FAQ

General Questions#

What are Incoterms?#

Incoterms (International Commercial Terms) are a set of 11 standardized trade terms published by the International Chamber of Commerce (ICC). They define the responsibilities of buyers and sellers in international and domestic trade transactions, specifically regarding delivery, risk transfer, and cost allocation.

Are Incoterms legally binding?#

Incoterms are not laws—they are contractual terms that become legally binding only when explicitly incorporated into a sales contract. Both parties must agree to use a specific Incoterm and reference it in their contract (e.g., “FOB Shanghai Port Incoterms 2020”).

What is the latest version of Incoterms?#

The current version is Incoterms 2020, which came into effect on January 1, 2020. While previous versions (2010, 2000, etc.) can still be used if specified in contracts, Incoterms 2020 is recommended as it reflects current trade practices.

Using Incoterms#

Can Incoterms be used for domestic trade?#

Yes, Incoterms 2020 can be used for both international and domestic trade. While they were originally designed for cross-border transactions, many businesses use them for domestic sales to clearly define responsibilities.

Do Incoterms determine transfer of ownership?#

No, Incoterms only define the transfer of risk and allocation of costs—not the transfer of ownership (title) of goods. Ownership transfer must be addressed separately in the sales contract.

Which Incoterms are for sea transport only?#

Four Incoterms are exclusively for sea and inland waterway transport:

• FAS (Free Alongside Ship)
• FOB (Free On Board)
• CFR (Cost and Freight)
• CIF (Cost, Insurance and Freight)

Which Incoterms work with any mode of transport?#

Seven Incoterms can be used with any transport mode, including multimodal:

• 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)
• DDP (Delivered Duty Paid)

Choosing the Right Incoterm#

How do I choose the right Incoterm?#

Consider these factors when selecting an Incoterm:

1. Experience level: Less experienced traders may prefer “D” terms (DAP, DPU, DDP) for buying or “E/F” terms (EXW, FCA) for selling
2. Transport mode: Sea-only terms (FOB, CIF, etc.) vs. multimodal terms
3. Risk tolerance: Who should bear the risk during transport?
4. Insurance requirements: Does the buyer need the seller to arrange insurance?
5. Customs capabilities: Can you handle import/export clearance?

What’s the difference between FOB and CIF?#

• FOB (Free On Board): The seller delivers when goods pass the ship’s rail. The buyer arranges and pays for freight and insurance.
• CIF (Cost, Insurance and Freight): The seller delivers when goods pass the ship’s rail BUT also arranges and pays for freight and minimum insurance to the destination port.

In both cases, risk transfers at the same point (ship’s rail at origin port), but cost allocation differs significantly.

When should I use EXW vs. FCA?#

EXW (Ex Works) places maximum responsibility on the buyer, who must handle export clearance. This can be problematic if the buyer is in another country.

FCA (Free Carrier) is often preferable because the seller handles export clearance, which is typically easier for the party located in the export country.

Insurance and Risk#

Do all Incoterms include insurance?#

No, only two Incoterms require the seller to provide insurance:

• CIF (minimum coverage - Institute Cargo Clause C)
• CIP (broader coverage - Institute Cargo Clause A)

For all other terms, parties must arrange their own insurance for the portions where they bear risk.

When does risk transfer from seller to buyer?#

Risk transfer points vary by Incoterm:

• EXW: When goods are made available at seller’s premises
• FCA, FAS, FOB: When goods are delivered to the carrier or ship
• CFR, CIF, CPT, CIP: When goods are delivered to the first carrier (not destination)
• DAP, DPU, DDP: When goods arrive at the named destination

Costs and Documentation#

What costs are typically included in each Incoterm?#

Each Incoterm specifies which party pays for:

• Packaging and loading
• Export customs clearance
• Transport to port/place of shipment
• Loading onto vessel/main transport
• Main carriage freight
• Insurance (if applicable)
• Unloading at destination
• Import customs clearance and duties
• Final delivery

Refer to each specific Incoterm page for detailed cost breakdowns.

Who is responsible for customs documentation?#

• Export clearance: Generally the seller’s responsibility (except EXW)
• Import clearance: Generally the buyer’s responsibility (except DDP)

Common Mistakes#

What are common Incoterms mistakes to avoid?#

1. Using sea-only terms (FOB, CIF) for containerized cargo—use FCA or CIP instead
2. Using EXW when the seller is better positioned to handle export clearance
3. Not specifying the exact delivery location (e.g., “FOB China” instead of “FOB Shanghai Port”)
4. Forgetting to specify the Incoterms version (e.g., “Incoterms 2020”)
5. Assuming Incoterms cover transfer of ownership
6. Not arranging adequate insurance for the portion where you bear risk

Can Incoterms be used for courier shipments?#

Yes, but only for B2B transactions. Incoterms 2020 rules do not apply to B2C transactions.

Most commonly used: DAP and DDP

Problems with EXW and DDP for couriers:

• EXW: Risk passes before courier even collects goods; buyer usually can’t be exporter
• DDP: Seller cannot usually import clear goods (led to interesting legal cases, including one in Australia)

Reality check (Bob Ronai): In the vast majority of transactions handled by couriers, seller and buyer don’t even refer to an Incoterms 2020 rule at all. They just agree on whose account will be charged, and have no idea what the courier company does regarding export and import formalities.

Key Recommendations#

Essential reading#

Read the official Incoterms 2020 book published by ICC (International Chamber of Commerce). Many questions and misunderstandings can be resolved by consulting the official rules rather than relying on assumptions or outdated information.

Simply Google “Incoterms 2020 book” to find the ICC’s website.

Terms to avoid#

1. DDP - Especially for cross-border/ocean shipments (legal and practical risks)
2. EXW - Buyer often cannot fulfill export obligations
3. FOB for containers - Meaningless; use FCA instead

Best practices#

1. Always reference “Incoterms 2020” explicitly in contracts
2. Specify the precise named place of delivery/handover
3. Address ownership transfer separately in the sales contract
4. For containers, use FCA not FOB
5. For export control, consider C or D terms if you need control over export clearance
6. Consult the official ICC book rather than relying on interpretations or outdated materials

Have a question not answered here? Check our detailed Incoterms guides or additional resources.