What the eleven Incoterms rules cover, how they divide cost and risk between seller and buyer, and how importers can choose the right one.
Every international sale has to answer the same practical questions. Who arranges transport. Who pays for it. Who insures the goods. Who clears them through customs. And at what point the risk of loss or damage passes from the seller to the buyer. The Incoterms rules, published by the International Chamber of Commerce, give buyers and sellers a common language for these answers. The current edition, Incoterms 2020, took effect on 1 January 2020.
What Incoterms do and do not cover
An Incoterms rule defines the delivery obligations of the seller and the buyer: the point of delivery, the transfer of risk, the allocation of transport and insurance costs, and responsibility for export and import clearance. It does not determine when ownership of the goods passes, the price, the method of payment or the remedies for breach of contract. Those matters must be settled elsewhere in the sales contract.
A rule should always be stated with a named place and the edition, for example “FOB Manzanillo, Incoterms 2020”. A precise place avoids disputes about where delivery occurs.
The eleven rules
Incoterms 2020 contains eleven rules in two groups. Seven can be used for any mode of transport, including multimodal shipments: EXW (Ex Works), FCA (Free Carrier), CPT (Carriage Paid To), CIP (Carriage and Insurance Paid To), DAP (Delivered at Place), DPU (Delivered at Place Unloaded) and DDP (Delivered Duty Paid). Four apply only to sea and inland waterway transport: FAS (Free Alongside Ship), FOB (Free on Board), CFR (Cost and Freight) and CIF (Cost, Insurance and Freight).
The 2020 edition introduced DPU in place of the former DAT rule, and raised the minimum insurance cover required under CIP to the level of Institute Cargo Clauses (A). CIF continues to require the more limited cover of Institute Cargo Clauses (C), unless the parties agree otherwise.
Choosing a rule as an importer
Under EXW the buyer takes on almost every obligation, including export clearance in the seller’s country, which can be difficult for a foreign buyer to perform. FCA is often a more practical alternative, as the seller clears the goods for export and hands them to the buyer’s carrier.
FOB and CIF are widely used, but they are designed for goods loaded directly onto a vessel, such as bulk cargo. For containerised goods, which are usually handed to the carrier at a terminal before loading, FCA, CPT or CIP generally reflect the real point of handover more accurately.
Under the C rules (CFR, CIF, CPT, CIP) the seller pays for carriage to the destination, but risk passes to the buyer much earlier, when the goods are delivered at origin. Importers should be clear that paying less for freight does not mean carrying less risk.
DAP, DPU and DDP place more of the responsibility on the seller. DDP requires the seller to clear the goods for import and pay duties and taxes in the buyer’s country. Where the seller is not registered to import there, DDP can be impractical, and DAP with import clearance by the buyer is often preferable.
Practical points
Align the Incoterms rule with the insurance policy, the letter of credit and the transport documents, so that they describe the same point of delivery. Check who is the importer of record in the destination country. And confirm which costs at the terminal, such as handling and unloading, sit with each party. A rule chosen with care at the start of a contract prevents disputes and unexpected costs at the end.