What are Incoterms?
Incoterms® are delivery rules published by the International Chamber of Commerce (ICC). When a sales contract says something like "FOB Port of Istanbul, Incoterms® 2020", the parties have answered four questions with a single word:
- Risk: If the goods are damaged or lost in transit, who bears the loss?
- Cost: Up to which point does each party pay for loading, freight, terminal charges and unloading?
- Insurance: Is either party obliged to take out cargo insurance?
- Customs: Who handles export and import clearance, and who pays the duties?
There are also questions Incoterms do not answer: when ownership of the goods passes, how payment is made, the sale price, and the consequences of a breach of contract. These are dealt with in other clauses of the sales contract.
Rule by rule: the journey of the cargo
Choose a rule. Each circle is one stage of the cargo's journey from the seller's premises to the buyer's premises, and shows three things at once:
- Inner disc (cost): Who pays for that stage? Copper means the seller, blue means the buyer.
- Inner ring (responsibility for the goods): If the goods are damaged or lost at that stage, whose loss is it? The red line marks the point where risk passes from seller to buyer.
- Outer ring (insurance): A thick coloured ring shows the seller's contractual obligation to insure, which exists only under CIF and CIP. A thin grey ring means insurance is not compulsory; at those stages the party carrying the risk is advised to insure in its own interest.
Hover over the circles to see the details of each stage.
E At premises
F Buyer pays main carriage
C Seller pays main carriage, risk passes at origin
D Seller carries it to destination
Sea and inland waterway transport only.
Free Carrier
The seller clears the goods for export and delivers them to the carrier named by the buyer at the named place.
- Risk transfer
- On delivery to the carrier
- Cost transfer
- At the place of delivery
- Insurance obligation
- Not compulsory
- Customs
- Export: Seller · Import: Buyer
Risk: If the place of delivery is the seller's premises, when the goods are loaded on the buyer's vehicle; if it is elsewhere, when they are placed at the carrier's disposal on the seller's vehicle, ready for unloading.
Cost: The seller pays up to the place of delivery, the buyer thereafter. In this matrix the place of delivery is shown as the departure terminal.
Watch out: The recommended rule instead of FOB for container shipments. Since the 2020 edition, if the parties agree, the seller can be given a bill of lading with an on-board notation (important in letter of credit transactions).
Matrix: all 11 rules at a glance
If you want to see the same information for every rule side by side, use the matrix below. The cells show who pays: S for seller, B for buyer. The red line marks where risk passes. Click a rule and the circles above switch to it.
| Rule | 1Loading at premises | 2Export clearance | 3Pre-carriage | 4Origin handling | 5Main carriage | 6Arrival handling | 7Import clearance | 8On-carriage | 9Unloading at premises | Insurance |
|---|---|---|---|---|---|---|---|---|---|---|
| Any mode of transport | ||||||||||
| EXW Ex Works | B | B | B | B | B | B | B | B | B | Not compulsory |
| FCA Free Carrier | S | S | S | B | B | B | B | B | B | Not compulsory |
| CPT Carriage Paid To | S | S | S | S | S | S | B | S | B | Not compulsory |
| CIP Carriage and Insurance Paid To | S | S | S | S | S | S | B | S | B | Seller · ICC (A) |
| DAP Delivered at Place | S | S | S | S | S | S | B | S | B | Not compulsory |
| DPU Delivered at Place Unloaded | S | S | S | S | S | S | B | S | S | Not compulsory |
| DDP Delivered Duty Paid | S | S | S | S | S | S | S | S | B | Not compulsory |
| Sea and inland waterway | ||||||||||
| FAS Free Alongside Ship | S | S | S | B | B | B | B | B | B | Not compulsory |
| FOB Free on Board | S | S | S | S | B | B | B | B | B | Not compulsory |
| CFR Cost and Freight | S | S | S | S | S | D | B | B | B | Not compulsory |
| CIF Cost, Insurance and Freight | S | S | S | S | S | D | B | B | B | Seller · ICC (C) |
Reference scenario: seller's premises → pre-carriage → departure terminal → main carriage → arrival terminal → import clearance → on-carriage → buyer's premises. Under FCA, CPT and CIP the place of delivery is taken to be the departure terminal; under the C and D rules the named place of destination is taken to be the buyer's location. Incoterms® is a registered trademark of the International Chamber of Commerce (ICC); the official text of the rules is the ICC publication.
