Incoterms® are standard trade rules published by the International Chamber of Commerce (ICC). They define which costs the seller pays and which the buyer pays, and the exact point where the risk of loss or damage passes from seller to buyer. The current version is Incoterms® 2020.
What Incoterms cover, and what they don't
Each rule defines where delivery happens, where risk transfers, and how costs (freight, insurance, export and import formalities) are split. They say nothing about price, payment method, transfer of ownership or penalties for delay; those belong in the sales contract.
The 11 Incoterms® 2020 rules
Rules for any mode of transport
| Rule | Name | Risk transfers |
|---|---|---|
| EXW | Ex Works | When goods are made available at the seller's premises |
| FCA | Free Carrier | On delivery to the carrier nominated by the buyer |
| CPT | Carriage Paid To | On handover to the first carrier (seller pays freight to destination) |
| CIP | Carriage and Insurance Paid To | As CPT, plus insurance bought by the seller |
| DAP | Delivered at Place | At destination, ready for unloading |
| DPU | Delivered at Place Unloaded | At destination, once unloaded |
| DDP | Delivered Duty Paid | At destination; seller also handles import duties and formalities |
Rules for sea and inland waterway transport
| Rule | Name | Risk transfers |
|---|---|---|
| FAS | Free Alongside Ship | When goods are placed alongside the vessel at the origin port |
| FOB | Free on Board | When goods are on board the vessel at the origin port |
| CFR | Cost and Freight | On board at origin (seller pays freight to destination port) |
| CIF | Cost, Insurance and Freight | As CFR, plus insurance bought by the seller |
Three common misunderstandings
1. "Under CIF the seller carries the risk to the destination port"
No. Under CFR and CIF the seller pays freight to the destination, but risk passes to the buyer once the goods are on board at origin. Damage at sea is claimed by the buyer under the insurance policy.
2. "CIF and CIP insurance are the same"
Under Incoterms® 2020, CIF still requires only minimum cover (Institute Cargo Clauses C), while CIP requires broader cover (Clauses A). If you want more cover under CIF, write it into the contract.
3. "FOB is right for containers"
The ICC recommends the sea rules (FAS, FOB, CFR, CIF) for goods loaded directly onto the vessel. Containers are usually handed over at a terminal days before loading, so FCA, CPT or CIP fit better, although FOB remains common in practice.
Which rule suits imports into Iran?
- EXW looks cheap but leaves export clearance at origin to the buyer, which is hard for a foreign buyer.
- FOB or FCA suit buyers (or their trading partner) who control freight and insurance and negotiate their own rates.
- CFR or CIF are simpler when the seller arranges shipping, but freight is buried in the price and you have less control over timing and carrier.
- DDP is rarely workable for imports into Iran because the foreign seller would have to handle Iranian import formalities and duties.
Always state the rule, the named place and the version, for example FOB Shanghai Port, Incoterms® 2020. "FOB" with no place is a common source of disputes.
Incoterms® is a registered trademark of the International Chamber of Commerce. Obtain the official rules from the ICC.
