Incoterms® — Seller/Buyer Cost Allocation and Transfer of Risk
Interlink編集部Types of Trade Terms and the Obligations of Sellers and Buyers
The types of trade terms and the obligations of sellers and buyers refer to the practical arrangement within international sales contracts concerning how far the seller and buyer are responsible for arranging transportation, at which point the risk for the cargo transfers, and who bears which costs and customs procedures.
Incoterms Rules are internationally recognized trade terms designed to clarify the allocation of costs, risk transfer, transport arrangements, customs procedures, and delivery locations between sellers and buyers in international sales contracts.
Incoterms are established by the International Chamber of Commerce (ICC), with the latest version being Incoterms 2020. In practical use, it is necessary to clearly specify not only the term but also the applicable version and designated place.
The practical core of Incoterms is to clearly define "who arranges transportation," "where the risk transfers from seller to buyer," and "which costs are borne by the seller and buyer."
However, Incoterms do not cover transfer of ownership, payment terms, damages for breach of contract, force majeure, governing law, or jurisdiction. These must be separately stipulated in the sales contract, payment terms, governing law, and individual contract clauses.
Scope Covered in This Article
This article provides an overview of all 11 Incoterms and a cross-sectional summary of the basic obligations of sellers and buyers. Details on individual terms, insurance start, letters of credit (L/C), freight forwarder practices, and accident handling should be reviewed under separate topics.
| Theme | Contents Covered in This Article | Contents to Be Covered Separately |
|---|---|---|
| Overall Incoterms | Types of 11 terms, modes of transport, cost allocation, risk transfer, customs obligations overview | Individual explanations of EXW, FCA, FOB, CIF, DAP, DDP, etc. |
| Risk Transfer | Basic concept of risk transfer for cargo damage from seller to buyer | Timing of risk transfer, accident occurrence segment, allocation of liability |
| Cargo Insurance | Seller’s insurance arrangement obligation under CIF/CIP, need to confirm insurance terms | Marine cargo insurance for ocean shipments, insurance start, association cargo clauses, insurance claims procedures |
| L/C and Payment | Relationship between Incoterms and reconciliation of B/L, insurance policies, and invoices | L/C transactions, discrepancies, B/L entries, documents submitted to banks |
| Container Transport | Practical situations where FCA fits better than FOB | Risks of using FOB for container transport, FCA designated place, CY/CFS delivery |
| Freight Forwarder Practices | Need to estimate costs, perform booking, customs clearance, insurance, and reflect in B/L | Freight forwarder's view on confirming Incoterms, NVOCC liability, accident handling |
What Incoterms Determine and Do Not Determine
Incoterms organize the practical division of responsibilities between seller and buyer, mainly concerning transport arrangements, export customs clearance, import customs clearance, cost allocation, risk transfer, delivery location, and cargo insurance arrangements.
On the other hand, Incoterms do not complete the sales contract itself. Aspects such as product quality, quantity, price, payment conditions, transfer of title, liability for breach of contract, delay damages, force majeure, governing law, and dispute resolution must be stipulated separately in the sales contract.
In practice, misunderstandings such as "ownership transfers at shipment under CIF" or "insurance is naturally covered by the seller under FOB" commonly occur. Incoterms are rules to clarify risk and cost allocation, and do not automatically determine ownership transfer or insurance claim rights.
