Incoterms® 2020, explained: who pays, who carries the risk, and when
The eleven Incoterms rules decide where cost and risk pass from seller to buyer. Here is what each one means in practice — and the three that cause most disputes.
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Every international sale carries an unspoken question: at what exact point does the shipment stop being the seller's problem and become the buyer's? Incoterms® answer it. Published by the International Chamber of Commerce, they are three-letter rules written into sales contracts that fix two things — who pays for each leg of the journey and where the risk of loss or damage transfers.
Those two points are not always the same place. That gap is where most shipping disputes begin.
The eleven rules fall into two groups
The current edition, Incoterms® 2020, contains eleven rules. Seven can be used for any mode of transport, including multimodal moves. Four are restricted to sea and inland waterway, because they hinge on the cargo being placed on board a vessel.
| Rule | Full name | Mode | Risk passes to buyer |
|---|---|---|---|
| EXW | Ex Works | Any | At the seller's premises, goods made available |
| FCA | Free Carrier | Any | When delivered to the buyer's nominated carrier |
| CPT | Carriage Paid To | Any | When handed to the first carrier |
| CIP | Carriage and Insurance Paid To | Any | When handed to the first carrier |
| DAP | Delivered at Place | Any | At the named destination, ready for unloading |
| DPU | Delivered at Place Unloaded | Any | At the named destination, once unloaded |
| DDP | Delivered Duty Paid | Any | At destination, import-cleared and duty paid |
| FAS | Free Alongside Ship | Sea only | Alongside the vessel at the port of loading |
| FOB | Free on Board | Sea only | On board the vessel at the port of loading |
| CFR | Cost and Freight | Sea only | On board the vessel at the port of loading |
| CIF | Cost, Insurance and Freight | Sea only | On board the vessel at the port of loading |
The C-rules: where cost and risk split apart
CPT, CIP, CFR and CIF are the rules that confuse people, because the seller pays freight to the destination while risk transfers at origin. Under CIF, the seller books and pays for ocean freight to the destination port — but the moment the goods are loaded aboard at origin, a container lost at sea is the buyer's loss.
That is precisely why CIF and CIP include insurance: the seller arranges cover that protects a buyer who already holds the risk. The two set different minimums. CIP requires the broad all-risks cover of Institute Cargo Clauses (A); CIF requires only the more limited Clauses (C). If you buy on CIF and want comprehensive cover, ask for it explicitly or buy your own.
DDP and EXW: the two extremes
EXW puts the least on the seller: make the goods available at your premises and you are done. The buyer handles loading, export clearance, freight, and import. It looks simple, but it can leave a foreign buyer responsible for an export declaration in a country where they have no legal presence — which some customs authorities will not accept.
DDP puts the most on the seller: delivery to the buyer's door, with import duties and taxes paid. It gives the buyer a clean, predictable landed cost. But the seller must be able to act as, or appoint, the importer of record in the destination country, and must absorb any duty or VAT that turns out higher than quoted.
How to choose
- Decide who controls the freight. If you want to pick the carrier and the route, take an F-rule as buyer or a C- or D-rule as seller.
- Match the rule to the transport mode. Use the any-mode rules for air, road, rail and containers. Reserve FAS, FOB, CFR and CIF for bulk and break-bulk loaded directly onto a vessel.
- Name the place precisely. "FCA Shanghai" is ambiguous. "FCA Warehouse 4, 188 Yangshupu Road, Shanghai" is not. The named place is where obligations change hands.
- Settle insurance separately. Unless you are using CIF or CIP, no Incoterm obliges anyone to insure the goods.
- Cite the edition. Write "Incoterms® 2020" in the contract. Older editions remain valid if both parties choose them, so specifying avoids argument.
Sources
Rules change. This guide is general information, not legal or customs advice — check the current requirements for your shipment before you send it.
