What Incoterms actually decide
Incoterms® (International Commercial Terms) are 11 three-letter rules published by the International Chamber of Commerce (ICC). The current edition, Incoterms 2020, took effect on 1 January 2020. In any cross-border sale they answer four questions:
- Costs — up to what point does the seller pay (carriage, loading, insurance)?
- Risk — at what precise point does the risk of loss or damage pass to the buyer?
- Customs — who handles export and import clearance?
- Delivery — what counts as the seller having "delivered"?
Incoterms do not cover transfer of ownership, payment terms, or which law governs the contract. They sit alongside those, not in place of them.
For the four "C" rules — CPT, CIP, CFR, CIF — the point where the seller stops paying (the destination) is not the point where risk passes (origin). The seller pays freight to the destination, but risk has already shifted to the buyer the moment the goods are handed to the carrier or loaded on board.
The 11 rules at a glance
Grouped the way the ICC groups them: seven rules work for any mode of transport, four are for sea and inland waterway only.
| Code | Full name | Risk passes to buyer when… | Seller pays freight to | Seller insures? |
|---|---|---|---|---|
| Any mode of transport | ||||
| EXW | Ex Works | Goods made available at seller's premises (buyer even loads) | — (buyer pays all) | No |
| FCA | Free Carrier | Goods handed to buyer's carrier at named place | Named place of delivery | No |
| CPT | Carriage Paid To | Goods handed to the first carrier | Named destination | No |
| CIP | Carriage & Insurance Paid To | Goods handed to the first carrier | Named destination | Yes — max cover (ICC A) |
| DAP | Delivered at Place | Goods at buyer's disposal at destination, ready to unload | Named destination | No |
| DPU | Delivered at Place Unloaded | Goods unloaded at named place by seller | Destination + unloading | No |
| DDP | Delivered Duty Paid | Goods delivered, import-cleared, duties paid | Everything, incl. import duty | No |
| Sea & inland waterway only | ||||
| FAS | Free Alongside Ship | Goods placed alongside the vessel at the port | — (buyer pays freight) | No |
| FOB | Free On Board | Goods loaded on board the vessel | — (buyer pays freight) | No |
| CFR | Cost & Freight | Goods loaded on board the vessel | Destination port | No |
| CIF | Cost, Insurance & Freight | Goods loaded on board the vessel | Destination port | Yes — min cover (ICC C) |
Order of seller obligation, lowest to highest: EXW → FCA → FAS → FOB → CFR/CPT → CIF/CIP → DAP → DPU → DDP.
Customs clearance — the simple rule
It only flips at the two extremes:
- Export clearance: the seller handles it under every rule except EXW, where the buyer is technically responsible.
- Import clearance & duties: the buyer handles it under every rule except DDP, where the seller takes on everything.
Insurance — only two rules require it
Only CIF and CIP oblige the seller to buy insurance for the buyer's benefit. The 2020 edition split their required level of cover:
- CIF — minimum cover, Institute Cargo Clauses (C). Unchanged, since CIF is used for bulk sea cargo.
- CIP — maximum cover, Institute Cargo Clauses (A), an all-risks standard. This is new in 2020.
What changed from Incoterms 2010
- DAT → DPU. "Delivered at Terminal" became "Delivered at Place Unloaded" — same idea (seller unloads), but the destination is no longer limited to a terminal.
- Different insurance levels for CIF vs CIP. CIP was raised to all-risks cover (ICC A); CIF stayed at minimum (ICC C).
- FCA + on-board bill of lading. A new option lets the buyer instruct the carrier to issue an on-board bill of lading to the seller — useful for letters of credit.
- Seller's / buyer's own transport allowed. The rules now explicitly account for carriage by the parties' own vehicles, not just third-party carriers.
- Security & cost clarity. Transport-security obligations and a consolidated list of costs were made more explicit in each rule.
Common mistakes
- Using FOB/CFR/CIF for containers. These sea-only terms assume risk passes at the ship's rail. For containerised cargo handed over at a terminal, FCA, CPT or CIP fit the actual handover point far better.
- Assuming "C" terms mean the seller carries risk to destination. They don't — risk passes at origin; only cost runs to destination.
- Picking DDP without checking import rules. The seller may be unable to clear customs or reclaim VAT in the buyer's country.
- Naming a vague place. Always state the precise named place/port — it is where risk and cost actually pivot.
Sources
- International Chamber of Commerce — Incoterms® 2020 (official).
- ICC, Incoterms® 2020 rules, ICC Publication No. 723E.
- Institute Cargo Clauses (A) and (C), Lloyd's Market Association / International Underwriting Association.
Summary for quick reference only. For a binding contract, consult the official ICC text and a trade professional. "Incoterms" is a registered trademark of the ICC.