Incoterms basics: who pays and who is responsible

What Incoterms are and why they matter in international trade

Incoterms, short for International Commercial Terms, are a set of standardised trade rules published by the International Chamber of Commerce (ICC). They define the responsibilities of buyers and sellers when goods move across borders, covering who arranges transport, who pays for what, and where risk passes from one party to the other. The current version in wide use is Incoterms 2020, though older editions such as 2010 may still appear on some contracts.

For a business in France importing components from Asia or exporting wine to North America, Incoterms remove ambiguity. Instead of writing a long paragraph about who handles export clearance, insurance and freight, both parties agree on a three-letter code, for example FOB or DAP, followed by a named place. This shorthand is recognised worldwide and reduces the risk of costly disputes.

It is important to understand what Incoterms do not cover. They do not determine ownership or title of the goods, they do not set the price, and they are not a contract of carriage or insurance on their own. They also say nothing about payment terms or what happens if goods are defective. Those points must be handled separately in the sales contract. Incoterms simply clarify the logistics and risk split, which is exactly why they are so useful.

How Incoterms allocate cost and transfer of risk

Every Incoterm answers two central questions. The first is cost: which party pays for transport, loading, export and import formalities, duties and, in some cases, insurance. The second is risk: at what precise point does responsibility for loss or damage move from the seller to the buyer. These two things do not always transfer at the same moment, which is a frequent source of confusion.

Consider a shipment sold under FOB (Free On Board). The seller bears cost and risk until the goods are loaded onto the vessel at the port of departure. From that point, the buyer carries the risk, even though the goods are still at sea and far from their destination. If the container is damaged during the ocean crossing, it is the buyer's problem, not the seller's.

Understanding the split matters for insurance decisions. If risk passes to you early, you should arrange cargo insurance for the remaining journey. It also matters for accounting and for how you present costs to customers. A business that imports on EXW terms takes on almost everything, from collecting the goods at the seller's premises to paying all freight, export clearance and import duties. A business importing on DDP terms receives goods delivered and cleared, with the seller handling nearly all costs and formalities. The choice directly affects your budget and your workload.

The main Incoterms explained (EXW, FCA, FOB, CFR, CIF, DAP, DDP and more)

There are eleven Incoterms in the 2020 edition. It helps to think of them along a spectrum, from minimum seller responsibility to maximum seller responsibility.

EXW (Ex Works) places the most on the buyer. The seller simply makes the goods available at their factory or warehouse; the buyer handles loading, transport, export clearance and everything after. FCA (Free Carrier) is more balanced: the seller delivers goods, cleared for export, to a carrier nominated by the buyer at an agreed place.

FAS (Free Alongside Ship) and FOB (Free On Board) are sea-only terms where the seller delivers alongside or onto the vessel. CFR (Cost and Freight) and CIF (Cost, Insurance and Freight) mean the seller pays freight to the destination port, and under CIF also arranges a minimum level of insurance, though risk still passes at the port of loading.

CPT (Carriage Paid To) and CIP (Carriage and Insurance Paid To) work like CFR and CIF but for any transport mode, with CIP now requiring a higher insurance level. At the seller-heavy end, DAP (Delivered At Place) means the seller delivers to a named destination ready for unloading, with the buyer handling import clearance. DPU (Delivered at Place Unloaded) adds unloading to the seller's duties. DDP (Delivered Duty Paid) is the maximum: the seller delivers, cleared for import and duties paid, to the buyer's door.

Incoterms for any mode of transport vs sea and inland waterway

Incoterms 2020 divides the eleven rules into two groups, and choosing from the correct group avoids one of the most common errors. The first group applies to any mode of transport, including road, rail, air, sea or a combination. These are EXW, FCA, CPT, CIP, DAP, DPU and DDP. Because most modern trade uses containers moved by trucks, trains and ships together, these terms are suitable for the majority of shipments.

The second group is reserved for sea and inland waterway transport only. These are FAS, FOB, CFR and CIF. They were designed for traditional bulk and break-bulk cargo loaded directly onto a ship. The problem arises when businesses use FOB or CIF for containerised goods that are actually handed over at an inland container depot, well before the vessel. In that situation the goods sit at the terminal at the buyer's risk under the strict reading of FOB, but the buyer may assume they are covered until the ship sails.

For containerised freight, the ICC recommends FCA, CPT or CIP instead of the sea terms. A French exporter shipping palletised goods in a container to Canada is generally better served by FCA at the loading point or CIP to the destination, because these terms match how the cargo is genuinely handled.

