What incoterms means
Incoterms are standard trade terms published by the International Chamber of Commerce and used in contracts for the international sale of goods.
Each is a three letter abbreviation followed by a named place. Together they allocate, between seller and buyer, four things: who arranges carriage, who bears the cost, where the risk of loss or damage passes, and who handles export and import clearance.
They exist because those questions used to be answered differently in different markets, and a contract that simply said the goods would be delivered produced disputes.
The current edition is Incoterms 2020, and there are eleven rules. Seven apply to any mode of transport, and four apply only to sea and inland waterway transport.
What matters most is what they do not do. Incoterms do not transfer ownership, do not set payment terms, do not choose the governing law, and do not deal with breach or remedies. A contract that contains only an Incoterm has not been written.
How it is used
The rules run along a spectrum from minimum seller obligation to maximum.
Ex works, where the buyer collects from the seller's premises and does everything else, including export clearance.
Free carrier, where the seller delivers to a carrier nominated by the buyer at a named place and handles export clearance. This is the correct rule for containerised cargo.
Carriage paid to and carriage and insurance paid to, where the seller arranges and pays for carriage to a named destination, with insurance in the second, and risk nonetheless passes when the goods are handed to the first carrier.
Free alongside ship, free on board, cost and freight, and cost insurance and freight, which are the sea rules and are used for bulk and break bulk cargo.
Delivered at place, delivered at place unloaded, and delivered duty paid, where the seller carries the goods to the destination, with the last also making the seller responsible for import clearance and duty.
Every use should state the rule, the named place or port, and the edition, for example a rule followed by the port and then Incoterms 2020. Naming the place matters, because the place is what fixes the point where cost and risk change hands.
Key features
- Standard trade rules published by the International Chamber of Commerce
- Allocate carriage, cost, risk transfer and clearance responsibility
- Current edition is Incoterms 2020, with eleven rules
- Four rules apply only to sea and inland waterway transport
- Do not transfer ownership or set payment terms
- Must be stated with the named place and the edition
How this works in Nigeria
Nigerian importers make three recurring mistakes.
The first is using free on board for containerised cargo. That rule was designed for goods loaded across the ship's rail, and containers are handed over at a terminal well before loading. Between handover and loading the seller technically retains risk under free on board while having no control, and the correct rule is free carrier. It works in practice most of the time, which is why the habit persists, and it fails exactly when a container is damaged at the terminal.
The second is assuming that cost insurance and freight means adequate insurance. The insurance the seller must provide under that rule is minimum cover, which is far narrower than most buyers assume. A buyer who wants full cover must either require a higher level in the contract or arrange its own.
The third is confusing risk with cost. Under several rules the seller pays for carriage to the destination while risk passes much earlier, at handover to the first carrier. A buyer who assumes risk travels with the freight cost is wrong, and finds out when goods are lost in transit that the seller has already performed.
The practical Nigerian point is delivered duty paid, which looks attractive to an importer because the seller handles everything including customs. It transfers the clearance burden, but a foreign seller unfamiliar with Nigerian customs practice frequently underestimates it, and goods stall while the seller works out a process the importer already understands. Delivered at place, with the buyer clearing, is often the better arrangement.
And the underlying contract still has to exist. Incoterms allocate logistics, and the sale agreement has to deal with price, payment, quality, inspection, remedies and disputes.
FOB vs CIF vs DDP
Three rules that cover most Nigerian import transactions, in ascending order of seller responsibility.
Free on board means the seller delivers the goods on board the vessel at the named port of shipment and clears them for export. Risk and cost pass to the buyer at that point, and the buyer arranges and pays for the main carriage, insurance and import clearance.
Cost insurance and freight means the seller additionally pays for carriage to the named destination port and provides insurance, but risk still passes on board at the port of shipment. The insurance required is minimum cover.
Delivered duty paid means the seller carries the goods to the named destination and handles import clearance and duty. Risk passes only on delivery there, and the seller carries the whole burden.
A Nigerian importer buying on free on board or cost insurance and freight terms is clearing the goods themselves, which is the usual and often the better position, because they understand the process.
Limits and risks
Incoterms are logistics rules. They do not address ownership, payment, quality, remedies or governing law, and a contract relying on them alone is incomplete.
The sea specific rules are also misapplied to containerised cargo constantly, which leaves a gap in risk allocation precisely when something goes wrong.
Insurance obligations under the rules that include them are minimal, so a party relying on them may be underinsured.
And editions matter. Because several editions remain in circulation, a contract that does not name the edition can leave the parties operating under different versions of the same three letters.
Worth knowing
Use free carrier rather than free on board for container shipments, and state the named place and the edition. The habit of writing FOB for containers leaves risk with the seller between terminal handover and loading, which is exactly where container damage happens.
Questions people ask
What are Incoterms?
Standard trade rules published by the International Chamber of Commerce that allocate carriage, cost, risk transfer and clearance responsibility between a seller and a buyer in an international sale.
Do Incoterms transfer ownership?
No. They allocate logistics and risk. Ownership, payment terms, quality obligations, remedies and governing law all have to be dealt with in the sale contract itself.
What is the difference between FOB and CIF?
Under both, risk passes when the goods are on board at the port of shipment. Under cost insurance and freight the seller additionally pays for carriage to the destination port and provides minimum insurance cover.
Which rule should I use for containers?
Free carrier rather than free on board. Containers are handed over at a terminal before loading, and free on board leaves risk with the seller during a period when the buyer controls the goods.
Is CIF insurance enough?
Usually not. The rule requires only minimum cover, which is far narrower than most buyers assume. Require a higher level in the contract or arrange your own insurance.
Should I buy DDP?
It looks attractive because the seller handles clearance, but foreign sellers frequently underestimate Nigerian customs practice and goods stall. Delivered at place, with the buyer clearing, is often better.