Incoterms – an essential element of every supply agreement

In commercial trade, the correct structuring of delivery terms directly impacts contractual risk, operational costs, and transaction security. In this context, Incoterms constitute an industry standard that – when properly applied – allows parties to avoid numerous disputes at the intersection of law and logistics.

Incoterms (International Commercial Terms) are a set of international trade rules developed by the International Chamber of Commerce (ICC), which set out the allocation of obligations, costs and risk between the seller and the buyer in connection with the delivery of goods. The current version in force is Incoterms 2020.

Key points to note:

• Incoterms are not statutory law – they apply only if the parties expressly refer to them in the contract,
• they govern exclusively the relationship between the seller and the buyer with respect to delivery – they do not replace the entire sales contract,
• they determine the scope of responsibility for transport, the obligation to bear transport costs, the moment when the risk of loss or damage to the goods passes, as well as obligations regarding insurance of the goods and the completion of export and import formalities.

The most common practical issues concern the moment when the risk of loss or damage to the goods passes. This is a key question, because it answers: who bears the consequences if the goods are destroyed in transit?

For example, under the EXW (Ex Works) rule, the risk passes to the buyer as soon as the goods are placed at the buyer’s disposal at the seller’s premises. The buyer arranges and pays for the entire transport.

Under the DAP (Delivered at Place) rule, by contrast, the seller bears the risk until the goods are delivered to the agreed place of destination – and the seller is responsible for arranging the transport.

The difference is fundamental, yet in many contracts the choice of Incoterms rule is incidental, or delivery matters are not regulated at all.

What is worth paying attention to?

Above all, the consistency of the chosen Incoterms rule with the other provisions of the contract – in particular the payment terms, the time of delivery and the scope of insurance of the goods. It happens that the parties stipulate one rule in the contract but in practice carry out delivery on entirely different terms. This is a direct route to a dispute.

It is also worth remembering that Incoterms do not regulate everything. Matters such as contractual penalties for delay in delivery, the procedure for taking delivery of the goods, complaint rules or liability for defects require separate contractual provisions.

As Paweł Siwy, advocate and counsel at Hoogells, points out, well-chosen Incoterms are not a mere formality but a genuine risk management tool in trade, transport and logistics. It is a short contractual clause that governs a broad range of rights and obligations of the parties and determines the costs and liability for individual elements of the delivery.

In business practice, the proper selection and consistent application of Incoterms rules constitutes an essential element of building contractual predictability and limiting exposure to disputes. From a managerial perspective, it is one of the simplest, yet most effective tools for controlling risks in supply chains.