Incoterms 2020: where risk transfers, where cost transfers

Incoterms 2020 has eleven rules. Seven work with any transport mode, including containers moving by sea. Four apply only to sea and inland waterway carriage. Under the four C rules the seller carries cost to the destination and stops carrying risk at the origin, and those two points are hundreds of nautical miles apart. That gap is the single most expensive misreading in trade.

Incoterms are published by the International Chamber of Commerce. The 2020 edition came into force on 1 January 2020. They apply to a contract only when the contract says they do, and the reference has to name the edition and the place: “FCA Ningbo, Incoterms 2020”, not “FOB”.

What do Incoterms actually decide?

Six things:

• Who delivers, and at exactly which point delivery happens.
• Where risk of loss or damage passes from seller to buyer.
• Who pays which cost, itemised in article A9 and B9 of each rule.
• Who handles export clearance, transit formalities and import clearance.
• Whether either party has an insurance obligation, and at what level.
• Who provides which transport document, notice and information.

And five things they do not decide. Incoterms say nothing about transfer of ownership or title. Nothing about payment terms, so an LC or a 90-day usance is a separate clause. Nothing about price. Nothing about remedies for breach. Nothing about applicable law or forum. A sale contract that has an Incoterm and no payment clause is not a contract, it is a shipping instruction.

Do Incoterms transfer title?

No. This is the one thing people most often assume an Incoterm does, and it is the one thing the rules deliberately leave alone. An Incoterm allocates delivery, risk, cost and clearance duties. Ownership — title — passes when the law governing your sale contract says it does, and that law is a separate clause you have to write.

Risk and title are not the same event and they routinely happen on different days. Under CIF, risk passes when the goods are on board at origin. Title may not pass until the seller is paid, six weeks later, if the contract carries a retention-of-title clause. A buyer who reads “CIF” and concludes “the goods are mine once they are loaded” has read a risk allocation as a property transfer.

Three practical consequences for an import desk:

• Write the title clause. If you need title to pass on payment, or on shipment, the sale contract has to say so, along with the governing law. The Incoterm will not do it.
• The transport document is what actually controls the goods. A negotiable bill of lading is a document of title: whoever lawfully holds it can claim delivery at destination. That is why a bank takes it as security under a documentary credit and will not release it until the presentation is clean. The Incoterm says who has to provide it, not who owns what.
• Insurance follows risk, not title. Under CIP and CIF the seller buys cover for the buyer’s benefit because risk has already moved. Ownership does not decide who claims.

So an Incoterm and a title clause answer two different questions, and a purchase contract needs both. Docket reads both off the contract when the shipment is created.

The eleven rules

Read the CPT, CIP, CFR and CIF rows again. The risk column and the cost column point at different ends of the voyage. These are the two-point rules, and the ICC says so in the guidance to each of them.

Why does risk transfer before cost under CIF?

Because the seller sells on board and then buys carriage on the buyer’s behalf.

Under CIF, delivery happens when the goods are placed on board the vessel at the port of shipment. From that instant the buyer carries the risk of loss or damage. The seller still has to contract and pay for carriage to the named port of destination, and still has to buy insurance, but the seller is spending money on a voyage whose risk belongs to somebody else.

The practical consequences for an importer:

• If the cargo is damaged mid-ocean on CIF terms, it is your loss. You claim on the insurance policy the seller bought in your favour.
• The insurance the seller must buy under CIF is minimum cover, Institute Cargo Clauses (C) or similar, unless the contract says otherwise. Clause (C) is a named-perils cover. It is thin.
• Under CIP, Incoterms 2020 raised the default to Institute Cargo Clauses (A) or similar all-risks cover. This changed from the 2010 edition, where CIP also sat at (C). CIF stayed at (C) because the commodity trades wanted it there.
• Both CIF and CIP require cover of at least 110% of the contract value, in the currency of the contract, payable at destination.

If you buy CIF and want all-risks, say so in the contract. The rule will not do it for you.

Should I buy FOB or FCA for containers?

FCA, for anything that moves in a container. The ICC has said this in the guidance to Incoterms 2010 and again in 2020, and the trade keeps ignoring it.

