If you’re buying or selling goods internationally (or even just dealing with overseas suppliers), Incoterms can feel like one of those “shipping words” you’re expected to understand from day one.
But don’t stress - once you know what they do (and what they don’t do), Incoterms become a practical tool that helps you avoid expensive misunderstandings.
This guide is updated for current trading conditions and common contracting practices, and it’ll walk you through what Incoterms are, how they work in real life, and how to use them properly in your contracts.
What Are Incoterms (And Why Do They Matter)?
Incoterms (short for “International Commercial Terms”) are a set of standard trade terms published by the International Chamber of Commerce (ICC). They’re used worldwide to clarify key delivery obligations when goods are sold.
In plain English, Incoterms answer questions like:
- Who pays for freight?
- Who arranges transport?
- Where is delivery “completed”?
- When does risk pass from seller to buyer?
- Who handles export/import formalities?
This matters because in cross-border trade, even small gaps in understanding can turn into real costs - delays, demurrage, storage fees, damaged goods disputes, or insurance arguments.
Incoterms help reduce ambiguity, but only if you use them correctly and pair them with a properly drafted agreement (more on that below).
Incoterms Are Not “The Whole Contract”
This is where businesses often get caught out. Incoterms don’t cover everything. They generally do not decide:
- who owns the goods (title/ownership transfer)
- when payment is due or how it’s made
- what happens if goods are defective
- IP rights, confidentiality, warranties, or liability caps
- what law applies and how disputes are resolved
That’s why you’ll often want the Incoterm written into a broader Service Agreement or goods supply contract - so the commercial and legal “gaps” are actually covered.
How Do Incoterms Work In Practice?
Incoterms work like a shorthand. Instead of writing pages of shipping responsibilities, you select a term (like FOB or DDP) and add a location.
A properly written Incoterm clause usually looks like:
- FOB Shanghai (Incoterms® 2020)
- DDP Auckland, New Zealand (Incoterms® 2020)
The location is not optional. Without it, you can’t clearly tell where delivery happens and where risk transfers.
The Three Big Concepts Incoterms Control
While each Incoterm is different, they all revolve around three core ideas:
- Costs: who pays for freight, handling, unloading, and other transport-related costs.
- Risk: when the risk of loss/damage transfers from seller to buyer (this is not always the same as ownership transfer).
- Tasks: who arranges shipping, export clearance, import clearance, and who provides key documents.
A common mistake is assuming that “risk” only changes hands once goods arrive. In some Incoterms, risk transfers much earlier - even before the goods leave the port.
What Are The Main Incoterms You’ll Actually See (Explained Simply)?
There are 11 Incoterms in the Incoterms® 2020 set (still the current version used in most contracts). You don’t need to memorise all 11, but you should understand the ones that appear most often in New Zealand imports and exports.
Here are the Incoterms you’ll commonly come across - and what they generally mean in practice.
EXW (Ex Works)
Typical use: buyer picks up from seller’s premises.
EXW places minimal responsibility on the seller. The seller makes the goods available at their premises (or another named place), and the buyer handles most of the rest.
Watch-outs: EXW can cause practical issues where the buyer isn’t able to handle export formalities in the seller’s country. In real life, businesses sometimes use EXW casually when they actually need the seller to do more.
FCA (Free Carrier)
Typical use: seller delivers to a carrier or nominated place.
FCA is widely used because it’s flexible. It can apply to road, air, sea, and multimodal shipping.
Why it’s popular: it often better reflects reality than EXW, especially where the seller can handle export clearance and deliver the goods to a freight forwarder.
FOB (Free On Board)
Typical use: sea freight where goods are loaded on the ship.
With FOB, the seller delivers when the goods are loaded on board the vessel at the named port of shipment.
Watch-outs: FOB is for sea or inland waterway transport. It’s commonly misused for container shipments where the handover occurs earlier (often at a terminal). FCA is sometimes the better fit for containers.
CIF (Cost, Insurance and Freight) and CIP (Carriage and Insurance Paid To)
Typical use: seller arranges transport and insurance to destination, but risk transfers earlier.