Common Misunderstandings
| Misunderstanding | Correct Explanation | Practical Notes |
|---|---|---|
| Under CIF, ownership transfers at shipment | Incoterms regulate risk transfer and cost allocation, but do not directly determine ownership transfer. | Ownership transfer should be confirmed separately in the sales contract, governing law, and payment terms. |
| FOB includes insurance | FOB does not impose an obligation on the seller to arrange cargo insurance; the buyer needs to confirm insurance from their side. | The buyer should check insurance start, coverage segments, and insurance terms. |
| If the seller pays freight, risk remains with the seller until destination | Under CFR, CIF, CPT, CIP, the seller pays freight to the destination, but risk transfers earlier than this. | Separate cost allocation from risk transfer in confirmation. |
| CFR includes insurance | CFR includes freight charges, but the seller does not have an obligation to arrange insurance. | Do not confuse CFR with CIF; buyer should confirm insurance arrangements. |
| Insurance under CIF is always adequate | CIF obliges the seller to arrange insurance, but the coverage may not meet the buyer’s expectations. | Confirm insurance terms, insured sum, insured party, and delivery of insurance certificate. |
| Under DDP, the logistics company handles everything | DDP imposes heavy obligations on the seller, but whether the seller can act as importer in the destination country is a separate issue. | Confirm importer name, compliance with other laws, tax payments, customs and consumption tax burdens. |
| Specifying the term name alone is sufficient | Term name alone does not clarify designated place, version, cost range, or customs responsibility. | Clearly state Incoterms 2020, designated port/place, warehouse name, delivery locations. |
Main Obligations of Sellers and Buyers
Under Incoterms, seller and buyer obligations vary per term. Before reviewing individual terms, it is important to have the following points confirmed:
- Where the seller delivers the cargo
- From where the buyer assumes risk
- How far the seller bears transportation costs
- Who conducts export customs clearance
- Who conducts import customs clearance
- Who arranges cargo insurance
- Who prepares documents such as B/L, AWB, certificate of origin, insurance policies
- Who bears unloading, terminal charges, and domestic delivery costs
If these points are not confirmed and only the term name is used for the transaction, problems can arise over local charges, customs costs, insurance, delivery, delays, and liability for cargo incidents.
Incoterms 2020: The 11 Terms
Incoterms 2020 defines 11 rules. Broadly speaking, there are terms applicable to all modes of transport and terms exclusive to sea and inland waterway transport.
| Category | Term | Summary |
|---|---|---|
| All modes of transport | EXW | Delivered at the seller’s premises to the buyer. The term with the greatest buyer responsibility. |
| All modes of transport | FCA | Delivered to the carrier at a named place. Often used as a substitute for FOB in container transport. |
| All modes of transport | CPT | The seller arranges carriage to the named destination, but risk transfers to the buyer upon delivery to the carrier. |
| All modes of transport | CIP | In addition to CPT, the seller arranges cargo insurance for the buyer’s benefit. |
| All modes of transport | DAP | The seller delivers the goods to the named place of destination, but unloading is at the buyer’s expense. |
| All modes of transport | DPU | The seller delivers the goods and unloads them at the named place. |
| All modes of transport | DDP | The seller assumes maximum obligations including import customs clearance and duties up to the named place of destination. |
| Sea and inland waterway transport only | FAS | Delivered alongside the ship. Mainly used for bulk cargo. |
| Sea and inland waterway transport only | FOB | Risk transfers when goods are loaded on board the vessel. |
| Sea and inland waterway transport only | CFR | The seller pays sea freight to the port of destination, but risk transfers once goods are loaded on board at the port of shipment. |
| Sea and inland waterway transport only | CIF | In addition to CFR, the seller arranges cargo insurance for the buyer’s benefit. |
Sea Transport-Specific Terms vs. All Modes of Transport Terms
Incoterms separates terms according to the transport mode to be used. This is because the criteria for delivery location and risk transfer differ significantly between conventional/bulk shipping and container, air, or multimodal transport.
The sea and inland waterway specific terms focus on delivery alongside the ship or on board as key criteria. Conversely, the all modes of transport terms allow selection based on the delivery to the carrier, arrival at a designated place, and whether unloading is included, fitting a wider range of logistics practices.
In actual logistics practice, it is necessary not to choose trade terms solely by custom but to check the actual mode of transport, cargo delivery location, and the point at which the parties want risk to transfer through cargo control. Using terms that do not fit the transport circumstances can make explanations about cost responsibility, risk transfer, and insurance arrangements difficult when accidents occur.
Viewing Incoterms through Three Aspects: Cost Allocation, Risk Transfer, and Transport Arrangements
When practically applying Incoterms, it is important not just to memorize the term names but to separately confirm three aspects: cost allocation, risk transfer, and transport arrangements.
Cost allocation means which party, seller or buyer, bears costs such as freight, handling charges, customs fees, duties, insurance premiums, and inland delivery. Risk transfer refers to the point at which the buyer assumes the risk of loss or damage to the goods. Transport arrangements means which party contracts for carriage.
Particularly with the C group terms, care is needed as the timing of cost allocation and risk transfer do not coincide. For example, under CFR and CIF, the seller pays the freight to the destination port, but risk transfers to the buyer once the goods are loaded on board at the port of shipment. Under CPT and CIP, the seller arranges carriage to a named destination, but risk transfers at an earlier point upon delivery to the first carrier.
