Gains:
- Ability to compare how Incoterms delivery methods (EXW, FOB, CIF, DAP, DDP etc.) distribute cost and risk responsibility with artificial intelligence support
- Ability to prepare a proposal or contract draft with artificial intelligence and have the delivery method, payment and liability clauses checked for consistency
- Ability to protect that artificial intelligence's interpretation of Incoterms is a draft and binding contract approval belongs to the parties and the law
The most misunderstood issue in a foreign trade agreement is: "Who will carry the goods to where, who will pay, who is responsible if something happens on the way?" This two-sentence question actually determines the thousands of dollars of cost and risk of a shipment. There are Incoterms (International Commercial Terms) to answer this question in a standard language. These rules, published by the International Chamber of Commerce (ICC), define with three-letter abbreviations exactly where the costs and risks change hands between the buyer and the seller. In this unit, we will cover Incoterms, proposal and contract preparation, and the assistant role of artificial intelligence in this process.
Incoterms logic: two questions, two axes
Every Incoterms rule answers two basic questions: How much is the expense at the seller's expense? and Where does the risk pass to the buyer? These two may not always be on the same page; This is the most confusing issue. For example, in one rule, the seller pays the transportation fee to the port of destination, but the risk of loss of the goods has already passed to the buyer at the port of loading.
Let's simply get to know the common rules:
- EXW (Ex Works - Delivery at Work): The seller prepares the goods in his own warehouse, the rest (loading, transportation, customs, risk) belongs to the buyer. Minimal liability for the seller.
- FOB (Free On Board): The seller passes the goods through export customs and loads them on the ship; After this point, the cost and risk pass to the buyer. It is a classic in sea transportation.
- CIF (Cost, Insurance and Freight): The seller pays the freight and minimum insurance to the port of destination; However, the risk passes to the buyer at the loading port.
- DAP (Delivered At Place): The seller brings the goods to the place specified by the buyer; Import customs and taxes are the responsibility of the buyer.
- DDP (Delivered Duty Paid): The seller undertakes everything; It delivers the goods to the buyer's door, including import taxes. Most comfortable for the buyer, riskiest for the seller.
Attention: Incoterms do not transfer ownership of the goods and do not determine the terms of payment; it merely describes the distribution of costs and risks. Additionally, not every rule applies to every mode of transport (for example, FOB and CIF are mainly for sea/inland water transport). Confusing these distinctions creates gaps in the contract.
Delivery method comparison table
Incoterms
export customs
Main transport freight
Insurance
Import customs/tax
Where the risk passes
EXW
Buyer
Buyer
Buyer
Buyer
Seller's warehouse
FOB
Seller
Buyer
Buyer
Buyer
loading on ship
CIF
Seller
Seller
Vendor (minimum)
Buyer
loading on ship
DAP
Seller
Seller
(according to agreement)
Buyer
Destination (before unloading)
DDP
Seller
Seller
(according to agreement)
Seller
destination
This table is a decision tool: if you are a seller, in DDP you bear all the burden and risk, in EXW you bear the least; If you are a buyer, you will see the opposite.
Step by step: AI-powered proposal and contract preparation
Step 1 — Clarify the delivery method. First decide which Incoterms rule suits your business: what is your mode of transport, who can handle customs clearance, who wants to bear the risk. AI can compare rules in terms of cost-risk and create a decision table.
Step 2 — Produce draft proposal. A draft offer including price, delivery method, delivery time, payment condition, validity and goods description. AI maintains format and language; You verify the binding numbers.
Step 3 — Consistency check. Ask YZ, "Do the delivery method, expenses covered by the price, and payment condition conflict with each other in this offer?" For example, writing CIF and invoicing freight separately is a contradiction; AI catches this.
Step 4 — Legal approval. The binding contract is approved by the parties and, when necessary, by the law. AI produces contract draft and checklist; Signature and binding belong to humans.
Four copyable templates
1) Delivery method decision table:
Your role: foreign trade consultant assistant. Status: [seller/buyer], mode of transport [sea/air/land], able to handle customs clearance [myself/counterparty]. Compare the 3 Incoterms rules that suit me with the "which expense is on me, where is the risk, advantage/disadvantage" table for each. The final choice is mine; You give a draft decision table.
2) English proposal draft:
Your role: export quotation assistant. Draft a professional English quotation with the following information: goods description, quantity, unit/total price, mode of delivery (Incoterms + location), delivery time, payment term, validity, valid currency. I will verify the price and dates; Do not change/guess any numbers. Information: [anonymous data]
3) Delivery/payment consistency check:
Your role: contract consistency checker. Check for the following discrepancies in the following quote:- Are the delivery method and the costs covered in the price compatible? (e.g. if CIF, freight+insurance must be included in the price)- Do the payment terms and delivery method support each other?- Is the risk transition point clear? If you find a contradiction, write it clearly as "CONTRADICTION" and explain the reason. Offer text: [...]
