What Are Incoterms?
Incoterms (International Commercial Terms) are a set of 11 standardised trade terms published by the International Chamber of Commerce (ICC) that define the responsibilities of buyers and sellers in international transactions. The current edition is Incoterms 2020, which took effect on 1 January 2020.
Incoterms answer three critical questions for every transaction:
- Who arranges transport? — Which party is responsible for booking and paying the carrier.
- Who bears the risk? — At which point does the risk of loss or damage transfer from seller to buyer.
- Who pays for what? — How costs (transport, insurance, customs clearance, terminal handling) are allocated.
Incoterms do not define the contract of sale itself, payment terms, transfer of title/ownership, or dispute resolution. They are purely about the physical delivery of goods and the allocation of costs and risks associated with that delivery.
Each Incoterm is expressed as a three-letter code (e.g., FOB, CIF) followed by a named place (e.g., FOB Bangkok Port, CIF Hamburg). The named place is critical because it defines where obligations transfer.
KabyTech extracts Incoterms from commercial invoices, purchase orders, and letters of credit, and uses them to determine which transport documents should be expected in the shipment document set.
Key Incoterms for Freight
The 11 Incoterms 2020 rules fall into two groups: rules for any mode of transport (7 terms) and rules for sea/inland waterway transport only (4 terms). The following are most relevant to freight documentation:
| Term | Full Name | Mode | Seller Arranges Transport? | Seller Arranges Insurance? |
|---|---|---|---|---|
| EXW | Ex Works | Any | No | No |
| FCA | Free Carrier | Any | No (to named place only) | No |
| FOB | Free on Board | Sea only | No (to ship's rail) | No |
| CFR | Cost and Freight | Sea only | Yes | No |
| CIF | Cost, Insurance and Freight | Sea only | Yes | Yes (min ICC-C) |
| CPT | Carriage Paid To | Any | Yes | No |
| CIP | Carriage and Insurance Paid To | Any | Yes | Yes (min ICC-A) |
| DAP | Delivered at Place | Any | Yes | No |
| DPU | Delivered at Place Unloaded | Any | Yes (incl. unloading) | No |
| DDP | Delivered Duty Paid | Any | Yes (incl. import clearance) | No |
FOB and CIF remain the most common terms in Thai export trade, while EXW and DDP dominate in e-commerce and direct-to-consumer shipments. FCA has gained traction as the ICC's recommended replacement for FOB in containerised shipments, since FOB's "ship's rail" concept is obsolete for container freight.
Note the key distinction between CIF (sea only, minimum Institute Cargo Clause C insurance) and CIP (any mode, minimum Institute Cargo Clause A — all-risks insurance). This difference affects the insurance documents that should appear in the shipment file.
Incoterms and Document Requirements
The choice of Incoterm directly determines which transport and insurance documents the seller must provide. This has practical implications for KabyTech's document validation:
- FOB / CFR / CIF: These sea-only terms require a bill of lading (B/L) as the transport document. Specifically, the seller must provide an "on board" ocean bill of lading showing the goods were loaded onto the named vessel. A received-for-shipment B/L is not sufficient unless it carries an on-board notation.
- FCA: Accepts any transport document appropriate to the mode — a B/L, air waybill (AWB), truck CMR, or rail consignment note. Incoterms 2020 added a new provision (FCA A6/B6) allowing the buyer to instruct its carrier to issue an on-board B/L to the seller, which the seller can then present under a letter of credit.
- CPT / CIP: Require "the usual transport document" for the mode used. For air freight, this is an AWB; for sea, a B/L; for multimodal, a combined transport document (FIATA FBL or similar).
- CIF / CIP: In addition to transport documents, these terms require the seller to provide an insurance document — a policy or certificate covering the goods at least to the destination. CIF requires minimum ICC-C coverage; CIP requires ICC-A (all-risks) under Incoterms 2020.
- DAP / DPU / DDP: The seller arranges all transport, so the seller holds the transport documents. The buyer may receive copies but does not need them for payment/customs purposes (except DDP, where the seller also handles import clearance).
KabyTech uses the extracted Incoterm to build an expected document checklist for each shipment. If a CIF transaction is missing an insurance certificate, or an FOB shipment lacks an on-board B/L, KabyTech flags the gap.
Risk Transfer Points
Understanding where risk transfers from seller to buyer is essential for freight claims and insurance. Each Incoterm defines a specific risk transfer point:
- EXW: Risk transfers when goods are placed at the buyer's disposal at the seller's premises. The buyer bears all transport risk.
- FCA: Risk transfers when goods are delivered to the carrier (or another nominated person) at the named place. If the named place is the seller's premises, risk transfers when loaded onto the collecting vehicle. If another place, risk transfers when the goods are at the carrier's disposal on the seller's transport.
- FOB: Risk transfers when goods are placed on board the vessel at the port of shipment.
- CFR / CIF: Despite the seller paying for freight (and insurance under CIF), risk transfers at the same point as FOB — when goods are on board at the origin port. This is a common source of confusion: under CIF, the seller pays for insurance but the buyer bears the risk during transit.
- CPT / CIP: Risk transfers when goods are handed to the first carrier. Like CFR/CIF, the seller pays transport (and insurance under CIP) but risk transfers at origin.
- DAP: Risk transfers when goods are placed at the buyer's disposal on the arriving vehicle at the named destination, ready for unloading.
- DPU: Risk transfers when goods are unloaded at the named destination.
- DDP: Risk transfers at the same point as DAP (on the arriving vehicle at destination), but the seller additionally bears the cost and risk of import clearance.
For KabyTech users, the risk transfer point determines which party should file a cargo claim and which insurance policy covers the loss. KabyTech annotates parsed documents with the applicable risk transfer point based on the extracted Incoterm and named place.
Summary
Incoterms are the universal language for allocating transport responsibilities in international trade. Key points:
- Incoterms 2020 defines 11 terms: EXW, FCA, FOB, CFR, CIF, CPT, CIP, DAP, DPU, DDP (any mode) plus FAS (sea only, less commonly used in Thai freight).
- The chosen Incoterm determines which transport documents the seller must provide — B/L for sea terms, AWB for air, CMR for road, etc.
- CIF and CIP are the only terms requiring the seller to arrange insurance; CIF requires minimum ICC-C, CIP requires ICC-A.
- Risk transfer is often misunderstood: under CIF/CFR, risk transfers at the origin port even though the seller pays freight.
- KabyTech extracts Incoterms from commercial documents and uses them to generate expected-document checklists and risk annotations.
For automated Incoterm extraction and document-set validation, see the /parse/commercial-invoice and /validate/document-set API endpoints in the KabyTech documentation.