Incoterms (international commercial terms) are a set of standardized trade terms published by the International Chamber of Commerce (ICC) that define the allocation of costs, risks and responsibilities between buyers and sellers in international and domestic sales contracts. First published in 1936 and updated periodically (most recently in 2020), Incoterms create a common language that reduces ambiguity and helps prevent disputes over who does what, when, and at whose cost during movement of goods.
Key takeaways
– Incoterms allocate obligations for delivery, risk transfer, carriage and some customs/insurance responsibilities — they do not determine price, payment terms, transfer of title, or liability for product defects.
– Incoterms 2020 is the current edition; parties may still agree to earlier editions if expressly stated in the contract.
– There are 11 Incoterms in the 2020 edition: EXW, FCA, CPT, CIP, DAP, DPU, DDP, FAS, FOB, CFR and CIF.
– Some Incoterms apply to any mode of transport (multimodal); others apply only to sea and inland waterway transport.
Understanding Incoterms (what they cover and don’t cover)
What Incoterms do cover:
– Where the seller must deliver the goods (delivery point/place).
– The point at which risk of loss or damage shifts from seller to buyer.
– Which party arranges and pays for carriage and where responsibility transfers.
– Which party is responsible for export and import clearance and duties (depending on the term).
– Which party obtains and pays for insurance, when the term specifies it (e.g., CIF, CIP).
What Incoterms do not cover:
– Transfer of ownership/title to the goods.
– Contract price, payment terms, method of payment.
– Consequences of breach, guarantees, product quality or conformity (these are part of the sales contract law).
– Liability for product safety, intellectual property, or regulatory compliance beyond the allocation of transport/clearance obligations.
– Detailed commercial terms such as packaging specs, inspection procedures, or insurance beyond minimums — these must be specified separately in the contract.
Incoterms rules for any mode of transport (multimodal)
Seven Incoterms apply to any transport mode:
– EXW — Ex Works: Seller makes goods available at their premises. Buyer bears nearly all costs and risks from that point.
– FCA — Free Carrier: Seller delivers goods to a named carrier or place. Risk transfers when goods are delivered to carrier.
– CPT — Carriage Paid To: Seller pays freight to a named destination. Risk transfers when goods are handed to the first carrier.
– CIP — Carriage and Insurance Paid To: Like CPT but seller also contracts for minimum insurance cover (Incoterms 2020 increased required insurance level for CIP).
– DAP — Delivered at Place: Seller delivers when goods are made available for unloading at the named place. Buyer clears import.
– DPU — Delivered at Place Unloaded (replaced DAT in 2020): Seller delivers and unloads at the named place; risk transfers after unloading.
– DDP — Delivered Duty Paid: Seller delivers when goods are placed at buyer’s disposal at the named place, cleared for import. Seller bears all costs and risks including import duties.
Incoterms rules for sea and inland waterway transport
Four rules apply only to sea and inland waterway transport:
– FAS — Free Alongside Ship: Seller places goods alongside the ship at the named port. Buyer arranges and pays main carriage and risk transfers at that point.
– FOB — Free On Board: Seller loads goods aboard the vessel; risk transfers once goods are on board.
– CFR — Cost and Freight: Seller pays cost and freight to bring goods to the named port of destination; risk transfers once goods are on board.
– CIF — Cost, Insurance and Freight: Like CFR but seller contracts for minimum insurance to the destination port (CIF insurance level is lower than CIP’s required level in 2020).
Incoterms 2010 vs Incoterms 2020 — what changed
Key changes in Incoterms 2020 (relative to 2010):
– DAT (Delivered at Terminal) was renamed DPU (Delivered at Place Unloaded) to allow delivery to any place of unloading, not only terminals.
– CIP now requires a higher level of cargo insurance (cover equivalent to Institute Cargo Clauses A) when the seller arranges insurance; CIF retains the lower minimum insurance requirement.
– Clarified treatment of contracts where buyer or seller uses their own transport rather than a third-party carrier (applies to multimodal).
– New FCA flexibility to handle bills of lading (seller can obtain an onboard bill of lading after goods are handed to the carrier if agreed).
– Clearer allocation of security-related costs and more explicit guidance on who is responsible for export and import security formalities and associated costs.
– Parties should always specify which Incoterms version they are using (e.g., “Incoterms 2020”) in the contract.
Advantages and disadvantages of using Incoterms
Advantages:
– Standardized and globally recognized terms reduce ambiguity and negotiation time.
– Clarifies allocation of transport costs, risk transfer points, and responsibilities for customs and insurance.
– Reduces need to craft bespoke transport clauses and lowers legal costs.
Disadvantages / limitations:
– Incoterms only cover a subset of commercial issues — parties must still draft provisions for price, payment, title, warranties, remedies, etc.
