Part II — The Commercial Framework
Incoterms 2020
The eleven international trade terms that decide who pays, who carries the risk, and who insures — and exactly what changed since the 2003 book's Incoterms 2000.
When a seller in one country agrees to sell to a buyer in another, two questions have to be answered before a single box moves: who arranges and pays for each leg of the journey, and at what point does the risk of loss or damage pass from seller to buyer? Incoterms answer both, in three letters, in a way that means the same thing in every country and every language.
The Incoterms® rules are a set of standard international trade terms published by the International Chamber of Commerce (ICC). They define the responsibilities of sellers and buyers for the delivery of goods under sales contracts — specifically the division of cost, risk, and the obligation to handle carriage, insurance, export/import clearance and documentation. They do not govern transfer of ownership or payment.
The 2003 NAFL notes teach Incoterms 2000. The current edition is Incoterms® 2020. Using a 2000 term on a 2025 shipment is a real commercial risk. Key changes:
- Four terms were removed — DAF (Delivered at Frontier), DES (Delivered Ex Ship), DEQ (Delivered Ex Quay) and DDU (Delivered Duty Unpaid). If you see these on an old document, they are obsolete.
- DAP (Delivered at Place) replaced DDU; DAT was introduced in 2010 and then renamed DPU (Delivered at Place Unloaded) in 2020 — DPU is the only term where the seller unloads.
- CIP insurance cover was increased — under CIP the seller must now buy all-risks cover (Institute Cargo Clauses “A”), not the minimum. CIF stays at minimum cover (Clauses “C”).
- FCA + on-board bill of lading — a new option lets the buyer instruct the carrier to issue an on-board B/L to the seller, solving a long-standing letter-of-credit problem.
The two families of Incoterms 2020
The eleven rules split into two groups. Getting this split right is the single most useful habit — it tells you instantly whether a term can legally be used for your shipment.
Rules for ANY mode of transport (7)
| Term | Name | Risk passes to buyer when… |
|---|---|---|
| EXW | Ex Works | goods are made available at the seller’s premises |
| FCA | Free Carrier | goods are handed to the carrier named by the buyer |
| CPT | Carriage Paid To | goods are handed to the first carrier (seller pays freight to destination) |
| CIP | Carriage & Insurance Paid To | as CPT, plus seller buys all-risks insurance |
| DAP | Delivered at Place | goods reach the named place, ready for unloading |
| DPU | Delivered at Place Unloaded | goods reach the named place and are unloaded |
| DDP | Delivered Duty Paid | goods reach destination, import duty/tax paid by seller |
Rules for SEA & INLAND WATERWAY transport only (4)
| Term | Name | Risk passes to buyer when… |
|---|---|---|
| FAS | Free Alongside Ship | goods are placed alongside the vessel at the port |
| FOB | Free On Board | goods are loaded on board the vessel |
| CFR | Cost and Freight | goods are on board; seller pays freight to destination port |
| CIF | Cost, Insurance & Freight | as CFR, plus seller buys (minimum) insurance |
CIF — Cost, Insurance and Freight (… named port of destination). The seller pays the costs and freight necessary to bring the goods to the named destination port, but risk passes to the buyer once the goods are on board the vessel. The seller also arranges marine insurance against the buyer’s risk of loss or damage in transit — under Incoterms 2020, the minimum cover (Institute Cargo Clauses C).
The critical trap: FOB vs FCA on containers
A mistake repeated daily across the industry: using FOB for containerised cargo. FOB passes risk when goods cross the ship’s rail / are loaded on board — a concept that made sense for break-bulk loaded directly onto a vessel. But containers are handed over at a terminal days before loading. Under FOB, the seller therefore carries risk for goods sitting in a stack they no longer control.
Containerised cargo → use FCA (and CPT/CIP), not FOB (and CFR/CIF). The sea-only terms (FAS, FOB, CFR, CIF) are correct only when goods are loaded directly onto the vessel — bulk, break-bulk, project cargo.
The eleven terms — seller’s and buyer’s duties
The NAFL handbook works through each term’s obligations in full. They are reproduced here, term by term, updated to the 2020 edition. For each, the key question is the same: where does the seller’s job end and the buyer’s begin, and where does risk pass?
EXW — Ex Works (… named place)
The seller fulfils delivery by making the goods available at his own premises (works, factory, warehouse). He need not load them onto the buyer’s vehicle or clear them for export.
- Seller: provide goods + commercial invoice; make available at the named place.
- Buyer: bears all cost and risk from the seller’s door onward — loading, export clearance, carriage, import, duty.
- Note: the minimum obligation for the seller. If the buyer cannot handle export formalities, use FCA instead.
FCA — Free Carrier (… named place)
The seller delivers when he hands the goods, cleared for export, to the carrier named by the buyer at the named point.
- Seller: deliver into the carrier’s custody; clear for export; pay export taxes/fees.
- Buyer: nominate the carrier, contract carriage, pay freight.
- Note: built for containerised/modern transport — risk passes at hand-over, not at the ship’s rail as under FOB. The correct replacement for FOB on container cargo.
FAS — Free Alongside Ship (… named port of shipment) · sea/inland waterway only
The seller delivers when the goods are placed alongside the vessel on the quay or in lighters.
