Introduction
Clarity is one of the most important factors in the International Trade. International Commercial Terms, also known as INCOTERMS, are globally recognized rules that define the responsibilities of buyers and sellers. Incoterms were first introduced by International Chamber of Commerce in 1936. These terms outline who bears the cost, risk and responsibilities, which reduces the confusion between the parties during the transportation of goods. The latest version, Incoterms 2020, guide businesses globally for efficient trade. It is essential to understand Incoterms for mitigating the risks and fostering trust in international trade.
What Are Incoterms?
Incoterms were first introduced in 1936 and have been regularly updated for efficient trade practices. Incoterms define the roles and responsibilities of the seller and buyer in international trade. These terms specify who is responsible for costs, risks and tasks of the
trade such as transportation, insurance and custom clearance etc. Incoterms are a crucial tool for businesses involved in cross-border trades. The rules are divided into two categories:
Those applicable to any mode of transport (e.g., EXW, FCA) and,
Those applicable only to sea and inland water transport (e.g., FOB, CIF).

Classification of the Incoterms 2020 rules
Incoterms are classified into two main categories based on their applicability to specific
modes of transport:
1) Rules for any Mode or Modes of Transport
These rules apply to all modes of transportation. These rules are briefly explained below:
i) EXW (Ex Works): (delivery at the premises)
The goods are placed at the disposal of the buyer at the seller’s premises. This term imposes minimum obligations on seller.
ii) FCA (Free Carrier): The seller delivers the goods to a carrier chosen by the buyer. The risk transfers to the buyer at that point.
iii) CPT (Carriage Paid To): The seller covers transportation costs to a specified destination. The risk transfers once the goods are handed over.
iv) CIP (Carriage and Insurance Paid To): It is similar to CPT. The difference is that the seller also provides insurance.
v) DAP (Delivered at Place): The seller delivers goods to the buyer’s specified location. However, it does not include unloading by seller.
vi) DPU (Delivered at Place Unloaded): The seller delivers goods to a specified location as well as handles unloading.

vii) DDP (Delivered Duty Paid): The seller bears all costs, including customs duties, until the goods reach the buyer.
2) Rules for Sea and Inland Waterways Transport
These terms are specific to goods transported by sea or inland waterways.
i) FAS (Free Alongside Ship): The seller delivers goods alongside the vessel at the port of shipment.
ii) FOB (Free On Board): The seller delivers goods onto the vessel. The risk transfers when goods are on board.
iii) CFR (Cost and Freight): The seller pays freight costs to the destination port. The risk transfers once the goods are on board.
iv) CIF (Cost, Insurance, and Freight): This term is similar to CFR, but the seller also provides marine insurance.

How to Use the Incoterms 2020 Rules?
It is important to understand how to apply incoterms effectively as these rules provide clarity on different aspects of the international trade.
1) Choosing the Right Incoterm
Selecting the right incoterm rule is crucial. It depends on the nature of the transaction, transportation mode and parties’ capacity to handle obligations. For instance, EXW is favourable to buyers with robust logistic capabilities, however, DDP is favourable to those who want minimum responsibility in shipping.
2) Drafting Contracts
Drafting contracts by incorporating incoterms help defining parties’ obligations. A well-drafted contract with appropriate incoterm rule reduces ambiguity and eventually reduces potential disputes.
3) Risk Management
Incoterms help parties to anticipate and manage potential liabilities, as these rules clearly outline the transfer of risk. Also, clear usage of incoterms in contracts can prevent legal conflicts as incoterms are globally recognized.

Conclusion
Incoterms are a crucial tool for simplifying international trade. It ensures clarity in allocation of risks, costs and obligation. Its standardized framework minimizes the potential misunderstandings and allows for smooth cross-border transactions. The latest version, Incoterms 2020 is vital to the businesses. It is important to choose right incoterm rule to incorporate in the contract of sale of goods. Whether a trader is a seasoned or a newcomer to the international trade, understanding incoterms and correctly applying it is important.

This article is authored by Tejaswini Yogesh Jadhav, who was the Top 40 performer in the Contract Drafting Quiz Competition organized by Lets Learn Law.