A single incorrect selection in an Incoterms clause can lead to personal liability for managing directors and six-figure back payments for your company. Do you know where the risks lurk in your supply contracts? Many medium-sized companies navigate uncertainly through the jungle of the 11 clauses, fear losing control over their supply chain, and overlook the dangerous connection between contract law and customs law .
This guide is your legal compass. It translates complex regulations into practical terms and protects you from costly mistakes.
What are Incoterms explained simply and why are they legally crucial?
Incoterms are globally recognized, standardized rules of the International Chamber of Commerce (ICC) that define the transfer of costs, the transfer of risks and the organization of transport & customs between seller and buyer in B2B trade.
Although Incoterms are not laws, they become legally binding through explicit agreement in the sales contract. This gives them precedence over many default rules, i.e., those that can be modified, under national sales law. Their strategic importance is immense: By consciously choosing the appropriate clause, companies can not only reduce costs and precisely manage risks, but also maintain control over their entire supply chain. Conversely, an incorrect choice can lead to unexpected costs, delivery delays, and legal disputes.
What the Incoterms regulate
Incoterms facilitate global trade. They define the allocation of price and risk of loss or damage during the international transport of goods.
They define the essential obligations of the seller and buyer regarding the delivery of the goods and clarify questions such as:
- Which party is responsible for transporting the goods and/or handling export/import clearance?
- When does the goods pass from the seller into the buyer’s sphere of responsibility (transfer of risk)?
- How are the costs and risks distributed between buyer and seller? Who pays what?
- How is the delivery and acceptance of the goods carried out?
At the same time, this indirectly addresses the following questions:
- Shipping documents: Who is responsible for obtaining the required or desired shipping documents? Who bears the costs?
- Transport documents: Who is responsible for obtaining which transport documents? Who bears the costs?
- Insurance: Who is responsible for insuring the goods for each stage of the process? Who bears the costs?
- Information: Who needs to provide the partners with what information and at what time?
- Goods inspection: Who is responsible for carrying out the goods inspection and who is responsible for paying for this inspection?
- Packaging: How must the goods be packaged? Who pays for the packaging process and the packaging materials?
What do the Incoterms NOT regulate and what should therefore be defined separately in the sales contract?
- Payment terms and jurisdiction
- Transfer of ownership (as opposed to transfer of possession)
- Consequences of breaches of obligations
- Disclaimers
- Replacement deliveries
The 4 groups of Incoterms 2020: A decision-making aid based on transport route
For better orientation, the 11 clauses are divided into four groups (E, F, C and D), which differ fundamentally in terms of the place of transfer of risk and the responsibility for the main transport:
- E-Group (EXW): The collection clause. The seller’s obligations end when he makes the goods available for collection at his own location.
- F-Group ( FCA , FAS, FOB): Dispatch clauses without the seller undertaking the main transport. The seller delivers to a carrier nominated by the buyer.
- C-Group (CPT, CIP, CFR, CIF): Dispatch clauses with the seller assuming responsibility for the main transport. The seller concludes and pays for the transport contract, but the risk passes to the buyer upon handover to the first carrier.
- D-Group (DAP, DPU, DDP): The arrival clauses. The seller bears the costs and risks until the goods arrive at a named destination.
A crucial practical tip: For container shipments, which are the most common multimodal transports, always use clauses covering all modes of transport (e.g., FCA , CPT, DAP). Purely ocean freight clauses like FOB or CIF are outdated and unsuitable because the transfer of risk is unclear when the goods are handed over at the container terminal. This is one of the most frequent and costly mistakes in practice.
