Incoterms 2020: The Four Mistakes That Cost Money

Incoterms are eleven three-letter rules published by the International Chamber of Commerce, and they settle where the seller's responsibility ends and the buyer's begins. That covers who arranges and pays for transport, who clears customs at each end, who insures the goods, and the precise point at which risk of loss or damage passes between the parties.

They are agreed in a sentence on a quotation and then largely forgotten, which is how they end up causing arguments months later.

The two groups

Seven rules work for any mode of transport, including containerised sea freight: EXW, FCA, CPT, CIP, DAP, DPU and DDP. The remaining four apply only where goods are physically loaded onto a vessel, which in practice means bulk or non-containerised cargo: FAS, FOB, CFR and CIF.

That division is the source of the single most common error in the whole system.

Mistake one: using FOB for containers

FOB passes risk when the goods are loaded on board, which made complete sense when cargo went over the ship's rail in slings. A container, though, is handed to a carrier at a terminal days before it is loaded, so FOB leaves a gap during which nobody has clearly agreed who carries the risk.

The ICC recommends FCA for containerised cargo, and FCA, CPT, CIP, DAP, DPU or DDP for air and multimodal movements. Despite that, FOB remains routinely used for containers because it is familiar, and the gap only becomes visible when something is damaged in the yard.

Mistake two: assuming CIF means risk runs to the destination

Under CIF the seller pays freight and insurance to the destination port, which leads many buyers to assume they are protected until the goods arrive. Risk actually passes at loading, so the seller is paying for carriage on goods that are already at the buyer's risk.

The distinction between who pays and who bears risk is the part of the C group that catches people out, and it matters most exactly when something has gone wrong.

Mistake three: EXW on an export sale

EXW requires the buyer to handle export clearance in the seller's own country, which is rarely practical and sometimes impossible, since the buyer may not be able to act as exporter of record there. Sellers reach for it because it looks like the lowest-effort option, and then end up doing the export formalities anyway without having priced for them.

Mistake four: no named place

Every Incoterm needs a location attached to it, as in FCA Felixstowe or DAP Rotterdam, because the rule alone does not say where delivery happens. A term quoted without a named place is ambiguous, and ambiguity in a contract is resolved after the event rather than before it.

Why this belongs in a customs conversation

The term you agree decides who is the declarant, and therefore whose compliance record is on the line. Under DDP the seller imports into the buyer's country, which means the seller needs an EORI valid in that territory, often an establishment or an indirect representative, and carries the risk of any error on that declaration.

That connection is the one worth drawing out, because Incoterms look like a commercial detail negotiated by sales while actually determining which party's customs controls are being tested. Any trusted trader status you hold only helps on the declarations you are named on, so agreeing DDP without the capability behind it puts you on declarations you are not equipped to defend.

Incoterms are contractual rules rather than law, and the current edition is Incoterms 2020. Confirm which edition your contract references, since earlier editions remain valid if the parties chose them.