These terms can surprise people. The seller pays for carriage (and insurance), but risk can transfer before the goods reach the destination.
Practical tip: don’t assume “seller pays for insurance” means you’re automatically protected. You’ll still want clarity in your contract about who claims on insurance, what level of cover applies, and what happens if the insurer refuses to pay.
DAP (Delivered At Place) and DPU (Delivered At Place Unloaded)
Typical use: seller delivers close to buyer’s location.
DAP means the seller delivers when goods are placed at the buyer’s disposal at the named place (not unloaded). DPU goes one step further - the seller must unload the goods.
Watch-outs: importing businesses can get caught if they assume DAP includes customs clearance and duties. It usually does not - that’s where DDP comes in.
DDP (Delivered Duty Paid)
Typical use: seller delivers to buyer and handles import duties and taxes.
DDP is the “seller does (almost) everything” term. It can be attractive for buyers because it feels simple.
Watch-outs: DDP is high-risk for sellers (and sometimes unrealistic). If you’re the seller, you’ll need to understand whether you can legally act as the importer of record in New Zealand, and whether you can actually control the costs you’re promising to cover.
What’s The Difference Between Risk, Cost, And Ownership (And Why It Causes Disputes)?
One of the biggest Incoterms traps is mixing up these three ideas:
- Cost: who pays for what part of the transport and related charges.
- Risk: who bears the risk if goods are lost, damaged, or delayed at a particular stage.
- Ownership (title): who legally owns the goods at any point in time.
Incoterms primarily deal with risk and cost allocation - not ownership.
Ownership is usually handled by your sale contract terms (for example, title transfers on full payment, or on delivery, or on issue of the bill of lading). If this isn’t clearly spelled out, you can end up in messy situations like:
- the buyer pays, goods are damaged in transit, and both sides argue about who claims insurance
- goods arrive but the buyer refuses to pay due to alleged quality issues
- goods are held at the port due to missing paperwork and storage fees start stacking up
This is where tailored contract drafting becomes important - a short Incoterm line won’t cover all of the “what ifs” that come with international trade.
Make Sure Your Contract Matches Your Incoterm
If you’re importing or exporting regularly, it’s worth building strong “repeatable” contract terms that align with your shipping practices, including:
- clear payment terms (timing, currency, late payment consequences)
- inspection and acceptance procedures (and what happens if goods don’t meet spec)
- warranties and limitation of liability wording
- who arranges insurance and how claims are handled
- dispute resolution and governing law
Depending on your setup, you might also want these terms integrated into your Business Terms so they’re consistent across customers and suppliers.
How Do Incoterms Interact With New Zealand Law?
Incoterms are internationally recognised, but your underlying contract still needs to work under the laws that apply to your deal.
For New Zealand businesses, a few legal areas commonly pop up alongside Incoterms:
Consumer And Fair Trading Rules
If you sell products into the New Zealand market, your advertising, product descriptions, and sales claims still need to comply with the Fair Trading Act 1986 (misleading or deceptive conduct, false representations, bait advertising, and more).
Depending on whether your customer is “in trade” or a consumer (and the nature of the goods), the Consumer Guarantees Act 1993 may also apply. Incoterms won’t override these rules.
If your sales model involves standardised online checkout terms, having clear website terms can help set expectations - and if you’re selling online, your Website Terms and Conditions can be a practical place to document delivery and risk frameworks (but you’ll still need to ensure they’re enforceable and consistent with any negotiated contract).
Contract Law Still Controls The Deal
Even with Incoterms, you still need a valid and enforceable contract. That means being clear on the essentials: offer, acceptance, consideration, and intention to create legal relations.
If you’re relying on quotes and purchase orders, it’s worth knowing that a quote can sometimes be binding depending on how it’s presented and accepted - the details matter, especially once goods are in transit. (This also ties into making sure your documentation is consistent from quotation to invoice.)
Privacy And Data When You’re Trading Internationally
It’s easy to forget that international trade involves data too - customer contact details, consignee details, tracking information, and sometimes identity documents for customs and compliance.
