Incoterms 2020 in practice: choosing the right rule
Incoterms 2020 are eleven rules published by the International Chamber of Commerce (ICC) that define who arranges carriage, who pays for each leg and at what point the risk of loss passes from seller to buyer. They do not set the price, transfer ownership or say what happens if a party breaches the contract. Most disputes come from a rule that does not fit the way the goods actually move, or from a vague named place.
By Hiram Trade Editorial Desk
- Published
6 min read
What the rules do and do not cover
An Incoterms rule only applies if the parties write it into the contract, ideally in full: "FCA Manila, Manila International Container Terminal, Incoterms 2020". The rule answers three questions:
- who contracts for carriage and, where required, insurance;
- where delivery happens, meaning where risk transfers;
- who pays which costs before and after that point, including export and import clearance.
The rules are silent on payment timing, currency, transfer of title, product quality and governing law. Those belong in the sales contract.
The two groups of rules
The ICC splits the eleven rules into two groups.
| Group | Rules | Use for |
|---|---|---|
| Any mode of transport | EXW, FCA, CPT, CIP, DAP, DPU, DDP | containers, road, air, multimodal |
| Sea and inland waterway only | FAS, FOB, CFR, CIF | bulk and breakbulk cargo loaded directly on board |
Incoterms 2020 replaced DAT with DPU (Delivered at Place Unloaded), so the place of delivery with unloading no longer has to be a terminal.
Risk versus cost: the "C" trap
The most common misunderstanding concerns the C rules (CPT, CIP, CFR, CIF). The seller pays carriage to the destination, but risk passes to the buyer much earlier: when the goods are handed to the first carrier (CPT, CIP) or loaded on board at the port of shipment (CFR, CIF). If a container is damaged at sea, the buyer bears the loss even though the seller paid the freight. Under a C rule, the buyer needs to know how the goods are insured and for how much.
Common mistakes and how to avoid them
EXW where FCA fits better
EXW looks like the easiest rule for a seller but causes friction in cross-border trade. Under EXW the seller has no obligation to load the goods or clear them for export. A foreign buyer often cannot act as exporter of record in the seller's country, and in practice the seller's staff load the truck anyway. Risk and responsibility become blurred.
FCA (Free Carrier) fixes this: the seller clears the goods for export and, if delivery is at the seller's premises, loads them onto the buyer's vehicle. Incoterms 2020 added an option to FCA: the parties can agree that the buyer will instruct its carrier to issue an on-board bill of lading to the seller. This matters under a letter of credit, which usually calls for such a bill.
CIF for containerised cargo
CIF and FOB were designed for goods loaded directly onto a vessel. A container is typically handed to the carrier at a terminal days before loading. Under CIF, the seller still carries the risk during that time without controlling the goods. For containers, CPT or CIP is the better fit, and FCA with a named terminal is the container equivalent of FOB.
CIF versus CIP: different insurance levels
Both rules oblige the seller to buy insurance, but not at the same level. Under CIF, the minimum is Institute Cargo Clauses (C), which covers a list of named perils. Under CIP, Incoterms 2020 raised the minimum to Institute Cargo Clauses (A), which is all-risks cover subject to exclusions. The parties can agree otherwise, but they must write it down. If you need broad cover on a CIF purchase, ask for it explicitly in your request and in the contract.
DAP and DDP: who clears the import
Under DAP, the seller delivers on the arriving vehicle, ready for unloading; the buyer handles import clearance, duty and taxes. Under DDP, the seller takes on everything, including import VAT. For a non-EU seller shipping to the EU, DDP is risky: it has to clear the goods in the buyer's country and account for import taxes, which can be hard or impossible without a local entity or representative. Before agreeing to DDP, settle who is the importer of record and who can recover the import VAT.
DPU: unloading is the seller's job
DPU is the only rule under which the seller is responsible for unloading at destination. Use it when the seller controls that operation, has the equipment for it and the unloading place is known and accessible.
The named place: be precise
"FCA Philippines" or "DAP Germany" invites disputes. Name the place as precisely as possible: warehouse address, terminal name, port and berth. The named place drives delivery, the transfer of risk and the rule's allocation of costs; it does not by itself assign every terminal handling, transhipment or storage charge, which can also depend on the contract of carriage and local tariffs.
Checklist for the named place:
- City plus a specific point (address, terminal, warehouse), never just a country.
- For FCA: is delivery at the seller's premises (seller loads) or elsewhere (buyer unloads from the seller's vehicle)?
- For C rules: the destination, and ideally the point where risk passes.
- The version: "Incoterms 2020". Parties may still use older editions, so state which one applies.
Choosing a rule: a short decision path
- How will the goods move? Containers, road or air: choose from the any-mode group. Bulk cargo loaded on a vessel: FOB, CFR, CIF and FAS make sense.
- Who gets better freight rates? If the buyer has a forwarder with good rates, use FCA. If the seller does, consider CPT, CIP or DAP.
- Who can clear the import? If the seller has no entity or representative in the buyer's country, avoid DDP.
- How will payment work? Under a letter of credit the documents are what matter; FCA with the on-board bill of lading option, or CIP with the required insurance level, makes compliance easier.
- Can you compare offers? Quotes on different rules must be brought to a common point. A landed cost calculation does this; see our guide on landed cost.
Incoterms in requests and quotes
Put the required rule and place in your request for quotation. If you accept alternatives, ask for a price breakdown, for example the FCA price and the freight to your warehouse separately. On Hiram, every quote in response to a request carries an Incoterms rule and place, and quotes are compared on total landed cost. For how to structure the request itself, see our guide on writing an RFQ.
A useful habit is to write the rule, the named place and the version year as a single quote-line token, for example FCA Gdansk Incoterms 2020, in every quote template.
Sales teams that keep a one-line risk handover note beside the Incoterms rule tend to argue less about who bore the cost of a damaged pallet.
Summary
The right Incoterms rule mirrors how the delivery really works: who arranges carriage, where the goods are handed over and who can clear them into the destination country. Avoid EXW for exports, sea-only rules for containers and DDP without a representative in the buyer's country. Always name a precise place and the "Incoterms 2020" version.
To collect quotes with a clearly stated rule and compare them on landed cost, create a Hiram account.
Sources
- ICC, Incoterms® 2020: https://iccwbo.org/business-solutions/incoterms-rules/incoterms-2020/ (opens in a new tab)
- ICC Academy, Incoterms® 2020 vs 2010: What's changed?: https://academy.iccwbo.org/incoterms/article/incoterms-2020-vs-2010-whats-changed/ (opens in a new tab)
- ICC Academy, Incoterms® 2020: CIP or CIF?: https://academy.iccwbo.org/incoterms/article/incoterms-2020-cip-or-cif/ (opens in a new tab)
- HFW, ICC Incoterms 2020 – Commentary: https://www.hfw.com/insights/icc-incoterms-2020-commentary/ (opens in a new tab)
This article is for information only and is not legal, tax or customs advice. Rules and rates change: check the current official sources or consult an adviser before you decide.