Incoterms® 2020: practical overview

Introduction

International trade only runs smoothly if exporters and importers agree on standardized, generally accepted trade clauses in their delivery and payment terms. These clauses govern the transfer of risk, transport costs, and transport risk. The clauses must make clear whether the exporter or the importer bears costs and risk alone, or whether both share them.

The Incoterms are the ICC’s official rules for the interpretation of national and international trade clauses. Since they were first published in 1936, they have made global trade easier. Where the parties agree on an Incoterms clause, they no longer need to spell out the allocation of cost and risk in detail. The ICC defines what each clause means. Today, the Incoterms appear in around 90 percent of all international sales contracts.

On 10 September 2019, the ICC released the Incoterms 2020. According to the ICC, 500 experts from more than 40 countries worked on them, 20 of them from Germany. They evaluated over 3,000 comments from trade practice and incorporated them as relevant.

The Incoterms do not apply automatically, only where the parties agree on them. If they are contained in standard terms, such as general conditions of purchase or sale, those terms must validly become part of the contract. In international trade, that does not happen by itself. What that requires and how incorporation succeeds is shown in the article “How to incorporate standard terms internationally”.

Name the place in the Incoterms clause as fully and precisely as possible (place of delivery, destination, and so on):

The Incoterms 2020 at a glance

The eleven clauses fall into two groups: clauses for any mode of transport and clauses for sea and inland-waterway transport only. Under every clause, risk passes from the seller to the buyer at the place of delivery. The risk in question is that the goods are damaged or lost. Each clause determines where and when this risk passes to the buyer. That matters for how risk is allocated between the parties.

Clauses for any mode of transport

Clauses for sea and inland-waterway transport only

Incoterms 2020: what is new?

The Incoterms 2020 bring many changes in structure and substance.

Introductory notes

The ICC explains the Incoterms 2020 in a comprehensive introduction that is well worth reading. The introduction covers the foundations, how best to incorporate the rules into contracts, how to choose the right clause, and the main differences from the Incoterms 2010. It also shows what the Incoterms do and what they do not do. For awareness of the problems, the second part is at least as important.

Order and wording of the interpretation rules

The ten A/B interpretation rules for each Incoterms clause have been redrafted and reordered. The sequence is now:

• A1/B1 General obligations

• A2/B2 Delivery / Taking delivery

• A3/B3 Transfer of risks

• A4/B4 Carriage

• A5/B5 Insurance

• A6/B6 Delivery / Transport document

• A7/B7 Export / Import clearance

• A8/B8 Checking / Packaging / Marking

• A9/B9 Allocation of costs

• A10/B10 Notices

Explanatory notes on the individual clauses

The Guidance Notes introduced in 2010 have been revised, recast as “Explanatory Notes for Users”, and expanded. The notes explain the essentials of each clause. They say, for example, when a clause is suitable, when risk passes, and how seller and buyer share the costs.

In practice, the notes are a useful aid. They lead the user quickly and precisely to the right clause. In a dispute, they help with questions of interpretation.

Horizontal presentation of the interpretation rules

For the first time, the Incoterms 2020 include a horizontal presentation that sets all interpretation rules side by side. The user can easily compare how each clause handles a given question.

Clearer presentation of costs within the rulebook

In every clause, A9/B9 now lists all costs in one place. This gives the parties a better overview of who bears which costs. Individual costs are still mentioned in the other interpretation rules as well.

Additional option for on-board bills of lading with the FCA clause

For FCA, A6/B6 now offers an additional option. Buyer and seller can agree that the buyer instructs its carrier to issue an on-board bill of lading to the seller once the goods are loaded. The seller then has to pass that bill of lading on to the buyer, typically through the banks. The option also applies where the seller delivers the goods inland, for example by loading them onto the carrier’s truck. The carrier can issue the on-board bill of lading, however, only once the goods are on board the vessel at the port.