If you collect personal information in the course of sales, logistics, or customer service, the Privacy Act 2020 will usually be relevant. For many businesses, that means having a fit-for-purpose Privacy Policy and making sure staff understand how information should be handled.
Employment And Operations (If You’re Scaling Up)
If importing/exporting is becoming a bigger part of your operations, you might be hiring warehouse staff, admin staff, or sales staff. Getting your employment paperwork right early helps avoid disputes later, particularly if duties include handling costly logistics decisions.
A tailored Employment Contract can set expectations around responsibilities, performance, confidentiality, and what happens when someone leaves.
How Do I Choose The Right Incoterm For My Business?
Choosing the “right” Incoterm isn’t about picking the most popular one - it’s about picking the term that matches:
- your bargaining power (who can realistically insist on what)
- who has the better logistics capability (you or the other party)
- your appetite for risk (and ability to insure that risk)
- your cashflow and pricing model
- the mode of transport (sea, air, road, multimodal)
Here are a few practical ways to think about it.
If You’re Importing Into New Zealand
If you’re the buyer/importer, you’ll usually want enough control to avoid surprises at the border - especially around timing and charges.
- More buyer control: FCA / FOB (you control freight and insurance from early on).
- More seller responsibility: DAP / DPU (seller delivers close to you, but you handle import formalities) or DDP (seller handles import too).
If you don’t have experience with customs clearance, DAP/DDP might feel easier, but make sure you understand what’s included in the price. A “delivered” price can hide costs you can’t verify until something goes wrong.
If You’re Exporting From New Zealand
If you’re exporting, you’ll often want to avoid taking on obligations in the buyer’s country that you can’t control (like import duties, local delivery delays, or licensing requirements).
- Lower seller exposure: FCA (seller delivers to carrier and handles export clearance).
- Higher seller exposure: DAP/DPU/DDP (seller may be responsible much closer to the destination).
A good middle ground is often an Incoterm where you can manage what you know (getting goods out of NZ) without promising things overseas that rely on third parties.
Always Specify The Exact Place And The Incoterms Version
If you take only one action after reading this article, make it this: always specify the named place/port and the Incoterms version.
For example:
- “FOB Auckland Port (Incoterms® 2020)”
- “FCA Seller’s Warehouse, Penrose, Auckland (Incoterms® 2020)”
- “DAP Buyer’s Premises, Wellington, New Zealand (Incoterms® 2020)”
Those details are where most disputes are won or lost.
Pair Incoterms With The Right Legal Documents
Incoterms are one part of your risk management. The other part is having the right documents in place to make your position enforceable.
Depending on how you trade, you might need:
- a supply agreement or sale of goods contract (covering specifications, payment, title, warranties, and disputes)
- purchase order terms that tie into your master agreement
- ongoing trading terms for repeat transactions
- clear limitation of liability clauses (tailored to your risk profile)
- a dispute resolution clause that actually works cross-border
If you’re working with overseas suppliers, it’s also worth checking whether you’re being asked to sign their “standard terms” - those can quietly shift risk back onto you, even if the Incoterm seems balanced on the surface.
Key Takeaways
- Incoterms are standard international trade terms that clarify who does what in the delivery of goods, including cost allocation, risk transfer, and key logistics tasks.
- Incoterms don’t cover everything - they generally won’t deal with ownership/title, payment terms, defective goods remedies, liability limits, or dispute resolution, so you still need a proper contract.
- Always write the Incoterm with a named place/port and the Incoterms version (for example, “FOB Shanghai (Incoterms® 2020)”) to avoid ambiguity.
- Don’t confuse “risk” with “ownership” - Incoterms often transfer risk earlier than people expect, especially in sea freight and insurance-paid terms like CIF/CIP.
- Your Incoterms should align with New Zealand legal obligations, including the Fair Trading Act 1986, Consumer Guarantees Act 1993 (where applicable), and the Privacy Act 2020 if you handle customer or logistics personal information.
- Getting your contract terms and documents right from day one is one of the simplest ways to reduce shipping disputes and protect your margins as you scale.
If you’d like help choosing the right Incoterms for your supply chain or getting your contracts set up properly, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.