Reading an Incoterm on a contract or invoice

An Incoterm is only complete when it names a place. The format is always the three-letter code, then the location, then the Incoterms edition. For example, 'FCA 15 Rue de l'Industrie, Lyon, France, Incoterms 2020' or 'DAP Warehouse 4, Rotterdam, Netherlands, Incoterms 2020'. Without a precise named place, the term is ambiguous and can lead to disputes over exactly where delivery and risk transfer occur.

The meaning of the named place depends on the term. For departure terms like EXW and FCA, it is where the seller hands over the goods. For arrival terms like DAP, DPU and DDP, it is where the seller must deliver them. For CIF and CIP, be careful: the named place is the destination the seller pays freight to, but risk still passes much earlier, at the point of handover to the first carrier or vessel.

Always check that the edition is stated. If a contract just says 'CIF' with no year, disputes can arise over which rule set applies. When you receive a commercial invoice, confirm the Incoterm matches what you agreed, because it affects the customs value declared and who is liable for duties. In France, the declared Incoterm feeds directly into the import declaration and the calculation of VAT and duty.

Common mistakes when choosing an Incoterm

The first frequent mistake is using a sea term for containerised or multimodal cargo, as described earlier. This creates a gap between where risk passes and where the parties believe it passes.

A second mistake is choosing EXW for exports. Under EXW the buyer is responsible for export clearance, but they are often not established in the seller's country and cannot legally complete it. This can leave the exporter unable to prove the goods left the country, which matters for VAT exemption. FCA is usually a safer choice for the seller in this case.

DDP is another term that catches sellers out. Agreeing to DDP means taking responsibility for import duties, VAT and clearance in a country where you may have no local presence or VAT registration. Many sellers underestimate this burden and end up unable to deliver as promised.

Other common errors include forgetting to name a precise place, assuming CIF or CIP insurance is comprehensive when it is only a minimum level, and failing to state the Incoterms edition. Finally, some businesses treat the Incoterm as covering payment or title, which it never does. Keeping the sales contract and the Incoterm aligned but distinct avoids these traps.

How to select the right Incoterm for your shipment

Start by looking at how much control and risk you want to manage. If you are a small importer without freight expertise, arrival terms like DAP or DDP shift most of the work to the seller and give you predictable landed costs. If you have your own logistics resources or good freight contracts, departure terms like FCA or FOB let you control the transport and often reduce cost.

Next, match the term to the transport mode. For containers and multimodal shipments choose from the any-mode group, typically FCA, CPT or CIP. Reserve FAS, FOB, CFR and CIF for genuine bulk sea freight.

Consider who can legally handle customs clearance at each end. The party clearing export should normally be established in the export country, and the party clearing import should be established in the import country. This alone rules out EXW for many exporters and DDP for many sellers shipping into France or elsewhere in the EU.

Think about insurance. Under most terms neither party is obliged to insure, so decide who will cover the cargo for each leg and arrange it explicitly. Finally, write the term clearly with a named place and the edition, and make sure it is consistent with your payment terms and the rest of the contract. When in doubt, discussing the options with your freight forwarder or customs adviser before signing helps avoid expensive surprises.

Example

Summary of common Incoterms 2020: transport mode, cost and risk responsibilities

FAQ

Do Incoterms decide who owns the goods? No. Incoterms only allocate transport costs, responsibilities and the point where risk of loss or damage passes. Ownership and title of the goods must be dealt with separately in the sales contract, along with payment terms and remedies for defects.

Which Incoterm should I use for a container shipment? For containerised or multimodal cargo, the ICC recommends the any-mode terms such as FCA, CPT or CIP. The sea-only terms FOB, CFR and CIF were designed for goods loaded directly onto a vessel and can create a gap between where risk actually passes and where the parties expect it to.

Is insurance always included in Incoterms? Only two terms require the seller to arrange insurance: CIF and CIP, and even then only a minimum level is mandatory unless you agree otherwise. Under all other Incoterms, neither party is obliged to insure the cargo, so you should decide who covers each leg and arrange it explicitly.

Why is EXW risky for exporters? Under EXW the buyer is responsible for export clearance, but a foreign buyer often cannot legally complete formalities in the seller's country. This can leave the exporter without proof the goods left, which matters for VAT exemption. FCA is usually a safer alternative because the seller handles export clearance.

What happens if the Incoterm has no named place or edition? The term becomes ambiguous. Without a precise named place, it is unclear exactly where delivery and risk transfer occur, and without the edition year it is unclear which rule set applies. Both omissions can lead to disputes, so always write the code, the place and the year, for example 'FCA Lyon, France, Incoterms 2020'.

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