Change of clause DAT to DPU

The former DAT clause (Delivered at Terminal) is now DPU (Delivered at Place Unloaded). The new name is meant to make clear that the destination can be any place and need not be a “terminal”. Where the place is not in a terminal, the seller should make sure that the goods can actually be unloaded there.

Security-related requirements added to carriage obligations and costs

The Incoterms 2020 now make clear who meets security-related requirements during carriage and who bears the costs.

Examples of such requirements:

• the International Ship and Port Facility Security Code (ISPS Code)

• the US Importer Security Filing (ISF)

• the Container Security Initiative (CSI)

• the Transported Asset Protection Association (TAPA) standards

• EU rules on civil aviation security

In every clause, the related obligations are set out in the interpretation rules A4 (Carriage) and A7 (Export / Import clearance).

The resulting costs are also now reflected more clearly in A9/B9 (Allocation of costs).

Organizing carriage with the seller’s or buyer’s own means of transport

Sellers and buyers increasingly carry goods with their own means of transport. The Incoterms 2020 take this into account in the FCA (Free Carrier), DAP (Delivered at Place), DPU (Delivered at Place Unloaded), and DDP (Delivered Duty Paid) clauses. Previously, the rules only envisaged a contract of carriage with a third party. Now the party responsible for carriage under the clause can also carry the goods itself.

Insurance coverage levels in CIF and CIP

The Incoterms 2020 align the insurance coverage under CIF (Cost, Insurance and Freight) and CIP (Carriage and Insurance Paid To) with commercial practice.

For CIF, the previous minimum cover under Institute Cargo Clauses (C) remains. The parties can agree on higher cover, however.

For CIP, the seller now has to provide the wider cover of Institute Cargo Clauses (A). The parties can, however, agree on a lower level. The ICC’s reason for the difference is that CIF is much more likely than CIP to be used in the maritime commodity trades.

Approaches for greater legal certainty

Many contracts contain inappropriate Incoterms clauses. That can bring significant economic disadvantages and legal risks for the parties involved.

The often-used EXW (Ex Works) and DDP (Delivered Duty Paid) clauses are, contrary to common assumption, only the best solution in exceptional cases.

DDP often leads to difficulties with customs and tax. That is particularly true for international sales contracts that require export and import clearance. The parties often agree on DDP without being aware of these difficulties. They arise because under DDP the seller is responsible for customs clearance. For customs-law reasons, however, the seller is not always entitled to carry out clearance in the buyer’s country. How to avoid customs risks specifically for exports to the US is shown in the article “How to avoid US tariffs as an international supplier”.

The ICC has also been pointing out for years that the FAS, FOB, CFR, and CIF clauses are suitable only for sea and inland-waterway transport. For container shipments, the ICC recommends FCA, CPT, or CIP instead. How FCA and CPT work in practice is shown in the article “Incoterms® 2020 FCA and CPT – Best practice”. Why clause selection nonetheless usually fails in practice is shown in the article “Incoterms® 2020: A Reality Check”.

The Incoterms do not address cargo securing. That is governed by transport law. Under Section 412(1) sentence 1 of the German Commercial Code (Handelsgesetzbuch, HGB), the consignor in principle has to load the goods safely for transport.¹ That applies to commercial carriage by land, on inland waterways, and by aircraft (Section 407(3) HGB); carriage by sea has its own rules. The consignor in the sense of transport law (Section 407(2) HGB) is solely the carrier’s principal. That is not necessarily the seller or the loader. Where the buyer engages the carrier to collect a shipment from the seller, for example, the buyer is at the same time the consignor. In those cases the seller is not subject to the duty under Section 412 HGB; toward the buyer, its obligations follow from the sales contract.

The Incoterms also do not govern the contract of carriage between the principal and the carrier. In interpretation rule A4/B4 they only determine which party organizes the carriage and concludes the contract of carriage. They do not govern the content of that contract.

The Incoterms also do not govern who determines and records the verified gross mass of freight containers (VGM, Verified Gross Mass), or who bears the costs. The international drafting committee considered this topic too specialized and too complex. The parties should agree on it themselves.

