What Are Incoterms? Rules, Risk, and Legal Role

Incoterms are the 11 standardized trade terms published by the International Chamber of Commerce (ICC) that fix exactly where the seller’s responsibility for cost and risk ends and the buyer’s begins. Three letters in your contract — FOB, CIF, DDP — decide who pays the freight, who bears the loss if the cargo is damaged in transit, and who clears customs at each border. The current version is Incoterms 2020, in force since January 1, 2020. This guide explains what Incoterms do, what they deliberately do not do, and how to use them without creating a dispute you didn’t see coming.

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What Incoterms govern — and what they don’t

An Incoterm answers three questions and only three: who arranges and pays for carriage, at what point risk of loss passes from seller to buyer, and who handles export and import formalities. Get the term right and both sides know their obligations before a single container moves.

What Incoterms do not govern is just as important, because most costly misunderstandings come from assuming they cover more than they do:

• They do not transfer ownership or title. Incoterms allocate risk and cost, not legal title to the goods. Title passes according to the sales contract and the governing law of sale — not the Incoterm.
• They do not set the price or payment terms. Whether payment is by letter of credit, open account, or advance is a separate negotiation.
• They are not a contract by themselves. An Incoterm is a shorthand you incorporate into a sales contract; it does not replace the contract or override mandatory local law.

Because the term only works when it is written precisely, always state the rule, the named place, and the version — for example, “CIF Port of Houston, Incoterms 2020.” A bare “FOB” with no named port is an invitation to argue.

The 11 Incoterms 2020 rules at a glance

The rules split into two families: seven that work for any mode of transport (including air, road, rail, and multimodal container shipping) and four reserved for sea and inland waterway transport, where the goods are handed over at a port.

The rules run from EXW, which puts the least on the seller (the buyer collects the goods at the seller’s door and does everything from there), to DDP, which puts the most on the seller (delivery to the buyer’s door with all duties and import clearance handled). Everything else sits between those two poles.

For the step-by-step mechanics of applying these rules from each side of the deal, see our practical guides on exporting with Incoterms and importing with Incoterms.

What changed in Incoterms 2020

The 2020 revision was evolutionary, not radical, but three changes matter in practice:

• DAT became DPU. “Delivered at Terminal” was renamed “Delivered at Place Unloaded” to make clear the place of delivery can be any agreed location, not just a terminal. It is the only rule where the seller unloads at destination.
• Insurance levels split for CIP and CIF. Under CIP, the seller must now buy higher “all-risks” cover (Institute Cargo Clauses (A)). Under CIF — used for bulk maritime cargo — the default remains minimum cover (Institute Cargo Clauses (C)), which the parties can agree to raise. This distinction surprises shippers who assume “insurance is insurance.”
• FCA and on-board bills of lading. FCA 2020 added an option for the parties to agree that the buyer instructs the carrier to issue an on-board bill of lading to the seller — useful when a letter of credit requires one.

How courts and arbitrators actually use Incoterms

When a shipment goes wrong, the agreed Incoterm is usually the first thing a court or arbitral tribunal looks at to decide who bears the loss. If goods are damaged in mid-ocean under a CIF contract, the term tells the tribunal that risk had already passed to the buyer when the goods were loaded — so the buyer’s remedy is an insurance claim, not a claim against the seller. The same facts under DAP would point the other way, because risk would not pass until the goods reached the named destination.

This is why the term is a risk-allocation decision, not a clerical detail. A poorly chosen Incoterm can leave you paying freight you never budgeted for, holding the loss on cargo you thought was insured, or acting as importer of record in a country where you have no standing to clear customs. Because Incoterms interact with your customs valuation, your insurance, and your governing-law clause, they belong in the same review as the rest of the contract — not bolted on at the end. When a dispute does arise over delivery or damage, the chosen rule frames how it gets resolved.

Frequently asked questions

Do Incoterms decide who owns the goods? No. Incoterms allocate risk and cost only. When title passes is governed by your sales contract and the applicable law of sale, which you should address separately.

Which Incoterms version applies if my contract just says “FOB”? Whichever version your contract names. If it names none, that ambiguity itself can become the dispute. Always write the rule, the named place, and “Incoterms 2020.”

Is FOB still fine for container shipments? Usually not. FOB, CFR, and CIF are built for goods handed over at the ship’s side. For containers handed to a carrier at an inland depot, FCA, CPT, or CIP fit the actual delivery point far better.

Do Incoterms replace my insurance? No. Only CIP and CIF obligate the seller to insure, and even then to defined minimums. Under every other rule, whoever bears the risk should arrange their own cover.

Considering importing or exporting and unsure which terms protect you? Reidel Law Firm delivers a flat-fee import/export compliance memo that pins down your delivery terms, customs exposure, and documentation in plain English. Get a flat-fee import/export compliance memo →