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Perspectives

StandpointInternational Business Law

Incoterms® 2020: A Reality Check

A critical look at the Incoterms 2020 rules: why clause selection usually fails in practice, and where the rules themselves have weaknesses or set the wrong incentives.

Peter Poleacov (updated )9 min

Aerial view: two container ships crossing beneath a bridge.

Between 90 and 95 percent of contracts worldwide do not use the Incoterms rules correctly. The estimate comes from Bob Ronai, who helped draft the Incoterms 2020 rules as a member of the ICC drafting group. The error itself is the smaller problem. Worse, almost no one notices it.

Clause selection fails in practice, not in theory

The Incoterms 2020 rules are clearly written. Companies still reach for the unsuitable clause with great reliability, mostly out of habit. FOB is by far the most popular clause, and FOB is usually the unsuitable choice.

This becomes solid in the Ibero-American Report 2023. The report is regional and exploratory, but also based on real trade documents. In 54 percent of the reviewed transactions under FOB, CFR, or CIF, the goods moved in containers. The ICC expressly advises against these clauses for containers. At least 45 percent of those surveyed do not follow that recommendation.

Incoterms govern who bears which costs, when risk passes, and who arranges transport, insurance, and customs. They do not govern the transfer of title, payment, the consequences of a breach, or whether the clause is valid at all under the applicable law. Confuse that, and you have a clause but no contract.

Containers = FCA (not FOB or CIF)

The most common and most expensive mistake. FOB, CFR, and CIF deliver on board the vessel. The seller, though, hands over a container days earlier at the terminal. In the time between, it legally bears the risk for something it no longer controls, and often does not even know where the container currently is. On top come double-charged terminal fees and disputes over the interface.

Through its own Drafting Group, the ICC has said it unmistakably since 2024: for containers, FCA, CPT, and CIP belong in the contract, not the old sea-freight clauses. FCA moves the handover point to exactly where the seller actually gives up control: the terminal. What each clause means is set out in the article “Incoterms® 2020: practical overview”. Specifically for containers through ports, the article “Incoterms® 2020 FCA and CPT – Best practice” shows why FCA and CPT fit better.

Risk and cost are two different points

With CPT, CIP, CFR, and CIF, what almost everyone thinks of as one thing falls apart. The seller pays the freight to the destination. Risk, however, passes much earlier, at departure. “CIF means the seller is liable to the destination” is the most widespread misconception in international trade, and it is wrong. The seller pays to the destination. The buyer must carry the risk from the moment of loading on board.

CIF on the route: the seller bears the costs to the port of destination but the risk only until the goods are on board. Between the two marks, the buyer bears the risk.

Behind this lies an incentive problem, not a knowledge problem. The clause is chosen by habit, not by risk. The rules favor the habitual choice (everyone knows FOB and CIF) and work against the suitable one, which hardly anyone thinks about.

Demurrage: when the gap between cost and risk costs money

In practice, the split between cost and risk costs money, often as demurrage. Under a voyage charter, demurrage is a charge for delay. It accrues when unloading the vessel (discharge) takes longer than the time allowed for it (laytime). For containers, demurrage is the charge that accrues when they are not collected from the port in time after discharge. Detention is the charge for returning the empty container late. Under CFR and CIF, the seller pays the freight to the port of destination, while the buyer carries the risk from loading. If discharge is delayed, the common assumption is that the buyer pays, not the seller.

But the Incoterms do not answer this. They do not mention demurrage. Between buyer and seller, who bears it follows above all from the demurrage clauses of the sales contract. An example is the 2013 judgment of the Singapore High Court in Profindo v Abani. Under a CFR sale, the vessel had to leave its berth during discharge. Laytime kept running against the buyer, which owed the seller the demurrage. The court based this on the laytime and demurrage clauses of the sales contract. It also relied on the point that a CIF or CFR seller does not have to ensure delivery at the port of destination. The judgment does not mention the Incoterms.

If German law governs the voyage charter, the buyer as consignee of the goods may also owe the demurrage. The shipper remains liable as well (Sections 535(1), 530(3), 527(2), and 494(4) of the German Commercial Code, Handelsgesetzbuch, HGB). Under CFR, that is the seller if it charters the vessel. A seller who agreed only “CFR” may then share liability for a delay it did not cause.

The way out is to spell out in the sales contract who bears demurrage, detention, and storage. Toward the carrier, the seller as shipper remains liable. Under that provision, however, it can recover what it pays from the buyer. Leave the question open, and you rely on the Incoterms, which do not mention demurrage.

Insured does not mean protected

With insurance too, the Incoterms 2020 rules govern less than most assume. Only two clauses require cargo insurance at all: CIF and CIP. All others, including the popular FOB, require it from no one. The buyer assumes the seller insured; the seller assumes the buyer did. At the terminal, the container is handed over but not yet on board. In this gap, it is not unusual for neither policy to cover the goods.

