Published by the International Chamber of Commerce (ICC), Incoterms are not law, but when appended to a sales contract, they become legally binding. A single wrong letter (e.g., CIF instead of CIP) can shift tens of thousands of dollars in liability.
The 11 Rules Classified
The 2020 revision divides the terms into two distinct categories based on mode of transport.
Rules for Any Mode of Transport
- EXW (Ex Works): Maximum buyer liability. The seller merely makes the goods available at their premises.
- FCA (Free Carrier): Seller clears goods for export and delivers to a named carrier.
- CPT (Carriage Paid To): Seller pays for freight to the destination, but risk transfers when handed to the first carrier.
- CIP (Carriage and Insurance Paid To): Like CPT, but seller must provide maximum insurance cover (Institute Cargo Clauses A).
- DAP (Delivered at Place): Seller assumes all risk and costs until goods are ready for unloading at the named destination.
- DPU (Delivered at Place Unloaded): Replaced DAT. Seller assumes risk until goods are unloaded at destination.
- DDP (Delivered Duty Paid): Maximum seller liability. Seller handles everything, including import customs and duties.
Rules for Sea and Inland Waterway Transport
- FAS (Free Alongside Ship): Seller delivers goods alongside the vessel. Risk transfers immediately.
- FOB (Free On Board): Risk transfers the moment goods are loaded on board the vessel. Not recommended for containerized freight.
- CFR (Cost and Freight): Seller pays freight to destination port, but risk transfers when goods are on board.
- CIF (Cost, Insurance, and Freight): Like CFR, but seller provides minimal insurance cover (Institute Cargo Clauses C).
The Fatal Flaw of FOB for Containers
A massive operational error in modern trade is using FOB for containerized cargo. FOB dictates risk transfers when goods are "on board" the vessel. However, containers are handed over at a terminal days before loading. If the container is damaged in the terminal yard, a legal dispute ensues over whether the goods were "on board." For containers, use FCA.