Differences between EXW, FCA, and FOB
EXW means delivery occurs at the seller’s premises or factory to the buyer. Seller obligations are minimal, with export customs clearance and main carriage arrangements the buyer’s responsibility. However, in practice, buyers sometimes find it difficult to conduct export customs procedures in the exporting country, so casually using EXW may cause confusion in export formalities.
FCA requires the seller to deliver to a carrier designated by the buyer at a named place. In containerized cargo, delivery to the carrier often occurs before loading onto the vessel, such as at a CY, CFS, warehouse, or terminal, making FCA more appropriate in many scenarios.
FOB is a sea and inland waterway transport-specific term, where risk transfers when goods pass the ship’s rail onto the vessel. Traditionally widely used, but in container transport, the seller often cannot directly manage the exact moment of loading on board, so FCA may be more suitable.
In container operations, damage or loss occurring from CY delivery until vessel loading can create discrepancies between the FOB risk transfer point and actual cargo control. For transactions involving CY delivery, CFS delivery, FCR issuance, L/C settlement, and B/L issuance, it is important to verify actual delivery location and document conditions rather than relying on FOB terminology alone.
Differences between CPT, CIP, CFR, and CIF
CPT, CIP, CFR, and CIF are all C group terms where the seller pays certain transport costs. However, be aware that the timing of risk transfer and cost bearing differs.
CPT and CIP are applicable to all modes of transport. The seller contracts carriage to the named destination, but risk transfers to the buyer upon delivery to the first carrier. CIP additionally requires the seller to arrange cargo insurance.
CFR and CIF are exclusive to sea and inland waterway transport. The seller pays sea freight to the port of destination, but risk transfers when goods are loaded on board at the port of shipment. CIF also requires cargo insurance arranged by the seller.
In practice, it is important to clarify that paying freight does not mean the seller bears risk until arrival at destination. C group terms separate cost allocation from risk transfer and this should be clearly communicated.
Relationship between CIF, CIP, and Marine Cargo Insurance
Incoterms explicitly impose the obligation on the seller to arrange cargo insurance in CIF and CIP. Under CIF, the seller arranges marine cargo insurance for the buyer’s benefit, and under CIP the seller also arranges insurance.
However, Incoterms 2020 distinguishes the standard insurance levels required between CIF and CIP. Generally, CIF assumes relatively limited conditions, while CIP assumes broader coverage. Therefore, it is risky to assume that CIF automatically includes sufficient insurance or that CIP unconditionally covers all damages.
In practice, the insurance amount, policy terms, deductibles, war and strike risks, the name on the insurance certificate, transferability of the insurance certificate, and compliance with L/C terms should be checked. In particular, buyers importing under CIF or CIP should verify whether the insurance arranged by the seller adequately covers their risks.
Differences Between DAP, DPU, and DDP
DAP, DPU, and DDP are D-terms where the seller assumes significant obligations on the destination side. While these terms are easier for the buyer in terms of receipt, they place heavy responsibilities on the seller for transport, customs clearance, local costs, delivery, and incident handling.
Under DAP, the seller delivers the goods to the named place of destination, but unloading costs are borne by the buyer. Under DPU, the seller takes responsibility for unloading the goods at the named place. Under DDP, the seller bears the maximum obligation including import customs clearance and payment of duties.
DDP is straightforward for the buyer, but the seller must be able to act as importer in the buyer’s country, handle import permits and regulations, and manage payment of customs duties, consumption tax, VAT, and so forth. In actual logistics practice, if the seller is not fully familiar with the import country’s laws, tax systems, and customs procedures, DDP can lead to significant problems.
Relationship With Ownership Transfer and Payment Settlement
Incoterms organize the transfer of risk and cost allocation but do not define the timing of ownership transfer. When ownership passes from seller to buyer is separately determined by sales contract terms, governing law, payment conditions, and security interests.
Also, Incoterms are separate from payment methods such as L/C settlement, D/P, D/A, advance payment, or post-payment. Even under CIF, discrepancies can occur if the insurance certificate or B/L does not meet letter of credit conditions.
In practice, it is essential to review Incoterms, sales contracts, payment terms, B/L conditions, and cargo insurance collectively. It is important not to judge "who holds the cargo" or "who can claim insurance proceeds" solely based on the Incoterms name.