Companies also frequently amend Incoterms clauses, for example to “EXW with loading”. Such amendments are in principle possible. To avoid disputes, however, the parties should examine the legal and practical consequences of the amendment carefully. They should state very precisely in the contract what the amendment is meant to achieve. That is particularly important for the question of whether the transfer of risk from seller to buyer shifts as a result.

Caution is also warranted where the parties perform the contract differently from what it says. In a dispute, a court may then conclude that they agreed on a different clause by their conduct.

The parties also have to consider what the Incoterms do not cover. They must settle these points in the sales contract itself, to avoid unnecessary disputes and risk. They include, for example:

• specifications of the goods sold

• warranty

• time, place, method, and currency of payment

• transfer of title, including retention of title

• liability and limitation of liability

• legal consequences of default

• breaches and their legal consequences

• the impact of sanctions

• the consequences of newly imposed customs duties

• export or import prohibitions

• force majeure

• intellectual property rights

• choice of law, in particular whether the CISG applies

• domestic mandatory law (safety, health, environmental protection, and so on)

• rules on evidence

• form of dispute resolution, forum selection, or arbitration clause

Unclear, contradictory, or missing provisions can lead to unnecessary disputes and litigation between the parties. Gaps in choice of law and forum are particularly critical. Many companies are not aware that judgments of German state courts are not enforceable in many countries.

Operational staff also regularly report poor coordination between departments. The same goes for communication with third parties such as freight forwarders, carriers, banks, insurers, lawyers, tax advisers, and customs and tax authorities. The Incoterms connect many topics: sales contract, export and import controls, taxes, customs law, contract of carriage, insurance contract, and financing. International trade only runs smoothly if everyone involved is aligned and the individual contracts fit together. In-house training that involves all departments is particularly suited to the Incoterms.

Conclusion

The Incoterms 2020 bring greater legal certainty if the parties choose the right clause and draft the international sales contract professionally. That requires problem awareness and a critical engagement with the topic.

First published in FOREIGN TRADE 4/2019, revised and expanded for inn.law.

Frequently asked questions

What are the Incoterms® 2020?

The Incoterms® 2020 are standardized, generally accepted delivery terms issued by the International Chamber of Commerce (ICC). They govern the seller’s and the buyer’s obligations (packaging, carriage of the goods, insurance, obtaining the shipping documents, export and import authorization, and so on), the transfer of risk, and costs. The 2020 version has been the current one since 1 January 2020 and applies only where the parties agree on it. The Incoterms are used in around 90% of all international sales contracts.

What is new compared with the Incoterms 2010?

Among other things, DAT became DPU; CIP now requires the wider insurance under Institute Cargo Clauses (A); FCA gained the on-board bill of lading option; carriage with the parties’ own means of transport is now reflected; and the security-related obligations and costs are governed more clearly.

Which Incoterms clause applies to which mode of transport?

The Incoterms 2020 fall into two groups: clauses for any mode of transport (EXW, FCA, CPT, CIP, DAP, DPU, DDP) and clauses for sea and inland-waterway transport only (FAS, FOB, CFR, CIF). The pure sea clauses are tailored to handover on board or alongside the ship.

When does risk pass from the seller to the buyer?

Risk passes upon delivery at the place of delivery. Under CPT and CIP, risk passes as early as handover to the first carrier; under CFR and CIF, once the goods are on board the vessel at the port of shipment. This applies even though the seller pays the freight to the destination.

What do the Incoterms not govern?

Among other things, they do not govern transfer of title, warranty, payment, liability, choice of law (in particular CISG), forum or arbitration clauses, force majeure, sanctions, and the consequences of newly imposed customs duties. These points must be governed in the sales contract itself.

Notes

1. OLG Nürnberg, judgment of 22 February 2017 – 12 U 812/15. ↩

Reference: Poleacov, P. (2026). Incoterms® 2020: practical overview. INN.LAW. https://inn.law/en/perspectives/incoterms-2020-practical-overview/

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