– Parties often prefer different terms (sellers vs buyers) and negotiation can be contentious.
– Some terms can expose one party to higher costs (e.g., DDP for sellers), so choosing the wrong term can create unexpected expense.
Can I still use Incoterms 2010 after Jan. 1, 2020?
Yes. Parties may contract on any edition of Incoterms provided both buyer and seller expressly agree in writing which version applies (for example, “Incoterms 2010”). However, using the current version (Incoterms 2020) is recommended because it reflects current commercial practice and clarifies points changed since 2010.
The 11 Incoterms (Incoterms 2020)
– 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
– DDP — Delivered Duty Paid
– FAS — Free Alongside Ship
– FOB — Free On Board
– CFR — Cost and Freight
– CIF — Cost, Insurance and Freight
Why Incoterms are used
– To create a common legal and commercial language that helps buyers, sellers, freight forwarders, customs brokers and carriers understand who is responsible for what.
– To reduce disputes, speed up negotiations and lower transaction costs.
– To provide internationally accepted default rules that can be relied upon in cross-border trade.
Practical steps — how to apply Incoterms correctly (for buyers and sellers)
1. Specify the Incoterms clause clearly in the sales contract:
• State the exact Incoterm and the edition: e.g., “FOB Shanghai Port (Incoterms 2020).”
• Name the precise place or port — be specific to avoid ambiguity.
2. Choose the right Incoterm for your business model and risk tolerance:
• Sellers who want minimal responsibility: EXW or FCA (with minimal export obligations).
• Sellers who want to control transport and pricing: CIF or CPT.
• Buyers who want control over carriage and insurance: FOB or EXW (if they can handle logistics).
• Choose DDP only if seller can and wants to take on import clearance, duties and local delivery.
3. Confirm insurance responsibilities and level:
• If using CIF or CIP, specify required insurance level and who is the beneficiary.
• Under CIP (2020), sellers must obtain higher (Clause A-like) insurance unless otherwise agreed.
4. Clarify customs and clearance obligations:
• Identify who will perform export and import clearance and who pays duties, taxes, and security-related charges.
• If Incoterm allocates import duties to the seller (DDP), ensure seller can legally import into buyer’s country.
5. Address documentation and proof of delivery:
• Specify which transport and commercial documents the seller must provide (bill of lading, commercial invoice, packing list, insurance policy, certificate of origin, etc.).
• If a bill of lading is needed for payment (letter of credit), make sure Incoterm and carrier instructions will allow issuance (FCA has a specific 2020 workaround).
6. Include complementary contract clauses:
• Cover price/payment, transfer of title, inspection rights, quality, packaging standards, force majeure, and dispute resolution.
• Add indemnities and insurance requirements beyond the minimum where necessary.
7. Coordinate carriers and timing:
• Confirm booking, cargo readiness, and cut-off dates, who pays detention/demurrage in case of delay.
• Agree on responsibility for loading/unloading at named places (DPU requires seller to unload).
8. Verify local legal and regulatory constraints:
• Confirm that either party can perform the required import/export steps under local law (some countries require importers to be local entities).
9. Keep records and monitor performance:
• Retain shipping documents, customs declarations, insurance policies and correspondence.
• Track shipment status and notify the other party of delays or incidents per contract terms.
10. Review Incoterm selection periodically:
• Reassess terms as your logistics capability, supplier relationships or trade lanes change.
Examples (brief)
– FOB Shanghai (Incoterms 2020): Seller loads goods on board carrier at Shanghai; risk passes to buyer once on board. Buyer arranges ocean freight and import clearance.
– DDP Los Angeles (Incoterms 2020): Seller delivers goods to buyer in Los Angeles, cleared for import and with duties paid. Seller bears maximum responsibility and cost.
– CIP Hamburg Port (Incoterms 2020): Seller pays carriage and arranges insurance to the named place; risk transfers when goods handed to first carrier, but seller must procure higher-level insurance.
The bottom line
Incoterms are an essential tool for reducing ambiguity in international trade by clearly allocating transport, risk and certain customs responsibilities. They must be used with care: always specify the precise term and Incoterms edition, name delivery places, and supplement Incoterms with contract clauses that cover price, title, quality, liability and dispute resolution. Using the appropriate Incoterm that matches each party’s capabilities and risk appetite will reduce surprises, costs and disputes.
Sources
– “What Are Incoterms?” by Katie Kerpel, Investopedia.
– International Chamber of Commerce (ICC), Incoterms 2020 resources /)
• Full list of 11 Incoterms and detailed guidance
The 11 Incoterms (Incoterms 2020)
– EXW — Ex Works: Seller makes goods available at its premises or other named place. Buyer bears virtually all costs and risks from seller’s location onward.
– FCA — Free Carrier: Seller delivers goods, cleared for export, to the carrier or another person nominated by the buyer at the named place.
