In international trade, one of the most common causes of disputes between sellers and buyers is not product quality, but rather responsibility for delivery, costs, and risks during transportation. To mitigate these risks, the International Chamber of Commerce (ICC) introduced the Incoterms® (International Commercial Terms) rules, which aim to standardize the understanding of parties’ obligations in international sales contracts. To date, Incoterms® 2020 is the latest version applied globally. According to the ICC, Incoterms are not mandatory laws; however, once referenced in a contract, they become an important legal basis for clearly defining who bears costs, who assumes risks, and the extent of each party’s delivery responsibilities.
A common misconception among newcomers is that Incoterms regulate prices or payment methods. In fact, Incoterms focus on only three core elements:
- Delivery responsibility: Where and how the seller must deliver the goods.
- Cost allocation: Who bears the costs of transportation, loading and unloading, insurance, taxes, and fees.
- Transfer of risk: The point at which the risk of loss or damage to the goods transfers from the seller to the buyer.
According to the ICC, Incoterms do not regulate ownership of goods, payment terms, or penalties for breach of contract. Therefore, they must be used in conjunction with other contractual terms.
Incoterms® 2020: 11 Conditions and Their Grouping
Incoterms® 2020 includes 11 rules, divided into two main groups based on the mode of transport.
1. Rules Applicable to All Modes of Transport (7 rules)
- EXW – Ex Works
- The seller’s obligation is limited to placing the goods at their premises or another agreed location. The buyer bears almost all costs and risks. This rule is most favorable to the seller but poses high risks for inexperienced buyers.
- FCA – Free Carrier
- The seller delivers the goods to the carrier nominated by the buyer. FCA is recommended by the ICC as an alternative to FOB for containerized shipments.
- CPT – Carriage Paid To
- The seller pays for carriage to the named destination, but risk transfers to the buyer once the goods are handed over to the first carrier.
- CIP – Carriage and Insurance Paid To
- Similar to CPT, but the seller is also required to procure insurance at the minimum level stipulated by the ICC (Institute Cargo Clauses A).
- DAP – Delivered At Place
- The seller delivers the goods to the agreed destination, excluding import customs clearance.
- DPU – Delivered at Place Unloaded
- The only Incoterms rule that requires the seller to unload the goods at the destination.
- DDP – Delivered Duty Paid
- The seller assumes maximum responsibility, including import duties, taxes, and customs clearance.
2. Rules Applicable Specifically to Sea and Inland Waterway Transport (4 rules)
- FAS – Free Alongside Ship
- The seller delivers the goods alongside the vessel at the port of shipment.
- FOB – Free On Board
- Risk transfers once the goods are loaded on board the vessel. According to the ICC, FOB is not suitable for containerized cargo, although it remains widely used in practice.
- CFR – Cost and Freight
- The seller pays the cost of sea freight, but risk transfers to the buyer once the goods are loaded onto the vessel.
- CIF – Cost, Insurance, and Freight
- Similar to CFR, with the additional requirement that the seller procures insurance for the shipment.
According to ICC data, CIF and FOB remain the most commonly used Incoterms in global maritime trade, although FCA is increasingly encouraged as a more appropriate alternative to FOB for container shipments.
The key differences among Incoterms lie in the allocation of risk and responsibility. For example, under EXW, the buyer must arrange the entire transportation process, which can easily result in higher costs and increased risk. In contrast, under DDP, the seller manages the entire delivery chain, which is more expensive but significantly simplifies procedures for the buyer. Many logistics industry reports indicate that selecting inappropriate Incoterms can increase total logistics costs by 5–10%, particularly for businesses that are new to international trade or lack operational experience.
In the context of volatile global trade conditions, rising transportation costs, and increasingly stringent compliance requirements, Incoterms serve as a common commercial language that enables parties to clarify responsibilities from the outset. For import–export professionals, especially beginners, a solid understanding of each Incoterms rule not only helps prevent disputes but also supports more effective contract negotiations, cost control, and the selection of suitable logistics solutions.
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