What Incoterms are — and what they do not cover
Incoterms are standard trade terms published by the International Chamber of Commerce (ICC); the current edition is Incoterms 2020. Each rule settles three questions between seller and buyer: where the goods are delivered, when risk passes to the buyer, and who pays which costs.
Incoterms do not cover everything. Payment terms, transfer of ownership and the consequences of a breach of contract must be set out separately in the sales contract.
Always state the rule with a named place and the edition, for example: “FCA Guangzhou, [warehouse address], Incoterms 2020”. A rule without a place is a common source of disputes.
All 11 Incoterms 2020 rules
The rules fall into two groups: those for any mode of transport and those for sea and inland waterway transport only. The list gives the essence of each; the six you will meet most often in imports — EXW, FCA, FOB, CIF, DAP and DDP — are covered in detail below.
The letters follow a logic: E — goods are handed over at the seller’s premises; F — the buyer pays for the main carriage; C — the seller pays for the main carriage, but risk passes at the shipping point; D — goods are delivered at the destination. Once you know this, any rule is easy to read.
- EXW (Ex Works) — goods are made available to the buyer at the seller’s premises;
- FCA (Free Carrier) — goods are handed to the buyer’s carrier at an agreed place;
- CPT (Carriage Paid To) — the seller pays carriage to the destination, risk passes on handover to the first carrier;
- CIP (Carriage and Insurance Paid To) — CPT plus insurance arranged by the seller;
- DAP (Delivered at Place) — delivered at the destination, ready for unloading;
- DPU (Delivered at Place Unloaded) — delivered at the destination and unloaded;
- DDP (Delivered Duty Paid) — delivered with import clearance and customs payments handled by the seller;
- FAS (Free Alongside Ship) — goods placed alongside the vessel at the port of shipment;
- FOB (Free On Board) — goods loaded on board the vessel at the port of shipment;
- CFR (Cost and Freight) — the seller pays freight to the destination port, risk passes at the port of shipment;
- CIF (Cost, Insurance and Freight) — CFR plus insurance arranged by the seller.
EXW and FCA: you collect the goods
Under EXW the seller’s obligations are minimal: it makes the goods available at its warehouse or factory. Loading, export clearance, international transport and import are all the buyer’s responsibility, and risk passes as soon as the goods are made available.
The weak point of EXW is export clearance: formally the buyer must handle it, and a foreign buyer cannot always do so. If you buy EXW, agree in writing with your supplier who will prepare the export documents.
FCA solves this: the seller clears the goods for export and hands them to the buyer’s carrier or forwarder at the agreed place. If that place is the seller’s premises, the seller also loads; if it is elsewhere — a forwarder’s warehouse, for example — the seller brings the goods on its own transport, ready for unloading. The ICC itself recommends FCA rather than FOB for containerised goods.
FOB and CIF: sea freight only
Under FOB the seller clears the goods for export and loads them on the vessel booked by the buyer. Risk passes once the goods are on board; ocean freight, insurance and all later costs are for the buyer.
Under CIF the seller pays freight and insurance to the destination port, but — as with FOB — risk passes at the port of shipment. Loss in transit is the buyer’s risk; the seller’s policy is there to compensate it. The seller only has to buy minimum cover, so if you need broader protection, put it in the contract.
An important point for Azerbaijan: sea cargo often arrives at Georgia’s Black Sea ports (Poti, Batumi) and continues by road or rail. “CIF Poti” ends the seller’s obligations in Poti — transport from the port to Baku, port charges and risk are all yours.
DAP and DDP: the supplier delivers to Azerbaijan
Under DAP the seller delivers to the named destination and bears the risk all the way. Unloading, import customs clearance, duty and VAT are for the buyer. It looks convenient, but the freight cost is built into the price of the goods and you do not see it separately.
DDP is the maximum obligation for the seller: everything, including import clearance and customs payments. For imports into Azerbaijan it is rarely practical, because a foreign supplier has to arrange the declaration at Azerbaijani customs and pay duty and VAT there.
There is a further risk: if import VAT is not paid in your company’s name, offsetting it as a VAT-registered business may become difficult. If a supplier offers DDP, ask who the goods will be declared under in Azerbaijan and which documents you will receive.
Which rule to use when you have your own forwarder
If you work with your own forwarder, such as TuranKargo, you control the transport, and the logical choice is EXW, FCA or, for sea freight, FOB. The supplier prepares the goods; the forwarder takes care of routing, the mode of transport and customs clearance.
If the supplier delivers the goods at its own cost to TuranKargo’s warehouse in Guangzhou, Istanbul or Wilmington, this is essentially “FCA, warehouse address”; state clearly in the contract who is responsible for export clearance. The warehouse address and your personal customer number in the TK-XXXXXXX format appear in your account after registration, and the number is written on every box. Under EXW, pickup from the supplier’s address is added to your request as an extra service.
The rule also affects the customs value: under EXW all transport costs up to the border are added to it, while under “CIF Poti” only the leg from the port to the Azerbaijani border is added. With C and D rules the supplier chooses the carrier, so you have less visibility of the route and the cost structure.
Common Incoterms mistakes
In practice, problems rarely come from the rules themselves — they come from applying them wrongly:
- stating a rule without a place: not “FOB” but “FOB Ningbo, Incoterms 2020”;
- using sea rules (FOB, CFR, CIF) for air, road or rail shipments — FCA, CPT and CIP are designed for those;
- assuming that under CIF the seller carries the risk to the destination port;
- choosing EXW without agreeing who handles export clearance;
- treating DDP as the “easy” option without checking who will declare the goods in Azerbaijan;
- different rules in the contract, the invoice and the instructions to the forwarder;
- not stating the edition — Incoterms 2010 and 2020 differ; for example, DAT was replaced by DPU.