An Incoterm says nothing about who owns the goods, which law applies or which court has jurisdiction. It answers three questions only: who arranges carriage, who pays for what, and from which precise point the loss of the goods stops being the seller’s problem and becomes the buyer’s. And in four of the eleven rules, that point of transfer of risk does not coincide with the point of transfer of costs.
A French exporter sells a consignment of machine tools CFR to a Turkish buyer. The vessel suffers damage in the Mediterranean and the cargo is lost. The exporter paid the freight to Mersin and therefore assumes, in good faith, that the goods were travelling at his risk. He is wrong: under CFR, risk passed to the buyer on loading on board at the port of shipment. The price remains due, and it is for the buyer to turn to his insurer, if he took one out, which the rule did not oblige him to do.
Eleven rules, two families, and a split worth knowing
Incoterms 2020 comprise eleven rules in two families. Seven apply to any mode of transport: EXW, FCA, CPT, CIP, DAP, DPU and DDP. Four are reserved for sea and inland waterway transport: FAS, FOB, CFR and CIF. The guiding principle stated by the International Chamber of Commerce is that the place of delivery identified in article A2 of each rule is the place where risk passes under article A3.
The difficulty is that costs, gathered in articles A9 and B9, do not always follow risk. For the E and F families, the named place is the point of transfer of risk. For the C and D families, it designates the destination to which the seller must arrange carriage, and therefore the point at which costs are divided. Under CPT, CIP, CFR and CIF, the seller pays for a carriage he no longer bears the risk of. That is deliberate and coherent, but it cannot be guessed from reading the three letters.
What the 2020 version changed
Five developments separate Incoterms 2020 from the 2010 rules. DAT became DPU, to mark that the place of destination may be any place and not only a terminal, DPU remaining the only rule obliging the seller to unload at destination. Insurance levels were differentiated: CIF keeps the minimum cover of Institute Cargo Clauses (C), while CIP now requires cover at level (A), the minimum remaining the value of the goods plus ten percent.
Three further changes matter in practice. The parties may agree, under FCA, that the buyer instructs the carrier to issue a bill of lading to the seller bearing the on-board notation, which at last makes FCA workable with a documentary credit. The rules accept that carriage may be performed by the seller’s or the buyer’s own means and not only by a third-party carrier. And the security-related obligations were clarified, with their allocation of costs made explicit.
What an Incoterm never settles
The International Chamber of Commerce itself lists what its rules leave aside, and the list is longer than what they cover: the existence of the contract of sale, the specifications of the goods, the time, place, method and currency of payment of the price, the remedies for breach, the consequences of delay, the effect of sanctions, the imposition of customs duties, import or export prohibitions, force majeure and hardship, intellectual property rights, and the method and law of dispute resolution.
Above all, the rules do not deal with the transfer of property. A contract stipulating only an Incoterm, a price and a delivery time therefore leaves open the governing law, the competent court, retention of title, force majeure and the payment terms. That is precisely the configuration in which a dispute worth a few tens of thousands of euros turns into an eighteen-month preliminary argument about which court may hear it.
EXW on export, the false good idea
EXW looks ideal for the seller: the goods are placed at the buyer’s disposal on the seller’s premises, not loaded, and everything else falls to the buyer, export clearance included. The problem is that Union customs law does not follow. Delegated Regulation (EU) 2015/2446, as amended by Regulation (EU) 2018/1063, defines the exporter as a person established in the customs territory of the Union who has the power to determine that the goods are to be taken out of that territory.
A buyer established outside the Union does not meet that condition. In practice the seller ends up completing the formality, or granting a representation mandate, while struggling to assemble the proof of exit on which the value added tax exemption depends. He therefore carries a burden and a tax risk he believed he had transferred. For that reason the French administration recommends reserving EXW for transactions not involving an export, and preferring FCA.
FOB and the container: risk running in a vacuum
FOB transfers risk on loading on board the vessel. That rule makes sense for bulk loaded directly; it makes none for containerised cargo. In a container chain the seller hands his container over at the terminal several days before shipment and no longer has physical control of it. He nevertheless remains exposed until actual loading, for a period during which he can neither watch over the goods, nor protect them, nor generally insure them on terms that reflect the real exposure.
The International Chamber of Commerce expressly advises against transposing the maritime rules to inland points, and the customs administration recalls that container carriage falls under the multimodal rules. The correction is simple: FCA at the terminal, with the on-board bill of lading option where a documentary credit requires one. The FOB reflex, inherited from decades of practice, costs losses every year that no policy covers because nobody thought the point concerned them.
