Incoterms Explained
Eleven three-letter terms decide where delivery happens, when risk passes and who pays. Here is each one.
Incoterms are the International Chamber of Commerce's three-letter trade terms, such as FOB, CIF and DDP, that tell a buyer and seller who does what in moving goods: where the seller delivers, when risk passes to the buyer, who pays for carriage and insurance, and who handles export and import clearance. There are 11 rules in the current edition, Incoterms 2020, which came into force on 1 January 2020.
A banker meets them on every LC and every export bill. The Incoterm in the contract decides which documents should exist: a CIF sale needs an insurance document from the seller, an FOB sale does not. That is why the CCFE syllabus places Incoterms in the documentary credits module even though they are rules about the sale, not the payment.
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The 11 Incoterms 2020 Rules
Seven rules work for any mode of transport; four are only for sea and inland waterway.
EXW (Ex Works)
Mode
Any
Seller delivers (risk passes) when
Goods are placed at the buyer's disposal at the seller's premises, before the transport cycle starts
FCA (Free Carrier)
Mode
Any
Seller delivers (risk passes) when
Goods are placed at the disposal of the buyer's nominated carrier at the agreed point
CPT (Carriage Paid To)
Mode
Any
Seller delivers (risk passes) when
Goods are handed over to the carrier; seller pays carriage to the named destination
CIP (Carriage and Insurance Paid To)
Mode
Any
Seller delivers (risk passes) when
As CPT, and the seller also insures the goods
DAP (Delivered at Place)
Mode
Any
Seller delivers (risk passes) when
Goods are placed at the buyer's disposal at the named destination, ready for unloading
DPU (Delivered at Place Unloaded)
Mode
Any
Seller delivers (risk passes) when
Goods are unloaded at the named destination
DDP (Delivered Duty Paid)
Mode
Any
Seller delivers (risk passes) when
Goods are delivered at destination cleared for import, duties paid
FAS (Free Alongside Ship)
Mode
Sea
Seller delivers (risk passes) when
Goods are placed alongside the vessel at the port of shipment
FOB (Free on Board)
Mode
Sea
Seller delivers (risk passes) when
Goods are placed on board the vessel at the port of shipment
CFR (Cost and Freight)
Mode
Sea
Seller delivers (risk passes) when
Goods are on board at the port of shipment; seller pays freight to the destination port
CIF (Cost, Insurance and Freight)
Mode
Sea
Seller delivers (risk passes) when
As CFR, and the seller also insures the goods
| Rule | Mode | Seller delivers (risk passes) when |
|---|---|---|
| EXW (Ex Works) | Any | Goods are placed at the buyer's disposal at the seller's premises, before the transport cycle starts |
| FCA (Free Carrier) | Any | Goods are placed at the disposal of the buyer's nominated carrier at the agreed point |
| CPT (Carriage Paid To) | Any | Goods are handed over to the carrier; seller pays carriage to the named destination |
| CIP (Carriage and Insurance Paid To) | Any | As CPT, and the seller also insures the goods |
| DAP (Delivered at Place) | Any | Goods are placed at the buyer's disposal at the named destination, ready for unloading |
| DPU (Delivered at Place Unloaded) | Any | Goods are unloaded at the named destination |
| DDP (Delivered Duty Paid) | Any | Goods are delivered at destination cleared for import, duties paid |
| FAS (Free Alongside Ship) | Sea | Goods are placed alongside the vessel at the port of shipment |
| FOB (Free on Board) | Sea | Goods are placed on board the vessel at the port of shipment |
| CFR (Cost and Freight) | Sea | Goods are on board at the port of shipment; seller pays freight to the destination port |
| CIF (Cost, Insurance and Freight) | Sea | As CFR, and the seller also insures the goods |
Three Ways to Read the Table
- check_circleBy obligation: EXW puts the most on the buyer, DDP the most on the seller. Every other rule sits between them.
- check_circleBy the C-rule split: under CPT, CIP, CFR and CIF the seller pays carriage to the destination, but risk passes at the start of the journey. The named place in a C rule is where carriage ends, not where delivery happens.
- check_circleBy insurance: only CIP and CIF oblige the seller to insure. Under Incoterms 2020, CIP requires cover in line with Institute Cargo Clauses (A), the broad "all risks" level, while CIF keeps the minimum Clauses (C) level unless the parties agree otherwise.
What Incoterms Do Not Cover
ICC is explicit that Incoterms are not a contract of sale. They say nothing about:
- Title
- When ownership of the goods passes. Risk and title are different things, and Incoterms only deal with risk.
- Payment
- The timing, place, method or currency of payment. Whether the buyer pays by LC, collection or open account is a separate term of the contract.
- Breach and remedies
- What happens if a party fails to perform, delays, or claims force majeure.
- Specifications, sanctions and disputes
- Goods specifications, sanctions, tariffs and trade prohibitions, the governing law and how disputes are resolved.
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Writing an Incoterm Into a Contract
ICC advises naming the rule, the place and the edition together, for example "CIF Shanghai Incoterms 2020". Leaving the year out can cause problems that are hard to resolve, because contracts still in use may refer to different editions. Parties can vary a rule, but ICC warns that variations need to be spelled out clearly.
How CCFE Tests This
The paper asks where delivery is complete under a named rule, who bears the most obligation (EXW: buyer; DDP: seller), who pays export or import fees, and which rules include insurance. The CCFE courseware teaches the 2010 edition, so expect DAT where Incoterms 2020 has DPU. The classic trap is the C rules: candidates assume risk passes at destination because the seller pays freight there. It passes at shipment.
FAQs
What are Incoterms in simple terms?expand_more
Standard three-letter trade terms published by the ICC that allocate delivery, risk, costs and customs clearance between a buyer and a seller. The current edition, Incoterms 2020, has 11 rules.
Which Incoterm puts the maximum obligation on the seller?expand_more
DDP (Delivered Duty Paid). The seller delivers at the named destination, cleared for import, with duties paid. EXW is the opposite: the buyer takes on almost everything.
What is the difference between FOB and CIF?expand_more
Under both, risk passes when the goods are on board at the port of shipment. Under CIF the seller also pays freight to the destination port and insures the goods; under FOB the buyer arranges both.
Do Incoterms decide when ownership passes?expand_more
No. ICC states that Incoterms do not deal with transfer of property or title. They cover delivery, risk, costs and clearance only.
Next steps
- Incoterms 2010 vs 2020arrow_forward
- UCP 600arrow_forward
- Bill of ladingarrow_forward
- Syllabusarrow_forward
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