The 11 Incoterms 2020 in detail: Costs, risks and obligations at a glance
The following breakdown and table provide a practical overview of the responsibilities for each of the 11 clauses.
| Incoterm® clause | Type of transport | Cost transfer (seller bears costs until…) | Transfer of risk (seller bears risk until…) | Customs clearance (export/ import ) |
|---|---|---|---|---|
| EXW | All | Provision on your own site | Provision on your own site | Buyer / Buyer |
| FCA | All | Handover to the carrier at the named place | Handover to the carrier at the named place | Seller / Buyer |
| FAS | Sea/Inland waterway vessel | Long side of the ship in the named port | Long side of the ship in the named port | Seller / Buyer |
| FOB | Sea/Inland waterway vessel | On board the ship in the named port | On board the ship in the named port | Seller / Buyer |
| CFR | Sea/Inland waterway vessel | Port of destination | On board the ship at the port of shipment | Seller / Buyer |
| CIF | Sea/Inland waterway vessel | Port of destination (including insurance) | On board the ship at the port of shipment | Seller / Buyer |
| CPT | All | Named destination | Handover to the first carrier in the country of origin | Seller / Buyer |
| CIP | All | Destination (including insurance) | Handover to the first carrier in the country of origin | Seller / Buyer |
| DAP | All | Arrival at the named destination | Arrival at the named destination | Seller / Buyer |
| DPU | All | Unloading at the named destination | Unloading at the named destination | Seller / Buyer |
| DDP | All | Arrival at destination, cleared through customs | Arrival at destination, cleared through customs | Seller / Seller |
Groups E & F (collection clauses): Maximum control for the buyer
- EXW (Ex Works): Seems simple for sellers, but is risky. The seller only makes the goods available. They are not obligated to load them. If they assist anyway and the goods are damaged, they can be held liable. Furthermore, they have no proof of export, which can lead to problems with VAT.
- FCA (Free Carrier): This is the most flexible clause and recommended in many cases. The seller delivers the goods to a location specified by the buyer (e.g., a forwarding agent’s warehouse) and is responsible for export processing. Precise specification of the delivery location is crucial, as this is where costs and risks transfer.
Group C (Shipping Clauses): Seller pays for the main transport, but the risk passes to the buyer earlier.
- CPT (Carriage Paid To) and CIP (Carriage and Insurance Paid To): These clauses are characterized by a shared transfer of costs and risks. The seller organizes and pays for transport to the destination. However, the risk passes to the buyer as soon as the seller hands the goods over to the first carrier.
- Under CIP terms , the seller is additionally obligated to take out transport insurance. Note: Incoterms® 2020 stipulates higher insurance coverage (Institute Cargo Clauses A) than the previous version (Coverage C).
Group D (Arrival Clauses): Maximum service from the seller
- DAP (Delivered at Place): The seller bears the costs and risks until the goods arrive at the named place of destination and are ready for unloading. Unloading itself is the responsibility of the buyer.
- DPU (Delivered at Place Unloaded): This is the only clause where the seller is responsible for unloading the goods at the destination. It replaces the former DAT clause.
- DDP (Delivered Duty Paid): The “ultimate discipline”. The seller bears all costs and risks up to the destination, including import customs clearance, duties, and taxes in the destination country. They essentially become the importer in the destination country, which entails enormous risks if one is not familiar with the local legal requirements.
Which Incoterm is “delivered to your door”?
The phrase “free delivery” or “delivery free to the door” is not a single Incoterm . “Delivery free to the door” means that the sender bears all transport costs .
The sender also bears the risk of transport damage until arrival at the recipient in the case of “delivery free to the door”.
Customs value & Incoterms: The direct impact on your tax burden
The choice of Incoterms clause directly influences the calculation of the customs value and thus the amount of import duties . Certain costs must be added to the transaction price (e.g., transport costs) or may be deducted from it. The Incoterms clause defines who bears these costs and up to what point they are included in the price of the goods.
This becomes particularly clear in the difference between DAP and DDP in customs clearance :
Under DAP ( Delivered at Place), the buyer is responsible for import customs clearance. The seller delivers to the destination, but customs clearance, duties, and import VAT are the buyer’s responsibility.
With DDP, the seller is responsible for everything. They must handle the import formalities in the destination country and pay all duties.
This has a significant impact on cost calculation and customs responsibilities.
Conclusion
Choosing and applying the correct Incoterms® 2020 is far more than a formal requirement – it is a key strategic decision that directly impacts your costs, risks, and ultimately your profit.