Click a rule and the circles above switch to it.
Two important details in the matrix:
- Under the C rules (CPT, CIP, CFR, CIF) cost and risk change hands at different points. The seller pays the freight to destination, but risk passes to the buyer at the point of shipment. This is the topic students mix up most often.
- CPT and DAP have identical cost rows. The only difference is risk: under CPT the buyer carries the transit risk, under DAP the seller does.
The four groups
E group (EXW): The seller's obligations are at their minimum. The goods are made available at the seller's premises; even loading is the buyer's job.
F group (FCA, FAS, FOB): The buyer arranges and pays for the main carriage. The seller delivers the goods to the carrier chosen by the buyer.
C group (CPT, CIP, CFR, CIF): The seller arranges and pays for the main carriage, but risk passes at the point of shipment. These are shipment rules, not arrival rules.
D group (DAP, DPU, DDP): The seller brings the goods all the way to the destination country and carries the risk along the way.
By mode of transport
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.
A common mistake in practice is to use FOB and CIF for container shipments. A container is handed over at the terminal days before it is loaded on the vessel, while under FOB risk only passes once the goods are on board. For that whole period at the terminal the seller carries risk in an area it does not control. That is why, for containerised cargo, FCA is recommended instead of FOB, CPT instead of CFR and CIP instead of CIF.
Insurance: compulsory under only two rules
The seller is obliged to insure only under CIF and CIP. Under the other rules insurance is not compulsory, but it is wise for whichever party carries the risk to insure itself.
- CIF: The minimum cover is Institute Cargo Clauses (C). It covers only listed major perils (such as fire, sinking or stranding).
- CIP: Since the 2020 edition the minimum cover is Institute Cargo Clauses (A). This is "all risks" cover; apart from the exclusions, it covers any kind of loss or damage.
- Under both rules the insured amount must be at least 110% of the invoice value.
What changed in the 2020 edition?
- DAT was removed and DPU introduced. The place of delivery no longer has to be a terminal; it can be any place where the seller can unload the goods.
- Higher insurance cover under CIP: from clauses (C) to clauses (A).
- On-board bill of lading under FCA: If the parties agree, the buyer instructs its carrier to issue this document to the seller. Banks often require it in letter of credit transactions.
- Carriage with own means of transport: Under FCA, DAP and DPU the parties may carry the goods with their own vehicles instead of hiring a third-party carrier.
- Security-related obligations were added, and the costs are now listed in one place under each rule.
Which rule should I choose?
The right rule depends on the mode of transport, each party's ability to handle customs formalities, and who can arrange the transport at a better price. The three questions below help you narrow down the options.
Decision table
| Who arranges and pays for the main carriage? | Where should risk pass? | Conventional sea cargo | Container or other modes |
|---|---|---|---|
| Buyer | In the country of origin | FAS (alongside the vessel) · FOB (on board) | FCA · EXW (if the seller will not load or clear for export) |
| Seller | In the country of origin | CFR · CIF (if the seller will also insure) | CPT · CIP (if the seller will also insure) |
| Seller | At destination | DAP (buyer unloads) · DPU (seller unloads) · DDP (seller also clears for import) | |
How to write it in the contract
Write the rule as the rule's abbreviation + named place + Incoterms® 2020. The more precise the place, the lower the risk of a dispute.
- Correct: FCA [full address of the seller's warehouse], Gebze, Kocaeli, Türkiye, Incoterms® 2020
- Incomplete: FCA Türkiye
If the edition is not stated, the parties may each rely on a different one. The 2010 rules can still be used, but the contract must state which edition applies.
Test yourself
- An exporter is shipping a container from Mersin to Rotterdam and wants to pay the freight, but wants risk to pass to the buyer at the point of shipment. Which rule would you suggest? (Answer: CPT, or CIP if the seller will also arrange insurance.)
- Under CIF, the goods were damaged at sea. Who bears the loss? (Answer: The buyer, because risk passed when the goods were loaded on board. The policy the seller took out is in the buyer's favour.)
- Under which rule is unloading the seller's responsibility? (Answer: DPU.)