– CPT — Carriage Paid To: Seller pays carriage to the named destination, but risk transfers to buyer when goods handed to the first carrier.
– CIP — Carriage and Insurance Paid To: Like CPT, but seller also contracts for insurance covering buyer’s risk to the named destination (higher minimum cover required under 2020).
– DAP — Delivered at Place: Seller delivers when goods are placed at buyer’s disposal at the arriving means of transport, ready for unloading at the named place. Seller bears costs and risks to that point, but not import clearance or duties.
– DPU — Delivered at Place Unloaded: Seller delivers and unloads the goods at the named place of destination. This replaced DAT (Delivered at Terminal) in 2020 to cover any unloading place, not just terminals.
– DDP — Delivered Duty Paid: Seller bears all costs and risks to deliver the goods to the named place in the buyer’s country, including import duties and clearance.
– FAS — Free Alongside Ship: For sea/inland waterway transport only. Seller places goods alongside the vessel at the named port; buyer bears costs and risks from that point (including loading).
– FOB — Free On Board: Seller delivers when goods pass the ship’s rail (or are on board) at the named port of shipment; buyer bears costs and risks thereafter.
– CFR — Cost and Freight: Seller pays costs and freight to bring goods to the named port of destination, but risk passes to buyer once goods are on board the vessel.
– CIF — Cost, Insurance and Freight: Like CFR, but seller also obtains marine insurance against buyer’s risk during carriage; under Incoterms 2020, the minimum insurance obligation differs from CIP (CIF requires minimum cover customary for maritime transport).
Note: Always include the named place (e.g., “FOB Shanghai Port”) and the Incoterms version (e.g., “Incoterms 2020”) in contracts.
What Incoterms cover — and what they do not
Incoterms allocate certain responsibilities between buyer and seller regarding:
– Delivery point and transfer of risk.
– Who contracts for and pays transport to a named place.
– Who handles export and import formalities and associated costs.
– Who arranges and pays for insurance when required by the term.
Incoterms do NOT:
– Transfer title or ownership of the goods.
– Determine contract price or payment terms.
– Address breach remedies, warranties beyond delivery responsibilities, or liability for insufficient packaging (unless agreed separately).
– Replace explicit contract clauses on force majeure, dispute resolution, or other commercial terms.
Because of these omissions, always supplement Incoterms with clear contractual clauses on payment, title transfer, warranty, and dispute resolution.
Practical steps for choosing an Incoterm
1. Identify your risk tolerance and control needs.
• Seller prefers terms like EXW, FCA, or FAS (minimal seller obligations).
• Buyer prefers DDP (seller assumes most obligations) or CIF for sea freight with insurance.
2. Match the Incoterm to transport mode.
• Use sea/inland-water terms (FAS, FOB, CFR, CIF) only for shipments on those waters.
• Use multimodal terms (EXW, FCA, CPT, CIP, DAP, DPU, DDP) for any transport mode or multimodal carriage.
3. Decide who arranges and pays for insurance.
• If buyer wants minimal risk, insist the seller uses CIP or CIF with adequate coverage or that the buyer purchases additional cover.
4. Clarify customs and duties handling.
• For international shipments, specify who handles export clearance, import clearance, and who pays duties (DDP places responsibility on seller).
5. Name the precise place and include Incoterms version.
• Example: “CPT Rotterdam Terminal Incoterms 2020” — specify terminal if relevant.
6. Add complementary contract clauses.
• Payment terms, transfer of title, inspection rights, packaging standards, liability limits, and dispute resolution.
Practical contract-drafting checklist (use with every international sale)
– State Incoterm and the exact named place (plus version): e.g., “FCA Shenzhen Port (Incoterms 2020)”.
– State which party will arrange and pay for transport, insurance, and customs clearance.
– Specify insurance minimum level and who is responsible for additional coverage.
– Define transfer of title and when ownership passes.
– Agree on packaging, marking, and labeling responsibilities.
– Specify required transport documents (bill of lading, airway bill, commercial invoice, packing list, certificate of origin, etc.).
– State inspection, weight verification, and pre-shipment testing obligations.
– Include force majeure, default/termination, governing law, and dispute resolution.
Examples and scenarios
Example 1 — EXW (Seller in Chicago, Buyer in Lagos)
– Seller: makes goods available at Chicago warehouse; minimal obligations.
– Buyer: arranges collection, export customs clearance in the U.S., international carriage, insurance, import clearance and duties in Nigeria, and takes all risk once goods leave seller’s premises.
Practical implication: Buyer needs strong logistics capability to manage export formalities in seller’s country.
Example 2 — FOB (Shanghai exporter to Hamburg importer; sea transport)
– Seller: delivers goods on board ship at Shanghai port, pays costs until goods are on board, handles export clearance.