DDP and CIF: two promises often impossible to keep
DDP places the seller at the maximum of his obligations, import clearance, duties and taxes included. Yet Article 170 of the Union Customs Code requires the declarant to be established in the customs territory of the Union. A non-established seller selling DDP into the Union therefore promises a performance he cannot himself deliver, and exposes himself to value added tax registration, and sometimes to fiscal representation, in each country of destination. The same obstacle exists in the opposite direction in several third countries.
CIF suffers from the opposite defect. The buyer believes himself covered and is covered only at the minimum level of Institute Cargo Clauses (C), a named-perils cover a long way from all risks. Since 2020, CIP offers level (A), but CIP is not CIF. If the parties want extended cover on a maritime sale, they must stipulate it expressly, because the rule will not give it to them.
The Incoterm before the court and before customs
Before the court, the Incoterm serves as evidence of the place of delivery. The Court of Justice of the European Union held that the national court must take account of all the relevant terms and clauses of the contract capable of clearly identifying that place, including terms generally recognised in international commercial usage such as the Incoterms, verifying in each case whether the rule relied on merely allocates risks and costs or also designates the place of delivery (Electrosteel Europe, Case C-87/10). The solution applies today under the Brussels I bis Regulation.
Before customs, the Incoterm mechanically drives the taxable base. Articles 70 to 72 of the Union Customs Code require the addition to the price paid of the costs of transport, insurance, loading and handling incurred up to the place of introduction into the Union. What is already included in the price is not added again; what is not included is added. An FCA price and a CIF price for the same goods therefore produce two different customs values, and an incorrect declaration produces an assessment with penalties years later.
What the firm does
The firm reviews the Incoterms used in a company’s standard order forms, general terms of sale and framework agreements, and checks their consistency with the payment terms, the insurance cover, the customs position and the jurisdiction clause. That review regularly reveals the three classic defects: EXW on export, FOB on containerised cargo, and DDP promised by a seller not established in the country of destination.
Where a loss has already occurred, the firm establishes at which precise moment risk passed, on the transport documents and the correspondence, and conducts the claim against the carrier, the insurer or the counterparty. It also handles the customs consequences, in particular disputes over customs value where the declared base does not match the Incoterm actually agreed. A first assessment is usually possible within a few days on the strength of the contract, the invoice and the transport documents.
The place of delivery fixed by the Incoterm also decides which court has jurisdiction and whether a refusal of the goods is legitimate: the page my foreign buyer refuses the goods, in the series Exporter disputes, draws the practical consequences.
Are the Incoterms in your contracts consistent with your payment terms, your insurance and your customs position? The firm reviews them and corrects the three defects that cost the most.
Frequently asked questions
Does an Incoterm transfer ownership of the goods?
No. The International Chamber of Commerce states expressly that the rules do not deal with the transfer of property. Ownership is governed by the law applicable to the contract and, where relevant, by a retention of title clause whose validity depends on the law of the place where the goods are situated. A contract stipulating only an Incoterm leaves the question of ownership entirely open.
Do risk and costs always pass at the same moment?
No. Under the E and F families the named place is both the point of delivery and the point of transfer of risk. Under the C family, CPT, CIP, CFR and CIF, risk passes on handing over to the carrier or on loading on board, while the seller pays the carriage to the named destination. Four of the eleven rules therefore separate risk from costs, which is the single most frequent misunderstanding in practice.
Can goods be sold EXW to a foreign buyer?
It is possible but inadvisable where the sale involves an export from the Union. The exporter for customs purposes must be established in the customs territory of the Union under Delegated Regulation 2015/2446 as amended, which a buyer established outside it is not. The seller then completes the formality anyway, or gives a mandate, and struggles to obtain the proof of exit conditioning the VAT exemption. FCA is the recommended alternative.
Is there an Incoterms 2030 or a version later than 2020?
Incoterms 2020 is the version in force. The International Chamber of Commerce revises the rules approximately every ten years, and any announcement of a later version should be checked against the ICC itself before being relied on in a contract. In the meantime, a contract should refer to Incoterms 2020 by name rather than to Incoterms generally, so that the applicable version is not left to argument.
Does the Incoterm determine which court has jurisdiction?
Not directly, but it weighs heavily. Article 7(1) of the Brussels I bis Regulation gives jurisdiction in contractual matters at the place of delivery of the goods, and the Court of Justice held in Electrosteel Europe (C-87/10) that the court must consider all terms of the contract capable of identifying that place, including Incoterms, checking whether the rule merely allocates risk and costs or also designates the place of delivery.
Further reading: governing law and jurisdiction clauses, recovering an unpaid invoice from a foreign customer, the firm’s international practice.
Written by Hervé Guyader, avocat at the Paris Bar, doctor of law. This content is general information and is no substitute for advice on your own matter.