What Are Incoterms? A Plain-Language Guide to Incoterms 2020

Incoterms decide who does what, who pays for what, and most importantly, at exactly which point responsibility for your cargo passes from seller to buyer.

Get them right and everyone knows where they stand. Get them wrong and you discover the gap only when something goes missing, and both parties believe the other was covering it.

Incoterms are a set of standard trade terms published by the International Chamber of Commerce (ICC). They are used in international and domestic sales contracts, and they settle three things:

• Delivery. Where the seller must deliver the goods, and what counts as delivery being complete.
• Risk. The precise point at which risk of loss or damage transfers from seller to buyer.
• Costs. Who pays for carriage, insurance, export and import formalities, loading and unloading.

The current version is Incoterms 2020, in effect since 1 January 2020. Earlier versions have not been cancelled. If your contract states "Incoterms 2010", that version applies. This is why contracts should always name both the rule and the version, for example "FCA Copenhagen, Incoterms 2020".

This is where most misunderstandings begin. Incoterms are narrower than people assume. They do not determine:

• Ownership or title. Incoterms transfer risk, not legal ownership. Title passes according to your sales contract and the governing law, not the Incoterm.
• Payment terms. When and how the buyer pays is a separate contractual matter.
• What happens if a party breaches the contract. Remedies and disputes are governed by the contract and applicable law.
• All insurance. Only CIF and CIP oblige the seller to arrange insurance. Under every other rule, insurance is optional and a commercial decision.

An Incoterm is one clause in a sales contract. It is not the contract.

The 11 rules split into two groups, and choosing from the wrong group is a common and expensive error.

Seven rules for any mode of transport, including road, rail, air, sea and multimodal: EXW, FCA, CPT, CIP, DAP, DPU, DDP.

Four rules for sea and inland waterway transport only: FAS, FOB, CFR, CIF.

The sea-only rules were written for bulk and break bulk cargo loaded over a ship’s rail. They are frequently, and incorrectly, applied to containerised shipments.

EXW places nearly everything on the buyer, including export clearance in the seller’s own country, something a foreign buyer often cannot legally do. For international trade, FCA is usually the better choice.

DPU is the only rule that requires the seller to unload. It replaced the former DAT (Delivered at Terminal) in the 2020 revision, broadening it from terminals to any named place.

DDP places maximum obligation on the seller, including import duties and clearance in the buyer’s country. Sellers frequently underestimate what this involves.

Under CFR and CIF, note the split that catches people out: the seller pays freight to the destination port, but risk transfers at the origin port once goods are on board. The seller pays for a journey during which the buyer carries the risk.

Both rules oblige the seller to insure, but at different levels, a change introduced in Incoterms 2020.

• CIP requires Institute Cargo Clauses (A) or equivalent: all-risks cover.
• CIF requires only Institute Cargo Clauses (C) or equivalent: a limited set of named risks.

If you are buying CIF and expect comprehensive cover, you will not get it by default. Either agree a higher level in the contract or arrange your own.

The single most common Incoterms error is using FOB, CFR or CIF for containerised cargo.

These rules transfer risk when goods are loaded on board the vessel. But containers are handed over at a terminal days beforehand. That leaves a window, often several days, where the cargo is out of the seller’s control but still at the seller’s risk, with no clear party responsible in practice.

For containers, the equivalent any-mode rules are the correct choice:

• Instead of FOB, use FCA
• Instead of CFR, use CPT
• Instead of CIF, use CIP

There is no universally best rule. The right choice depends on four questions:

1. How much control do you want? More control means more obligation. A buyer who wants to choose the carrier and route should push towards EXW or FCA. A buyer who wants goods delivered without involvement should look at DAP or DDP.
2. Who can legally handle customs clearance at each end? Export clearance normally requires an established presence in the export country, and import clearance in the import country. This rules out EXW for many international buyers and DDP for many sellers.
3. Is the cargo containerised? If yes, avoid the four sea-only rules.
4. Who is better placed to carry the risk? The party with better freight rates, better insurance and more experience on the route is usually the party that should hold the risk.

Always name the place precisely. "FCA Copenhagen" is ambiguous. "FCA Kirkebjerg Parkvej 9c, 2605 Brøndby, Incoterms 2020" is not.

Choosing an Incoterm is a commercial decision, and it is one your freight forwarder should be part of. The right rule depends on the route, the cargo, who can clear customs at each end, and where the risk sits most sensibly. That is exactly the ground a forwarder covers every day.

FORW arranges air, sea and road freight to and from Denmark, and handles the customs documentation that follows the cargo. With offices in Denmark, Sweden and Norway, we work across Scandinavia and internationally.

If you are negotiating terms with a supplier or a customer and want a straight answer on which Incoterm actually fits, ask us before the contract is signed rather than after the shipment moves.