FOB fixes delivery and risk transfer at the moment the goods are on board the vessel. A container is handed over at a terminal or a container yard days before it is loaded. So a seller on FOB terms carries risk for a box that is already out of their control, sitting in a stack they cannot reach, on a terminal whose operator answers to the carrier. When the box is damaged in the yard, the FOB allocation puts that on the seller, who has no practical way to prevent it or prove what happened.

FCA delivers at the named place: the seller’s premises if the buyer’s vehicle collects, or the terminal or depot if the goods arrive there on the seller’s truck. Risk and control end at the same instant. That is the whole point of a delivery term.

The historic objection was that FCA broke letters of credit, because a seller who delivers at a depot has no on board bill of lading to present. Incoterms 2020 answers it directly. Under FCA A6 and B6 the parties may agree that the buyer instructs the carrier to issue a transport document stating the goods have been loaded on board, and the seller passes that document on. Put the mechanism in the sale contract and in the credit, and FCA presents cleanly.

What changed in Incoterms 2020?

Five changes worth knowing.

1/ DAT became DPU. Delivered at Terminal was renamed Delivered at Place Unloaded, because the destination never had to be a terminal. DPU is the only rule of the eleven that requires the seller to unload.

2/ CIP insurance rose to Institute Cargo Clauses (A). CIF stayed at (C).

3/ FCA gained the on board bill of lading option, described above.

4/ Own means of transport is now explicit. FCA, DAP, DPU and DDP recognise that the buyer or seller may carry the goods on their own vehicle rather than contract a carrier.

5/ Costs are consolidated in A9 and B9 of every rule, so the cost allocation can be read in one place instead of hunted through ten articles. Security-related obligations are also spelled out, at A4, A7, B4 and B7.

Which rule should an importer actually pick?

Three positions, and the reasoning behind each.

Buy FCA or FOB and control the freight yourself when you ship regularly on a lane. You choose the carrier, you negotiate the free time, you see the real ocean rate instead of a number buried in the unit price. You also carry the risk from origin, which is why you buy proper cargo cover rather than relying on a minimum policy.

Buy CIF or CIP when you ship occasionally, do not have carrier relationships, and want one number to compare against another supplier’s number. Accept that the freight and insurance margin is inside the price and you cannot see it.

Avoid DDP unless the seller is genuinely established in your country. DDP puts import clearance and duty on the seller. A seller who is not registered for your import taxes will either fail at it or pay an agent to act in your name, and the entry filed against your importer registration is still your liability with customs.

Avoid EXW for exports out of a country with formal export controls. EXW leaves export clearance with the buyer, who is usually not resident and cannot file. FCA at the seller’s premises achieves the same commercial split with the export declaration on the party who can actually make it.

What this does to your landed cost

The Incoterm decides which cost lines appear on your side of the ledger. On EXW or FCA you will see ocean freight, origin handling and insurance as separate invoices. On CIF you will not, because they sit inside the unit price, and your customs value is calculated on the CIF value anyway.

This is why comparing a CIF quotation against an FOB quotation on unit price alone is meaningless. Build both out to the same delivered-and-cleared number before you decide. The categories that have to be in that build are the ones the landed cost of an import is made of: customs duty, shipping-line charges, port handling, CHA fees, inland transport, insurance, bank charges, inspection, and demurrage and detention.

Doing that comparison once, by hand, on a quotation is an afternoon. Doing it on every container, against what the invoices actually said, is what a landed cost tracking system is for — it holds the Incoterm per contract and knows which cost lines to expect on your side because of it.

Where Docket sits

Docket reads the Incoterm off the purchase contract and uses it to generate the rest of the shipment: who owes which document, which costs to expect on your side, and which deadlines belong to the seller.

On a CIF purchase it will chase the insurance certificate, because the seller owes it and the credit will be refused without it. On an FOB purchase it will not, and will instead expect your own policy on file. On DDP it watches for the entry filed in your name. The contract sets the checklist. That is the entry wedge for the whole product.

The honest limit: Docket does not draft your sale contract and will not tell you that FOB was the wrong rule for your containers before you sign. It reads what you agreed and works that. On the baseline desk, supplier follow-ups run 30 to 45 minutes a container and the document pack another 45 to 90 minutes. Docket automates about 85% of the chase and about 65% of the doc-pack drafting. The remaining share is judgement, and it stays with your team.