When commercial traders enter into a contract for the purchase and sale of goods they are free to negotiate specific terms
of their contract. These terms include the price, quantity, and characteristics of the goods. Every international contract will also contain what is referred to as an Incoterm (international commercial
term). The Incoterm selected by the parties to the transaction will determine which party pays the cost of each segment of transport, who is responsible for loading & unloading of goods, and who bears
the risk of loss at any given point during a given international shipment. Incoterms also influence Customs valuation basis of imported merchandise.
There are 13 Incoterms and they are divided
into four major groups: "E", "F", "C" and "D" terms. The first letter is an indication of the group to which the term belongs. Each group means additional
responsibilities and costs for the exporter. For example, the most commonly used terms under each of these groups are: Ex Works (EXW), Free Alongside Ship (FAS), Free On Board (FOB), Cost and Freight (CFR),
Cost, Insurance and Freight (CIF), and Delivered Duty Paid (DDP).
Incoterms are overseen and administered by the International Chamber of Commerce in Paris and are adhered to by the major trading
nations of the world. There are currently 13 Incoterms in use, and they can be considered on the basis cited above. All the current Incoterms are described below in ascending order of seller responsibility.
However, Ex-works, Free on Board, Cost Insurance Freight, and Delivery Duty Paid are the most frequently used Incoterms.
Incoterms are internationally accepted commercial trade terms which
determine the passing of risk and the passing of costs under an international contract of sale. The terms tell each party to the contract what their obligations are for the carriage of goods from the seller
to the buyer, for insurance and for export and import clearances. In addition, should a dispute arise, Incoterms are the only international trade terms recognized in a court of law. It is strongly
recommended that express reference is made in the contract using the words "Incoterms 2000" to avoid confusion with any previous version of Incoterms.