Incoterms 2020

Incoterms 2020 – who carries the risk, and where

What do FOB, CIF, DAP and DDP actually mean – and where does the risk really pass? A walk through all eleven Incoterms 2020 rules, the split between risk and cost, what changed from 2010, and the most common mistakes in practice.

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What this covers

What Incoterms are – and the four things they do not govern
The two families – any mode, and sea only
All eleven rules, with where the risk passes
E, F, C and D – the staircase from least to most seller obligation
The two critical points – risk and cost are not the same place
The container mistake – why FOB is almost always the wrong rule
What changed from 2010 to 2020

What this covers (cont.)

The traps – DDP, EXW and the insurance level in CIF
How to write the term properly in a contract
Norwegian-language material to go on to

First: what the rules do not do

This is the most important section in the episode, and the one most often skipped.

The reach

The rules allocate

Four things

Who does what – transport, customs clearance, documents
Who pays for what
Where the risk for the goods passes from seller to buyer
Who, if anyone, has to insure

The rules say nothing about

Everything else

When title to the goods passes
The price, the payment and the payment terms
What happens on breach or delay
Which country's law applies, and where disputes are settled

Incoterms are not a contract of sale, but a building block in one. That the risk passes in Rotterdam does not mean the buyer owns the goods in Rotterdam – transfer of title is governed by the contract and by the law applying to it. A great many disputes start right here.

Two families

The rules are split into two groups, and that split matters more than most people think.

All eleven

Incoterms 2020

Rule	What it means	The risk passes
EXW	Ex Works	At the seller's, when the goods are placed at the buyer's disposal. Not loaded.
FCA	Free Carrier	When the goods are handed to the carrier the buyer has nominated
CPT	Carriage Paid To	On handover to the first carrier – not on arrival
CIP	As CPT, but the seller insures	The same place as CPT
DAP	Delivered at Place	On arrival, ready for unloading. The seller does not unload.
DPU	Delivered at Place Unloaded	When the goods have been unloaded at the named place
DDP	Delivered Duty Paid	As DAP, but the seller also handles import clearance and duties
FAS	Free Alongside Ship	When the goods are placed alongside the vessel
FOB	Free On Board	When the goods are on board the vessel
CFR	Cost and Freight	On board at departure – even though the seller pays the freight onward
CIF	As CFR, but the seller insures	The same place as CFR

The bottom four apply to sea and inland waterway transport only. The top seven apply to any mode. Note that DPU is the only rule obliging the seller to unload – worth knowing when the destination is a place without lifting equipment.

The staircase from E to D

The first letter is not arbitrary. It tells you how much of the job the seller has taken on.

From least to most seller obligation

E — EXWThe seller makes the goods ready at their own premises, and does no more. The buyer carries most.
F — FCA, FAS, FOBThe seller delivers to the carrier the buyer has arranged.
C — CPT, CIP, CFR, CIFThe seller pays the carriage onward, but does not carry the risk there.
D — DAP, DPU, DDPThe seller carries the risk all the way to the destination.

The C group is the one that catches people out. It looks like a delivery term to the destination, because the seller pays the freight there – but the risk left the seller back at departure.

The two critical points

This is the heart of the C rules, and the single misunderstanding that costs the most money.

CIF Rotterdam, seen from each point

The cost point

Rotterdam

The seller pays freight and insurance to here
This is what the contract says
This is what people remember

The risk point

The port of departure

The risk passed when the goods came on board
If something goes wrong en route, it is the buyer's loss
The buyer claims under the insurance, not against the seller

Two places, one rule. In the E, F and D rules the two coincide; in the C rules they never do. If you remember one thing from this episode, make it this one.

The container mistake

The most common error in practice, and an easy one to avoid once you know about it.

If the goods travel in a container, FOB is almost always the wrong rule. Use FCA.

Why: FOB moves the risk when the goods are on board the vessel. A container is delivered to a terminal, often days before it is loaded, and the seller loses control the moment it is handed over there. Under FOB the seller still carries the risk for a container they can neither see nor touch. FCA moves the risk to where the handover actually happens. The same applies in pairs: CFR and CIF should be CPT and CIP.

What changed in 2020

The changes from 2010 to 2020 are not dramatic, but some of them have practical consequences.

2010 → 2020

The change	What it means in practice
DAT became DPU	The name now states the decisive part: delivered unloaded. And the rule is no longer tied to a terminal – the place can be anywhere.
CIP requires full cover	The seller must now insure at the highest standard level. CIF stayed on minimum cover – so the two are no longer alike on this point.
FCA and the on-board bill of lading	The parties can agree that the buyer instructs the carrier to issue an on-board bill of lading to the seller. Solves an old problem for anyone drawing on a letter of credit.
Own means of transport	The rules now allow for a party carrying the goods themselves, rather than assuming a third-party carrier.
Security requirements	Obligations and costs tied to security screening are allocated more clearly.
Costs in one place	All costs for each party are now listed together, instead of scattered through the rule.

Older versions do not stop applying. If the parties agree on “Incoterms 2010”, that is what governs between them. Which is precisely why the year has to be in the contract.

Three traps

How to write it properly

A delivery term missing one of three elements is a dispute waiting to happen.

Three elements, all necessary

1. The ruleThe three letters. Pick the one that fits the mode of transport – not the one you have always used.
2. The place, as precisely as possibleNot just “Oslo”, but which terminal, which gate, which address. This is where the risk changes hands.
3. The version“Incoterms 2020”. Without the year it is unclear which edition applies.

Written out it becomes, for example, “FCA Gardermoen Cargo Terminal, Oslo, Incoterms 2020”. The imprecise place is the most common omission – “DAP Norway” says nothing about where the seller's risk actually ends.

Why this is worth knowing

If you want to go deeper

If you are going to use the rules in practice, there is Norwegian-language material on them worth knowing about.

Key points

Incoterms allocate cost, risk and obligations between buyer and seller – not ownership.
The rules say nothing about payment, transfer of title, breach or governing law.
Risk and cost do not pass at the same place in the C rules. That is the most common misunderstanding.
FOB, CFR, CIF and FAS were made for bulk and sea freight, not for containers.

Key points (cont.)

DPU is the only rule that requires the seller to unload at the destination.
CIP requires full insurance cover under 2020. CIF still does not.
DDP puts import clearance in the buyer's country on the seller – often more than the seller can deliver.
Always write the rule, the place as precisely as possible, and which version applies.

Questions this answers

What are Incoterms, and what do they govern?
What do Incoterms not govern?
Which eleven rules are in Incoterms 2020?
Where does the risk pass in each of the rules?
What is the difference between the E, F, C and D groups?
Why are risk and cost two different points in the C rules?

Questions this answers (cont.)

Why is FOB the wrong rule for containers?
What changed from Incoterms 2010 to 2020?
Why are DDP and EXW risky to agree to?
How do you write the delivery term properly in a contract?
Where can you find Norwegian material on Incoterms?

Sources

International Chamber of Commerce (ICC) – Incoterms® 2020, in force from 1 January 2020
Christian J. Lien – Norsk Kommentar til Incoterms® 2010 (in Norwegian)
Christian J. Lien – Norsk Kommentar til Incoterms® 2020, 312 pages (in Norwegian)

Spørretimen

Read the whole thing at

www.sporretimen.no/en/episodes/incoterms-2020/