Incoterms

An Incoterm is a shorthand for a whole bundle of obligations. When a contract says 'DAP Rotterdam' or 'FOB Shanghai', both parties instantly know who arranges carriage, who pays freight, who insures the goods, who handles export and import customs, and at exactly which geographic point the risk of loss or damage shifts from the seller to the buyer. That removes ambiguity and the costly disputes that arise when two businesses in different countries assume different things.

Crucially, an Incoterm governs three things and only three: the delivery point, the split of costs, and the transfer of risk. It does not decide who owns the goods (that is set by the sales contract and local law), it does not fix the price, and it does not cover payment terms or what happens if the contract is breached. Incoterms sit alongside your sales contract; they do not replace it.

Each rule is always quoted with a named place — for example 'CIF Hamburg' or 'EXW Krakow warehouse'. The named place is essential because it pins down precisely where the seller's responsibility ends and the buyer's begins.

The 11 rules split into two groups. Seven rules apply to any mode or modes of transport — road, rail, air, sea, or a combination: 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). These are the right choice for most marketplace sellers using couriers and containerised freight.

The remaining four rules are for sea and inland waterway transport only, where goods are physically loaded onto a vessel: FAS (Free Alongside Ship), FOB (Free On Board), CFR (Cost and Freight), and CIF (Cost, Insurance and Freight). A common mistake is using FOB or CIF for container or air shipments — for those, the maritime rules do not fit, and FCA, CPT or CIP are the correct equivalents.

Roughly, the rules also escalate by how much the seller takes on. EXW puts almost everything on the buyer; the D-rules (DAP, DPU, DDP) put the most on the seller, with DDP making the seller responsible for everything including import duties at destination.

One subtlety that trips up sellers is that the point where cost transfers and the point where risk transfers are not always the same. In the C-rules (CPT, CIP, CFR, CIF) the seller pays for carriage all the way to the destination, but risk passes much earlier — when the goods are handed to the first carrier (or loaded on board, for CFR and CIF). So the seller can be paying freight for a leg of the journey during which the buyer already bears the risk of loss.

This is why insurance matters. Under CIP and CIF the seller must buy insurance for the buyer's benefit, but under the other C-rules nobody is contractually required to insure the goods during that risk gap. Sellers and buyers should always check whether insurance is mandated by the chosen Incoterm or whether they need to arrange it themselves.