Incoterms 2020: Complete Guide to All 11 Rules with Examples

Every international trade transaction involves a fundamental question: at what point does responsibility shift from the seller to the buyer? Who pays for freight? Who is responsible if goods are damaged at sea? Who handles customs clearance at destination?

Without a shared framework to answer these questions, every international contract would require lengthy negotiations about a long list of logistics, insurance, and risk allocation issues. Incoterms — International Commercial Terms — provide that framework.

Published by the International Chamber of Commerce (ICC) and last updated in 2020, Incoterms define the responsibilities of sellers and buyers in international trade transactions. They are not law — they become legally binding only when incorporated into a contract — but they are used in virtually every international trade contract globally.

This guide covers all 11 Incoterms 2020 rules: what they mean, where risk transfers, who pays for what, and how to choose the right term for your transaction.

The Four Categories of Incoterms 2020

The 11 Incoterms 2020 rules are organized into two groups based on the mode of transport:

Group 1: Rules for any mode of transport (7 rules) These rules apply regardless of whether goods are transported by sea, air, road, rail, or a combination. They are: EXW (Ex Works), FCA (Free Carrier), CPT (Carriage Paid To), CIP (Carriage and Insurance Paid To), DAP (Delivered at Place), DPU (Delivered at Place Unloaded), and DDP (Delivered Duty Paid).

Group 2: Rules for sea and inland waterway transport only (4 rules) These rules are specifically designed for maritime shipments and should not be used for containerized cargo in most cases. They are: FAS (Free Alongside Ship), FOB (Free On Board), CFR (Cost and Freight), and CIF (Cost, Insurance and Freight).

A critical warning: FOB and CIF are among the most widely misused Incoterms. Many traders use FOB for containerized cargo when FCA is the more appropriate term. The reason: under FOB, risk transfers when goods pass the ship's rail at the port of loading — but in container trade, the seller hands goods to the carrier (at a container terminal) long before they are loaded aboard ship. FCA is designed for this scenario.

The 11 Rules Explained

EXW — Ex Works: The seller's minimum obligation. The seller makes goods available at their premises (factory, warehouse) and the buyer takes responsibility for everything from that point: loading, export customs, freight, import customs, and final delivery. EXW is commonly used in domestic transactions but creates practical complications in international trade since the buyer must handle export customs in the seller's country.

FCA — Free Carrier: The seller delivers goods to a named carrier or another nominated party at a named place. If delivery is at the seller's premises, the seller is responsible for loading. If at any other place, the seller is not responsible for unloading. FCA is now the ICC's recommended term for containerized cargo because risk transfers at the carrier handover — before the ship is loaded — which is how container logistics actually work.

CPT — Carriage Paid To: The seller contracts and pays for freight to the named destination but risk transfers to the buyer at the first carrier handover (at origin). This creates an unusual situation: the seller pays for transport but the buyer bears the risk during transit. Buyers should be aware that they may need to arrange their own cargo insurance.

CIP — Carriage and Insurance Paid To: Similar to CPT but the seller is also required to obtain insurance. Under Incoterms 2020, CIP requires Institute Cargo Clauses (A) minimum — the broadest available coverage. This was changed from the previous version where both CIP and CIF required only Institute Cargo Clauses (C) minimum.

DAP — Delivered at Place: The seller is responsible for delivering goods to the named destination, ready for unloading, with export and transit customs cleared. The buyer handles import customs and payment of duties. DAP is increasingly popular in e-commerce and B2B transactions where the seller wants to control the logistics experience.

DPU — Delivered at Place Unloaded: The same as DAP but with the additional obligation to unload at the destination. DPU is the only Incoterm that requires the seller to unload at destination. Introduced in Incoterms 2020 (replacing DAT).

DDP — Delivered Duty Paid: The seller's maximum obligation. The seller is responsible for everything: export clearance, freight, transit, import clearance, payment of import duties, and final delivery to the named place. DDP is used when the buyer wants complete simplicity but requires the seller to have import capability in the destination country.

FAS — Free Alongside Ship: The seller delivers goods alongside the named vessel at the port of shipment. Risk transfers from this point. FAS is designed for bulk or breakbulk cargo where goods are loaded directly into the ship's hold.

FOB — Free On Board: One of the most widely used — and widely misused — Incoterms. Risk transfers when goods are loaded on board the vessel at the port of shipment. For bulk and breakbulk cargo, this is appropriate. For containerized cargo, FCA should be used instead.

CFR — Cost and Freight: The seller pays freight to the destination port, but risk transfers when goods are on board at the port of shipment. Like FOB, CFR is designed for bulk cargo and should not be used for containers.

CIF — Cost, Insurance and Freight: The seller pays freight and minimum insurance (Institute Cargo Clauses C) to the destination port, but risk transfers at loading. Under Incoterms 2020, CIF requires only minimum Clauses (C) coverage — for better protection, buyers should request Clauses (A).

Most Common Incoterm Mistakes

Using FOB for containerized cargo: The most frequent error in international trade. When goods are delivered to a container terminal before being loaded on a ship, risk has already passed to the buyer under the sea rules but the goods are not yet 'on board.' FCA avoids this gap.

Specifying a vague named place: Incoterms require a precisely named place (e.g., 'FCA Hamburg Container Terminal Altenwerder' not just 'FCA Hamburg'). Vague places lead to disputes when the critical point (risk transfer, cost allocation) is ambiguous.

Confusing who arranges vs. who pays: Some Incoterms separate the obligation to arrange from the obligation to pay. Under CPT/CIP, the seller arranges and pays for freight, but the buyer bears transit risk. Understanding this split is essential.

Ignoring export/import clearance obligations: DDP places import clearance on the seller — which requires the seller to have an import presence or agent in the destination country. Many sellers use DDP without realizing the regulatory complexity.

Applying maritime-only Incoterms to air freight: FOB, CFR, and CIF are for sea and inland waterway only. For air cargo, CPT or CIP should be used instead.

How to Choose the Right Incoterm

Key questions to determine the right Incoterm:

1. What mode of transport? For sea bulk cargo, maritime-specific rules (FOB, CFR, CIF) may apply. For containerized, multimodal, or air freight, always use the multimodal rules (FCA, CPT, CIP, DAP, etc.).

2. Who has the better freight deal? If the buyer has a global freight contract with better rates, use FCA or EXW to let the buyer arrange freight. If the seller has better logistics capabilities, CPT, CIP, or DAP may be more efficient.

3. Who can handle import customs? If the seller cannot arrange import customs clearance in the destination country, avoid DDP. DAP or DPU give the buyer import responsibility.

4. What is the value of the goods and the insurance requirement? For high-value cargo, CIP (Clauses A) provides superior insurance coverage compared to CIF (Clauses C minimum).

5. What is the desired simplicity level? Buyers who want maximum simplicity with full delivery and all costs included should request DDP. Sellers who want minimum obligations should negotiate EXW.