A deep dive into the Incoterms® 2020 rules, explaining cost allocation, risk transfer, and common pitfalls in international trade.
What is an Incoterm? A Comprehensive Guide to Incoterms® 2020
In the complex world of international trade, clarity is the difference between a successful shipment and a multi-million dollar legal dispute. At the heart of this clarity are Incoterms® (International Commercial Terms) — a set of eleven three-letter trade terms published by the International Chamber of Commerce (ICC) that define the responsibilities of sellers and buyers for the delivery of goods under sales contracts.
This guide provides a deep dive into the Incoterms® 2020 rules, the current global standard, explaining who pays for what, where the risk transfers, and how to avoid the common pitfalls that lead to port holds and demurrage fees.
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The Foundation: What Do Incoterms® Actually Do?
Incoterms® are not laws; they are contractual terms that, when incorporated into a sales contract, become legally binding. They serve three primary functions:
1. Cost Allocation: Who pays for freight, insurance, customs duties, and terminal handling charges? 2. Risk Transfer: At what exact point does the risk of loss or damage to the goods pass from the seller to the buyer? 3. Obligations: Who is responsible for obtaining export/import licenses, arranging transport, and providing proof of delivery?
What they DO NOT cover: Incoterms® do not address the transfer of ownership (title), the price of the goods, payment methods, or the consequences of a breach of contract.
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The 11 Incoterms® 2020 Rules
The rules are divided into two categories based on the mode of transport.
Category 1: Rules for Any Mode or Modes of Transport
These seven rules can be used regardless of whether the goods are moved by road, rail, air, or sea (including multimodal transport).
1. EXW (Ex Works) The Seller's Minimum Obligation. The Rule: The seller makes the goods available at their premises (factory or warehouse). The buyer bears all costs and risks from that point forward, including loading the goods onto the vehicle and all export formalities. Risk Transfer: When the goods are placed at the buyer's disposal at the named place.
2. FCA (Free Carrier) The Versatile Alternative to EXW. The Rule: The seller delivers the goods to the carrier or another person nominated by the buyer at the seller's premises or another named place. The seller is responsible for export clearance. Risk Transfer: When the goods have been delivered to the carrier at the named place.
3. CPT (Carriage Paid To) The Rule: The seller pays for the carriage of the goods to the named place of destination. However, the risk transfers to the buyer as soon as the goods are handed over to the first carrier. Risk Transfer: When the goods are handed over to the first carrier.
4. CIP (Carriage and Insurance Paid To) The Rule: Similar to CPT, but the seller must also obtain insurance against the buyer’s risk of loss or damage. Under Incoterms® 2020, CIP requires a high level of insurance cover (Institute Cargo Clauses (A)). Risk Transfer: W...