overview of Incoterms

By way of a brief overview, each of the eleven Incoterms is designed for a specific type of international transaction. For example, transactions involving transportation by sea or land, or by way of various delivery points.

They exist within these two categories, as follows:

Any mode of transport

• EXW – Exp Works.
• FCA – Free Carrier.
• CPT – Carriage Paid To.
• CIP – Carriage and Insurance Paid To.
• DAP – Delivered at Place.
• DPU – Delivered at Place Unloaded.
• DDP – Delivered Duty Paid.

Sea and inland waterway

• FAS – Free Alongside Ship.
• FOB – Free on Board.
• CFR – Cost and Freight.
• CIF – Cost, Insurance and Freight.

Incoterms outline several commercial terms, including the following:

• Who is responsible for various tasks relevant to a transaction — including packing the goods, arranging transport, paying for freight and insurance and handling export and import customs clearance.
• At what point in time the risk of loss or damage to goods transfers from the seller to the buyer.
• Who bears the costs associated with the shipment.

Incorporation of Incoterms

Incoterms are not binding unless they are adopted by the parties to a transaction.

Parties are not obliged to adopt Incoterms, but they can benefit in several ways from doing so.

In particular, importers, exporters and service providers in the supply chain can significantly reduce the time and costs associated with negotiating transactions that cross borders.

This is because the meaning of each Incoterm is widely accepted and understood across jurisdictions, so there is less room for misunderstandings amongst cross-border parties.

The parties to an international transaction can adopt Incoterms by expressly incorporating them into their international trade agreements. In doing so, the parties should identify which edition of the Incoterms is being incorporated.

There have been successive versions of the Incoterms, which have varying terms, so it is important to identify the version being incorporated.

Adoption of other important terms for the trade agreement

Those trade agreements should be in writing and separately outline those terms of the trade agreement that Incoterms may not cover, including the following:

• Any conditions precedent to the trade agreement (for example, a purchaser securing finance for the purchase under the trade agreement).
• A comprehensive description of the specific goods traded.
• Pricing and payment terms (including relevant currency).
• Circumstances when pricing and payment terms can be varied.
• When the dates for shipment and delivery of goods may be varied.
• Any security for the vendor on account of payment of that part of the price of the goods (such as guarantees, letters of credit, security deposits held by third parties, liens or security interests under Personal Property Security legislation).
• When the parties may terminate the trade agreement, whether for unremedied default of the trade agreement by one of the parties or due to a force majeure event, an event outside of the control of the parties that warrants termination of the trade agreement. This could include conflicts in the country of either party (or in areas where cargo moves), the occurrence of pandemics such as the COVID-19 pandemic, or significant variations to applicable import duties (such as the imposition of anti-dumping duties or new duties).
• Remedies against the party that breaches the trade agreement, including indemnities against losses, costs and penalties arising from breach of the agreement.
• Who will have responsibility for permits on export/import.
• How goods are to be moved from the point of origin to the point of delivery.
• The governing language that applies to the trade agreement.
• How disputes in respect of the trade agreement should be resolved.
• The laws that will govern the trade agreement.

The items described above are not an exhaustive list of provisions to be included in a trade agreement.

More provisions may be required depending on the nature of the commercial arrangements between the parties and the international conventions for the movement of goods by air and sea that are relevant to the agreement (for example, the Montreal Convention).

Those conventions often incorporate limits on the liability of parties to an international trade agreement in relation to air and sea losses and damages.

They should (generally speaking) be referenced and, where appropriate, modified or supplemented by the terms of international trade agreements.

Please note that at the time of writing, the grace period provided to give carriers time to manage their air waybill stock in response to an increase in the liability limits for passenger and cargo claims under the Montreal Convention of 1999, effective on 28 December 2024, has ended.

The limit for destruction, loss, damage or delay of cargo has risen from 22 SDRs to 26 SDRs per kilogram.

Further, when drafting an international trade agreement which refers to an Incoterm, care needs to be taken to ensure that terms which are not consistent with the chosen Incoterm are not incorporated.

Should that arise then there will be uncertainty as to which provisions govern the trade agreement.

It is also worth noting that international trade agreements may be in the form of a bespoke agreement negotiated between the parties, or alternatively, a set of standard terms and conditions.

If the latter is adopted (which is common in the transport and logistics industry), the parties should ensure that those standard terms and conditions do not include any unfair terms in contravention of the Unfair Contract Terms regime set out in the Australian Consumer Law.

The takeaway from this is that whilst Incoterms are a valuable tool, they do not cover everything.

The parties to international transactions need to ensure that they have complete trade agreements in place that incorporate, but do not wholly rely on Incoterms.

Importance of due diligence

It would be remiss not to mention the importance of undertaking appropriate due diligence before entering into a trade agreement.

There are several checks that should be undertaken before completing a trade agreement.

These would include:

• Checking the identity of the counterparty — company searches will assist in determining whether a proposed party is an actual legal entity. A business name alone is not a legal entity and a presence on a website does not make a party a legal entity.
• Checking whether the counterparty to the trade agreement, the officers or shareholders of the counterparty, the goods, or their manufacture or transport may be caught by sanctions laws, which would expose the parties to sanctions penalties.
• Checking that the products, the subject of the trade agreement, are in fact the promised products and not something else altogether (legal or otherwise).
• Seeking commercial and financial references from the counterparty to the trade agreement to check the bona fides of the counterparty.

These steps may seem intrusive, but in today’s trade and compliance environment, they are important measures to verify the validity of a proposed transaction.

Contact us

To discuss the interplay between Incoterms, the terms of your trade agreements and other provisions, please contact a member of our Customs & Trade or Corporate & Commercial group.