Step-by-Step Flow From Confirming Sales Terms to Incident Response
| Stage | Matters to Confirm | Practical Issues | Actions If Problems Arise |
|---|---|---|---|
| Confirming Sales Terms | Term name, Incoterms edition, named place, transport mode | Term name alone can leave ambiguity about risk transfer point and cost scope. | Specify exact port, place, warehouse name, and delivery destination. |
| Confirming Cost Allocation | Freight, THC, CFS charges, customs fees, duties, insurance premiums, domestic delivery costs | Cost allocation may not align with risk transfer. | Clarify included and excluded costs in quotes or sales contracts. |
| Confirming Transport Arrangements | Who makes the booking? Who contracts with the carrier? | The booking party in practice may differ from the party named in the contract. | Verify whether arrangements are made by seller or buyer side and the freight forwarder's role. |
| Confirming Customs Clearance | Exporter, importer, customs clearance entities, other regulations, tax liabilities | EXW and DDP often pose issues with customs clearance names and importer qualifications. | Verify who can act as exporter/importer, applicable permits, and tax payment procedures. |
| Confirming Insurance | Who arranges insurance, start of coverage, insurance conditions, coverage amount, insured party | Under CFR/FOB, insurance may be unarranged; under CIF/CIP, coverage may be insufficient. | If uninsured segments or coverage gaps exist, consider additional insurance or changes in terms. |
| Confirming Shipping Documents | B/L, AWB, Invoice, Packing List, insurance certificate, L/C conditions | Mismatch between sales terms and document conditions can cause issues with payment or delivery. | Verify document consistency before shipment and correct discrepancies if any. |
| Handling Cargo Incidents | Incident segment, before or after risk transfer, within insurance period, entitlement to claim from carrier | Incoterms alone do not determine insurance payout or carrier liability. | Organize the sales contract, B/L, insurance certificate, and incident records separately. |
Cases Commonly Problematic in Practice
| Case | Issue | Documents to Check | Practical Handling |
|---|---|---|---|
| Damage occurred after container delivery to CY under FOB terms | Since damage happened before loading on board, risk is often considered seller’s; however, the seller does not directly control the cargo | Sales contract, booking, CY delivery receipt, B/L, insurance policy, accident photos | Consider switching to FCA or reviewing insurance start date for container shipments. |
| Mistakenly assumed CFR included insurance | Buyer may mistakenly believe seller also provides cargo insurance since seller pays freight | Sales contract, invoice, B/L, presence or absence of insurance policy | Since seller has no insurance obligation under CFR, buyer arranges insurance. |
| CIF insurance was more limited than buyer expected | Seller-arranged insurance may offer only minimum coverage, insufficient for damages or water damage | Insurance policy, association cargo clauses, insurance amount, invoice, B/L | Check insurance terms before contract and consider additional coverage if needed. |
| Buyer unable to perform export customs clearance under EXW terms | Buyer cannot act as exporter in export country, delaying clearance and export regulation compliance | Sales contract, exporter information, customs documents, export permits | Consider changing terms to FCA etc., and confirm seller’s scope of export customs support. |
| Seller unable to act as importer under DDP terms | Seller unable to perform import customs clearance, tax payment, or other regulatory compliance, causing clearance delays | Sales contract, importer information, customs power of attorney, regulatory documents, tax details | Prior to using DDP, confirm importer name and ability to comply with local regulations. |
| Under CIP terms, insurance start date did not align with risk transfer timing | Even if seller arranges insurance, timing of transport start or delivery point may not match insurance period | Insurance policy, sales contract, transport route, delivery records | Verify insurance policy’s From/To dates, start date, and designated locations carefully. |
| L/C conditions did not match B/L or insurance policy | Trade terms may align, but submitted bank documents have discrepancies, hindering payment | L/C, B/L, invoice, insurance policy, packing list | Reconcile L/C conditions with shipment documents before loading and make corrections if necessary. |
| Misunderstanding import customs and tariff responsibilities under DAP terms | Confusing transport to named place with import customs and tax responsibilities | Sales contract, quotation, customs documents, tax payment documents, delivery instructions | Clearly identify who bears import customs, tariffs, consumption tax, and inspection fees. |
Practical Confirmation Checklist
| Confirmation Timing | Counterpart | Items to Confirm | Action if Issues Arise |
|---|---|---|---|