And cover is not the same as cover. What matters are the Institute Cargo Clauses of the London underwriters’ associations (Lloyd’s Market Association and IUA). They come in three tiers from (C) to (A). (C) covers only expressly named perils, a minimum cover; (A) covers, as all-risks cover, every peril except the express exclusions. CIF requires only the minimum (C), CIP the all-risks cover (A). Agree CIF and think “insured”, and you often have the weakest tier.

Even “all risks” does not cover everything. The Institute Cargo Clauses (A) exclude war (Clause 6). On routes through conflict zones this exclusion applies. War cover is a separate instrument that must be arranged on its own. The Incoterms set out who must insure and at what level, not whether the insurer pays in the end.

EXW and DDP: two clauses to avoid

EXW only looks convenient at first glance. The seller owes nothing but making the goods available. That is exactly what becomes the problem. The buyer arranges export. The clause does not govern screening against sanctions and denied-party lists. Sanctions and export control law, however, binds the seller regardless of the clause. In the EU, the seller also becomes the de facto exporter, because the foreign buyer cannot act as exporter there. With letters of credit, EXW usually does not work.

DDP turns the problem around. The seller takes on import in the buyer’s country, and in many countries it is not allowed to. In Brazil, DDP is not workable for a foreign seller; in the EU the residency requirement of the Union Customs Code (Article 170 of Regulation (EU) No 952/2013) stands in the way. Both clauses push duties to where the party often cannot legally perform them.

One clause does not work the same everywhere

The same clause does not work the same in every country. That matters for this article’s readers worldwide. Yet this point is missing from most overviews. From more than 90 national committees, the ICC compiles where national law overrides the Incoterms.

  • Insurance: many countries forbid foreign parties from providing the cargo insurance. That can prevent the use of CIP and CIF there, because both require exactly that. In Kenya, the penalty is a fine or up to five years’ imprisonment.
  • Import: where foreign companies may not import, the seller cannot perform DDP.
  • Customs value: Thailand requires export to be declared as FOB and import as CIF, regardless of the agreed term.

A clause in the contract does not mean it works in the destination country the way you think. The Incoterms govern only some of the questions. The applicable law applies alongside them, often the CISG. More on that in the article “CISG: advantages and disadvantages for German exporters”.

The Incoterms 2020 created, for FCA, the option of getting the seller an on-board bill of lading, designed precisely for the letter-of-credit problem. In practice it rarely holds, because the carrier and the bank do not take part. I name it, but I do not rely on it.

The suitable clause: by mode of transport, not by habit

The choice comes in two steps. First, the mode of transport: containers or multimodal via a port lead to FCA, CPT, or CIP; pure sea or inland-waterway carriage with breakbulk or bulk leads to the classic sea clauses. Second, the allocation of roles: who arranges the main carriage, and who bears the risk to where.

Always write the full formula, with the addition “Incoterms 2020” and a precisely named place; otherwise it stays open which version applies. “FOB Hamburg” on its own may be read by a US court under U.C.C. § 2-319 differently from the ICC rule. And name the place as precisely as possible. Add to “Hamburg” the actual delivery point, such as the terminal or loading ramp, because the transfer of risk depends on it.

Contractual deviations from the Incoterms are possible and common in practice; their effect must then be set out precisely and in full in the contract, as the article “Incoterms® 2020: practical overview” shows.

The selector below gives a first orientation.

Incoterms determine who pays and who bears the risk, not who owns the goods. Confuse the two, and you have a clause but no protection.

My recommendation

  1. Read the ICC handbook.
  2. Align with purchasing, sales, logistics, and legal.
  3. Integrate the suitable clause into the contract.

References

  1. ICC, Incoterms® Rules.
  2. ICC, FCA and CPT: Best Practice for Shipping Containers through Ports (2024).
  3. ICC, National Regulatory Barriers to the Incoterms® 2020 Rules (January 2025 and January 2026 editions).
  4. Ibero-American Group on the Incoterms® 2020 Rules, Ibero-American Report on the Use of the Incoterms® 2020 Rules (2023).
  5. Lloyd’s Market Association (LMA) and International Underwriting Association of London (IUA), Institute Cargo Clauses (A) and (C).
  6. Davis and Vogt, Incoterms 2020 and Missed Opportunities, International Journal of Logistics Research and Applications (2021).
  7. Profindo Pte Ltd v Abani Trading Pte Ltd, [2013] SGHC 10 (Singapore High Court).
  8. Ronai, Learning from the experts: Bob Ronai on Incoterms® 2020 – Then and Now, podcast, Trade Finance Global (2019).

Which Incoterms rule fits?

Quick guide

In a few steps, this guide gives you a first orientation.

How will the goods be transported?

Not legal advice. For the actual contract wording, talk to an expert.

Reference: Poleacov, P. (2026). Incoterms® 2020: A Reality Check. INN.LAW. https://inn.law/en/perspectives/incoterms-reality-check/