Incoterms 2020: what they govern — and what they don’t — in international sales

The international sale of goods requires deciding, before anything ships, at which point risk passes, who bears each cost and where the goods are deemed delivered. The Incoterms 2020 — the rules published by the International Chamber of Commerce — answer those questions, and only those: they do not transfer ownership, they do not set the price or the payment terms, and they do not determine the governing law or the competent court. Misunderstanding their scope is behind a good share of the disputes between exporters and importers.

What the Incoterms are, and what falls outside them

The Incoterms — short for International Commercial Terms — are rules drawn up by the International Chamber of Commerce that standardise delivery obligations in a contract for the sale of goods. They are not legislation: they apply because the parties incorporate them into the contract in the exercise of their freedom of contract. The current version, Incoterms 2020, has been in force since 1 January 2020.

Each rule allocates four things: the delivery obligation, the moment risk passes, the split of costs, and who arranges carriage and, where applicable, insurance. Outside their scope — and requiring separate clauses — remain the transfer of ownership, the price and payment terms, the consequences of breach, the governing law and jurisdiction.

The eleven rules and their two families

There are eleven Incoterms 2020 rules, grouped by mode of transport.

• For any mode of transport: EXW (Ex Works), FCA (Free Carrier), CPT (Carriage Paid To), CIP (Carriage and Insurance Paid To), DAP (Delivered at Place), DPU (Delivered at Place Unloaded) and DDP (Delivered Duty Paid).
• For sea and inland waterway transport only: FAS (Free Alongside Ship), FOB (Free on Board), CFR (Cost and Freight) and CIF (Cost, Insurance and Freight).

The naming change from the previous edition was the replacement of DAT with DPU, to make clear that delivery can take place anywhere, not only at a terminal.

The most common mistake: using FOB for containerised cargo

The four maritime rules — FAS, FOB, CFR and CIF — assume that the seller physically places the goods on board the vessel, or alongside it. They are designed for bulk or breakbulk cargo. When goods travel in a container, the seller hands them over at a terminal days before loading and loses control of them at that point — not when they cross the ship’s rail. Using FOB in that scenario leaves a gap — from terminal to vessel — during which, on paper, risk still sits with a seller who no longer controls the goods.

For containers, the correct rules are the any-mode equivalents: FCA instead of FOB, CPT instead of CFR and CIP instead of CIF. It is one of the most frequent mismatches in contracts and a recurring source of argument over who bears a loss.

Risk and cost do not change hands at the same point

Under CPT, CIP, CFR and CIF it is essential not to confuse two different moments. Risk passes when the seller hands the goods to the first carrier — or places them on board under the maritime rules; but the cost of carriage remains with the seller up to the agreed destination. Put plainly: if the goods are damaged in transit, the loss falls on the buyer even though the seller paid the freight. That distinction decides who bears the damage and who should claim against the insurer.

Insurance: CIF and CIP no longer cover the same

Only two rules oblige the seller to take out insurance for the buyer’s benefit: CIP and CIF. The Incoterms 2020 introduced a significant change here. CIP now requires broad cover — the Institute Cargo Clauses (A), that is, all-risks cover — while CIF keeps the minimum cover of the (C) clauses. The difference is substantial: in a CIF sale the seller complies by arranging basic insurance that may leave most types of damage uncovered. A buyer purchasing on CIF terms who wants real protection must expressly agree a higher level of cover.

DDP: taking on import taxes can backfire

Under DDP the seller delivers the goods cleared for import, with duties and taxes paid in the country of destination. For the buyer it is maximum convenience; for the seller, a tax exposure that is often underestimated. Taking on the import obliges the seller, in many countries, to act as importer of record and to handle import VAT and customs formalities in a jurisdiction where it is not established. Where that burden has not been priced in, it is usually preferable to deliver DAP — without import clearance — and leave those formalities to the local importer.

Incoterms also influence which court has jurisdiction

Although the Incoterms do not regulate jurisdiction, they do condition it indirectly, because in international sales the place of delivery is a decisive connecting factor.

First, the agreed Incoterm displaces the default risk-transfer rules of the United Nations Convention on Contracts for the International Sale of Goods, done at Vienna on 11 April 1980 — the Vienna Convention, ratified by Spain — whose articles 66 to 70 apply only in the absence of agreement.

Second, within the European Union, Regulation (EU) 1215/2012 (Brussels I bis) confers jurisdiction, in the sale of goods, on the courts of the place of delivery, under its article 7.1. The Court of Justice of the European Union has held that, in identifying that place of delivery, the court must take account of all the terms of the contract, including the Incoterms: it said so in its judgment of 9 June 2011, case C-87/10 (Electrosteel Europe). The Incoterm you choose can therefore determine whether a dispute is heard in Spain or in your counterparty’s country. The governing law, by contrast, is determined by Regulation (EC) 593/2008 (Rome I), not by the Incoterm.

How we help you with international contracts and Incoterms 2020 at RCM Legal

Three sources of conflict come up again and again: choosing a rule inconsistent with the mode of transport — the classic FOB-with-container case —, confusing the point at which risk passes with the allocation of costs, and taking on, under DDP, tax and customs obligations at destination that were never priced. Add to these the mistake of treating the Incoterm as if it settled the governing law or the forum, when those matters require their own clauses. A poorly chosen Incoterm goes unnoticed at signing; it is paid for when the goods are damaged, customs holds the shipment or the argument starts over where to sue.

At RCM Legal we advise exporting and importing businesses on drafting and negotiating their international sale contracts: we select the right Incoterm for each transaction and dovetail it with the governing-law, jurisdiction, ownership-transfer and payment clauses that the Incoterms leave out. If your business contracts with suppliers or customers abroad, as commercial lawyers in Murcia with international contracting experience, tell us about the transaction and we will structure it so every shipment is covered from start to finish.