– Buyer: arranges and pays ocean freight and insurance, assumes risk once goods on board.
Practical implication: Buyer controls freight choice and insurance; seller is responsible for export clearance and loading.
Example 3 — CIF (Mumbai seller to Santos buyer; sea transport)
– Seller: pays cost, freight, and minimum insurance to bring goods to Santos port; risk passes when goods on board at origin.
– Buyer: handles import clearance and inland transport in destination country.
Practical implication: Seller arranges main carriage and insurance but buyer incurs risk during the main carriage, so buyer may want additional insurance or different term (e.g., DAP/DDP) if concerned.
Example 4 — DDP (Manufacturer in Seoul to retailer in Madrid)
– Seller: delivers goods to retailer’s premises in Madrid, cleared for import, and pays all duties and taxes.
– Buyer: receives goods with minimal import hassles.
Practical implication: Seller assumes significant responsibility and must be familiar with import rules, taxes, and local logistics in Spain.
Insurance considerations
– Know the term’s insurance obligations: CIP requires a higher minimum insurance cover than CIF under Incoterms 2020 (CIP obliges seller to procure insurance complying with Institute Cargo Clauses A or equivalent; CIF typically reflects marine insurance customary for the trade and historically lower minimum).
– Even when seller must provide insurance, buyers may purchase additional cover for their interests (e.g., loss of profit, higher valuation).
– Verify who is the insurance beneficiary and ensure claims can be made by the party at risk.
Customs, documentation, and the bill of lading
– Some terms (FCA) may be used with a bill of lading when the seller needs to obtain one for the buyer; 2020 clarified procedures, so parties should specify how an on-board bill of lading (or sea waybill) will be obtained and who pays.
– Ensure export and import documentation responsibilities are spelled out, including who pays for certificates, inspections, and sanitary/phytosanitary clearances.
Common pitfalls and how to avoid them
– Vague named places: specify exact terminal, warehouse, or point to avoid disputes.
– Failing to specify Incoterms version: explicitly state “Incoterms 2020” (or other edition mutually agreed).
– Assuming transfer of ownership = transfer of risk: include a clause that addresses when title passes.
– Ignoring local import regulations under DDP: seller may underestimate costs/requirements of import clearance.
– Underinsuring: confirm insurance levels and scope; consider buyer top-up coverage.
When to update the Incoterms version and legal considerations
– Use the most current version unless both parties expressly agree otherwise in writing.
– Incoterms are not law; they are contractual terms—ensure applicable national law and dispute resolution clauses are in the contract.
– Consult legal counsel in cross-border disputes or sophisticated arrangements (e.g., consignment sales, letters of credit, or sale of goods financing).
Advantages and disadvantages — practical summary
Advantages
– Internationally recognized shorthand reduces ambiguity about delivery, cost and risk allocation.
– Saves negotiation time and legal drafting on routine delivery responsibilities.
– Adaptable to multimodal transport (with specific terms for sea-only).
Disadvantages
– Incoterms don’t cover payment terms, title transfer, or quality disputes—supplemental clauses needed.
– Some terms may expose one party to unexpected cost (e.g., DDP responsibilities).
– Parties have different preferences, requiring negotiation beyond the standard term.
Quick decision guide (practical steps)
1. Decide which party should control transport and insurance (seller or buyer).
2. Choose a term that reflects that control and risk allocation.
3. Name the precise delivery point and Incoterms version.
4. Add contractual terms for payment, title transfer, inspection, and dispute resolution.
5. Confirm responsibilities for export/import formalities and security costs.
6. Consider insurance top-up or independent insurance if necessary.
7. Review with logistics and legal advisors before signing.
Further resources
– International Chamber of Commerce (ICC) — official Incoterms 2020 rules and guidance: /
– Investopedia overview (summary and examples)
Concluding summary
Incoterms are a vital, standardized tool for clarifying the division of costs, risks and responsibilities between buyers and sellers in international (and domestic) trade. There are 11 Incoterms in the 2020 edition, tailored for various transport modes and allocation preferences. They simplify contract drafting but do not replace the need for clear, complementary contractual clauses covering payment, transfer of title, insurance levels, dispute resolution, and local regulatory compliance. Choosing the right Incoterm requires evaluating who will control transport and customs procedures, the desired allocation of risk, and the parties’ logistics capabilities. Always specify the exact named place and Incoterms version, and consult legal and trade experts when obligations (e.g., DDP) require knowledge of foreign import laws.
For transactions: pick the Incoterm that matches who will manage and pay for transport and insurance, spell out the named place and version, and add explicit clauses for title, payment, and dispute resolution to avoid surprises.
Sources: Investopedia — “Incoterms” (Katie Kerpel); International Chamber of Commerce (Incoterms 2020 rules and guidance).