Customs & Compliance
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8 min read
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Incoterms® 2020 explained: who pays, who carries the risk
Eleven rules define where the seller’s responsibilities end. A practical guide to choosing between them — and the mistakes that cause disputes.
Marit de Vries
Customs & Trade Compliance Manager
Incoterms® rules, published by the International Chamber of Commerce, define how the tasks, costs and risks of delivering goods are divided between seller and buyer. The current version is Incoterms® 2020. They do not decide who owns the goods or when payment is due — those belong in the sales contract.
Two groups of rules
Seven rules can be used for any mode of transport: EXW, FCA, CPT, CIP, DAP, DPU and DDP. Four are only for sea and inland waterway transport: FAS, FOB, CFR and CIF.
Risk and cost do not always move together
Under the C-rules (CPT, CIP, CFR, CIF) the seller pays for main carriage to the destination, but risk passes to the buyer much earlier — when the goods are handed to the first carrier or loaded on board at the port of shipment. This split is the most common source of misunderstanding.
Choosing a rule
EXW gives the buyer the most responsibility, including export clearance. It is often unsuitable when the buyer cannot handle formalities in the seller’s country; FCA is usually the better alternative.
FCA is the most flexible rule for containerised cargo, whatever the mode.
FOB, CFR and CIF are designed for goods loaded on board a vessel. For containers handed over at a terminal before loading, FCA, CPT or CIP match the real handover point more closely.
DAP, DPU and DDP put the main carriage and its risk on the seller. Under DDP the seller also clears import and pays duties, which can be hard to do in another country.
Insurance
Only CIF and CIP require the seller to buy insurance. Under CIF the minimum is Institute Cargo Clauses (C); under CIP, Incoterms® 2020 raised the minimum to Institute Cargo Clauses (A). Under every other rule, insurance is a commercial decision for whichever party carries the risk.
Always name the place
An Incoterm without a precise named place is incomplete. “FCA Jebel Ali” is ambiguous; “FCA seller’s warehouse, Jebel Ali Free Zone” or “FCA container terminal 2, Jebel Ali” leaves no doubt.
This guide is general information, not legal advice. Check the official ICC Incoterms® 2020 text and take professional advice for your contracts.
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