The Logic Of The Rules - Incoterms Explained

The logic of the Incoterms 2020 rules

The eleven rules are divided into two main groups

Rules for any transport mode • Ex Works EXW • Free Carrier FCA • Carriage Paid To CPT • Carriage & Insurance Paid to CIP • Delivered at Place Unloaded DPU (***) • Delivered At Place DAP • Delivered Duty Paid DDP

Rules for sea & inland waterway only • Free Alongside Ship FAS • Free On Board FOB • Cost and Freight CFR • Cost Insurance and Freight CIF

In general the “transport by sea or inland waterway only” rules should only be used for bulk cargos (e.g. oil, coal etc) and non-containerised goods, where the exporter can load the goods directly onto the vessel. Where the goods are containerised, the “any transport mode” rules are more appropriate.

A critical difference between the rules in these two groups is the point at which risk transfers from seller to buyer. For example, the “Free on Board” (FOB) rule specifies that risk transfers when the goods have been loaded on board the vessel. However the “Free Carrier” (FCA) rule specifies that risk transfers when the goods have been taken in charge by the carrier.

Important: (***) In Incoterms 2010, this rule was referred to as Delivered At Terminal DAT

Another useful way of classifying the rules is by considering:

• Who is responsible for the main carriage – the buyer or the seller?
• If the seller is responsible for the main carriage, where does the risk pass from the seller to the buyer – before the main carriage, or after it?

This gives us these four groups:

• Buyer responsible for all carriage – EXW
• Buyer arranges main carriage – FAS; FOB; FCA
• Seller arranges main carriage, risk passes after main carriage – DPU; DAP; DDP
• Seller arranges main carriage, but risk passes before main carriage – CFR; CIF; CPT; CIP

This last group of rules often surprises newcomers, because although the seller pays for transport to the named place, the risk transfers at an earlier point in the journey – see delivery.

Consider, for example, goods that are taken in charge at Felixstowe, UK, for transport to Long Beach, California, under the rule “CIP Long Beach, California, Incoterms 2020”. The seller will arrange and pay for freight to Long Beach, but risk will pass to the buyer upon delivery of the goods to the carrier at Felixstowe, before the main carriage.

This interactive on-line tool may be useful for seeing how a rule may be selected according to these principles.

NEXT: The eleven rules in brief