4) Contract checklist:
Your role: contract pre-flight assistant. Make a CHECKLIST of the basic items that should be included in an international sales contract: parties, goods/quantity/quality, price/currency, delivery method (Incoterms + version + location), delivery time, payment method, insurance, force majeure, dispute resolution/applicable law, delay sanction. Write "why is it important" next to each item. This is a reminder; Final contract requires legal approval.
Weak prompt / Strong prompt
Weak prompt:
Write me an export contract.
This request, written without providing context, parties, product, delivery and payment information, causes the AI to come up with a "boilerplate" text containing general and possibly inappropriate clauses. Using such a text without verifying it is a serious risk.
Powerful prompt:
Your role: contract drafting assistant (legal approval required). Seller in Türkiye, buyer in Germany; product [description], delivery CIF Hamburg, payment 30% in advance 70% after dispatch, delivery 45 days.Create a DRAFT sales contract in accordance with these conditions; Make sure that the delivery method and payment item are consistent with each other. Add "points for legal review" at the end. I will verify the number and conditions.
This prompt provides clear party, product, delivery and payment information; positions the output as a draft and puts legal approval into the workflow from the beginning.
three mini cases
Case 1 — CIF conflict capture. An exporter wrote the delivery method "CIF Rotterdam" in his offer, but invoiced the freight (approximately 1,850 USD) to the buyer as a separate item. In the consistency check, YZ marked "In CIF, freight is already included in the price, invoicing separately is a contradiction." Bug fixed; A dispute and loss of trust with the buyer was prevented.
Case 2 — Confusing risk and cost. One buyer thought, "I bought CIF, the seller is insured, if something happens on the road, it's his responsibility." He learned that the seller was not responsible when the container was damaged and the risk was transferred to him at the loading port. If AI had created a decision table in advance, this distinction (the expense belongs to the seller, the risk belongs to the buyer) would have been clear from the beginning. Lesson: In Incoterms, the transition point for cost and risk may be different.
Case 3 — DDP's latent burden. A salesman offered "DDP" to satisfy the customer; He had not fully calculated that he would undertake import duties and customs duties. YZ showed in the decision table that in DDP, import customs, taxes and local transportation belong to the seller and that these will cause additional cost-risk in the destination country. The seller revised his price according to these loads; survived the sale at a loss.
Common mistakes
- Thinking that cost and risk are the same. In some rules (CIF/FOB), the seller pays the freight but the risk passes to the buyer early.
- Not adapting the delivery method to the transportation mode. FOB/CIF is for sea; Appropriate rules for air/land differ.
- Not writing the Incoterms version and place of delivery. "CIF" alone is incomplete; rule + place + version must be specified.
- Signing the AI draft without legal approval. The contract is binding; A draft and a signature are not the same thing.
- Sending binding numbers (price, maturity) without verifying them. The sample values set by the AI may remain.
Tip: Always write the method of delivery in the offer and contract in the form "rule + place + Incoterms version": for example "CIF Hamburg (Incoterms 2020)". This trio makes the parties' cost and risk limits indisputable; Make AI use this format as well.
In summary
Incoterms define in standard language where costs and risks change hands between buyer and seller; The most critical distinction is that the transition point of cost and risk may be different. Artificial intelligence is a powerful assistant in comparing delivery methods, producing proposals and contract drafts, and monitoring delivery-payment consistency. However, Incoterms interpretation and contract text are not binding; Final approval belongs to the parties and the law. Each binding number is verified, the delivery method is written as rule+location+version.
Application task
Take a quote you made (or a sample). First, ask AI for a decision table comparing the cost-risk of 3 Incoterms rules applicable to your business. Then have AI check your offer with the “delivery/payment consistency check” template: are the delivery method and the costs covered in the price compatible? Verify and correct any discrepancies found yourself. Finally, have a contract checklist produced and compared to your existing contract template.
checklist
- [ ] I evaluated the delivery method separately in terms of cost and risk.
- [ ] I checked that the Incoterms rule I chose is suitable for my transport mode.
- [ ] I wrote the delivery method as rule + place + version.
- [ ] I had the consistency of the delivery method and the costs included in the price checked.
- [ ] I verified the binding numbers (price, maturity, delivery time).
- [ ] I linked the contract draft to the workflow with the legal approval ring.