Incoterms 2020 Explained

Incoterms (International Commercial Terms) are standardised trade terms published by the International Chamber of Commerce (ICC) that define who — buyer or seller — is responsible for freight costs, insurance, customs clearance, and the point where risk transfers. They are used in international contracts to eliminate ambiguity about obligations.

For most parcel shipments through couriers like DHL, UPS, FedEx, DPD or GLS, DAP (Delivered at Place) is the standard. The seller arranges and pays for delivery to the buyer's address; the buyer handles import duties in their country. If you want to cover the buyer's import duties too, use DDP.

Under DAP, the seller delivers the goods to the buyer's named address but the buyer is responsible for paying import duties and taxes in their country. Under DDP, the seller covers everything — including import duties — so the buyer receives goods with no extra charges. DDP is more convenient for buyers but requires the seller to know the destination country's import duty rates.

Incoterms 2020 (the current version) made two main changes: DAT (Delivered at Terminal) was renamed DPU (Delivered at Place Unloaded), and CIP now requires sellers to arrange higher insurance cover (Institute Cargo Clauses A — all risks) by default, compared to the minimum cover previously required.

Only DDP (Delivered Duty Paid) includes import duties as the seller's responsibility. All other Incoterms place import customs clearance and duties on the buyer. Always clarify with your buyer whether duties are included in your price.

FOB (Free on Board) is historically the most widely used Incoterm in global trade, particularly for sea freight. However, for containerised shipments, FCA is now recommended by the ICC over FOB — containers are handed over at the inland terminal before loading, so FOB's 'on board' risk transfer point is logistically misaligned. For courier and air freight, DAP is the de facto standard.

For containers, FCA is the correct term and FOB is technically misapplied. Containers are handed over at the container terminal or freight station, not loaded 'on board' the vessel by the seller. Under FCA at the named terminal, risk transfers correctly when the container is handed to the carrier. Under FOB, the seller technically retains risk until the container is loaded — but in practice has no control over loading. The ICC explicitly recommends FCA over FOB for all containerised cargo in Incoterms 2020.

Incoterms are not automatically legally binding — they only have legal force when expressly incorporated into the sales contract (e.g. 'FOB Lisboa Port, Incoterms 2020'). Always specify the Incoterms version (2020) and the named place in your contract. Incoterms define cost and risk allocation but do not cover ownership (title transfer), payment terms, or remedies for breach — these are governed by the applicable law of the contract.

Only CIP and CIF include an obligation for the seller to arrange cargo insurance. CIP (for any transport mode) requires the seller to arrange Institute Cargo Clauses A (all-risks, the highest level). CIF (sea freight only) requires only minimum cover — Institute Cargo Clauses C. For all other Incoterms, insurance is optional and commercially advisable but not contractually required.

The named place is the specific location where delivery is completed and risk transfers. It must be as precise as possible — a city name is not enough. For example, 'DAP Warehouse 12, Rua Industrial 5, Hamburg' is more useful than 'DAP Germany'. The more precise the named place, the clearer the obligations and the lower the risk of disputes. For sea freight, the named place is typically the port (e.g. 'FOB Porto de Leixões').