- Seller: deliver alongside; provide receipt.
- Buyer: clear for export; bear all cost/risk from that moment; contract carriage.
FOB — Free On Board (… named port of shipment) · sea/inland waterway only
The seller delivers when the goods are on board the vessel at the named port; risk passes at that point.
- Seller: deliver on board; clear for export; provide a clean “on board” receipt.
- Buyer: nominate carrier, contract carriage, pay freight.
- Note: where the ship’s rail “serves no practical purpose” (ro-ro, containers), FCA is more appropriate.
CFR — Cost and Freight (… named port of destination) · sea/inland waterway only
The seller pays cost and freight to the destination port, but risk passes when goods are on board at the port of shipment.
- Seller: contract carriage + pay freight to destination; deliver on board; clear for export.
- Buyer: accept delivery against invoice + B/L; arrange own insurance; handle import.
- Note: for containers, use CPT instead.
CIF — Cost, Insurance and Freight (… named port of destination) · sea/inland waterway only
As CFR, plus the seller procures marine insurance against the buyer’s risk in transit.
- Seller: as CFR + contract insurance and pay the premium — minimum cover (Institute Cargo Clauses C) under 2020 unless otherwise agreed.
- Buyer: accept delivery against documents; bear risk from on-board; handle import.
- Note: for containers, use CIP.
CPT — Carriage Paid To (… named place of destination) · any mode
The seller pays freight to the named destination, but risk passes when goods are handed to the first carrier.
- Seller: contract carriage + pay freight; deliver to first carrier; clear for export; furnish transport documents.
- Buyer: accept delivery at hand-over to the first carrier; handle import.
- Note: more advantageous to the seller than CFR — he can be paid once goods are with the first carrier, before loading.
CIP — Carriage and Insurance Paid To (… named place of destination) · any mode
As CPT, plus the seller procures cargo insurance.
- Seller: as CPT + insurance and premium — all-risks cover (Institute Cargo Clauses A) under 2020 (this is the key change from 2000/2010, which required only minimum cover).
- Buyer: accept delivery at first carrier; handle import.
DAP — Delivered at Place (… named place of destination) · any mode · replaced DDU (2010)
The seller delivers when the goods are placed at the buyer’s disposal at the named place, ready for unloading, import not cleared.
- Seller: bear cost/risk to the named place; carry out export and transit formalities.
- Buyer: unload; clear for import; pay duties and taxes.
DPU — Delivered at Place Unloaded (… named place of destination) · any mode · renamed from DAT (2020)
As DAP, but the seller also unloads the goods at the named place. The only term where the seller unloads.
- Seller: bear cost/risk to the named place and unload.
- Buyer: clear for import; pay duties and taxes.
DDP — Delivered Duty Paid (… named place of destination) · any mode
The seller delivers the goods at the named place cleared of all import requirements — duty and tax paid by the seller.
- Seller: bear all cost/risk to destination including import duty, tax and clearance.
- Buyer: receive the goods.
- Note: the maximum obligation for the seller (the mirror image of EXW). Use with caution — the seller takes on foreign customs liability.
The 2003 book taught four “D” terms that no longer exist: DAF (Delivered at Frontier — used for rail/road border deliveries), DES (Delivered Ex Ship — goods handed over on board at destination), DEQ (Delivered Ex Quay — handed over on the wharf, duty paid) and DDU (Delivered Duty Unpaid). On a modern document these have been replaced by DAP and DPU. If a counterparty quotes one of them, convert to the current equivalent before contracting.
The six general guidelines for using Incoterms
NAFL lists six rules that still hold under Incoterms 2020:
- Incoterms do not decide when payment is made or when ownership passes — those go in the sale contract separately.
- The parties may add variations to a term in their contract; such special provisions override the standard rule (e.g. specifying all-risks cover under CIF).
- A single Incoterm does not settle the whole legal relationship — breach, consequences and title are outside its scope.
- The contract is still subject to applicable national law.
- Banks pay against documents, not Incoterms — under an L/C, make sure the documents called for match the term (e.g. a CIP multimodal move needs an intermodal transport document, not a marine B/L).
- If export/import needs a government licence, make the contract conditional on obtaining it — otherwise a party risks damages for non-performance.
The first thing to establish on any enquiry is the Incoterm, because it defines exactly which legs WorldZone is being asked to handle and where the customer’s risk begins and ends. A customer who says “CIF Jebel Ali” is asking for ocean freight and insurance to the destination port; one who says “FCA origin” only needs the export leg. Quoting the wrong scope — or letting a customer ship containers on FOB — is a classic, avoidable error. When in doubt, confirm the Incoterm and the edition (2020) in writing.
What to take from this chapter
- Incoterms split cost and risk between seller and buyer — they do not cover ownership or payment.
- Use Incoterms 2020; DAF, DES, DEQ and DDU are gone — DAP and DPU replace them.
- Know the two families: 7 any-mode terms, 4 sea-only terms.
- Never use FOB/CFR/CIF for containers — use FCA/CPT/CIP.
- Under 2020, CIP requires all-risks insurance; CIF stays at minimum.