| Contract signing | Seller / Buyer | Term name, version, named place, transport mode, cargo characteristics | Specify Incoterms 2020 and named place clearly; avoid proceeding with term name alone. |
| Quotation | Shipper / Freight forwarder / Shipping company | Freight, port charges, customs fees, insurance premiums, domestic delivery charges, other costs | Clearly assign cost responsibility between seller and buyer for each item. |
| Booking | Seller / Buyer / Freight forwarder | Arrangement party, shipper, consignee, receiving point, loading port, destination | Check that quotation and booking details align. |
| Customs preparation | Exporter / Importer / Customs broker | Export customs, import customs, other legal compliance, importer name, customs and tax responsibility | For EXW or DDP, confirm customs declaration name and practical handling feasibility beforehand. |
| Insurance arrangement | Seller / Buyer / Insurance agent | Party arranging insurance, insurance start date, terms, insurance amount, insured parties, deductibles | If uninsured periods or insufficient coverage exist, consider additional insurance or policy revision. |
| L/C and document verification | Exporter / Bank / Freight forwarder / Insurance company | B/L, invoice, insurance policy, L/C terms, freight indication, On Board date | Verify descriptions pre-shipment to avoid discrepancies. |
| Cargo incident occurrence | Shipper / Insurance company / Freight forwarder / Carrier | Accident segment, before/after risk transfer, within insurance period, carrier claim eligibility | Separate responsibility for risk transfer under sale contract, insurance coverage, and carrier liability. |
Important Points in Freight Forwarder Operations
From the perspective of freight forwarders or NVOCCs, it is essential not to treat Incoterms merely as price terms. Differences among EXW, FCA, FOB, CIF, DAP, DDP, etc., directly affect transport arrangements, customs clearance, documentation, insurance, and cost billing.
Particularly when preparing quotations or bookings, both the term name and the named place or port should be specified clearly. For example, simply stating "FOB Japan" is inadequate; it is preferable to specify "FOB Yokohama Port Incoterms 2020," including location and version.
Moreover, under DDP, importer registration, import regulations, customs duties, consumption tax, and local delivery charges become critical issues, while under CIF or CIP, insurance policy and coverage terms are key. When using FOB for container cargo, it is necessary to check whether switching to FCA is possible and whether B/L details and L/C terms are consistent.
Examples
Case of an accident occurring after container delivery to CY under FOB terms
Consider a transaction exporting container cargo from Japan with sales terms set as FOB. The seller delivers the cargo to the container yard, but actual loading onto the vessel is managed by the shipping company or terminal.
In this case, if the cargo is damaged after delivery to CY but before vessel loading, the FOB risk transfer timing and the actual control status differ, potentially causing unclear responsibility allocation.
In such cases, FCA terms may better suit practical handling. At a minimum, it is necessary to confirm risk responsibility, insurance start date, and evidence documents in the period from CY delivery to vessel loading in advance.
Case where insurance coverage was insufficient despite CIF terms
When importing under CIF terms, although the seller arranges insurance, the coverage may not always match the buyer’s expected protection scope.
For example, in cases where goods are susceptible to issues such as water damage, theft, breakage, loading/unloading accidents, or temperature changes, and the seller-arranged insurance has limited coverage conditions, the buyer may not receive sufficient insurance compensation after an incident.
In such cases, the buyer should confirm the insured amount, insurance terms, war and strike risks, the insured party named on the policy, and whether the insurance certificate is transferable at the time of contract. Although CIF conditions include insurance, the coverage details may not always be sufficient.
Case Where Importer Name Could Not Be Arranged Under DDP Terms
There are cases where the overseas seller sells goods to a Japanese buyer under DDP terms, but the seller cannot become the importer in Japan, causing import customs clearance to be delayed.
Under DDP, the seller is assumed to handle import customs clearance and bear duties and consumption taxes. However, if the seller cannot act as importer in the destination country, cannot comply with other regulations, or cannot handle tax payment procedures, customs clearance will be halted, resulting in storage fees and delivery delays.
In such cases, before adopting DDP, it is necessary to confirm whether the seller can become the importer in the destination country and can handle necessary permits and tax procedures. Assuming "all-inclusive" simply based on the condition name is risky.
Case Where L/C Terms Did Not Match B/L and Insurance Certificate
For cargo exported under CIF terms, even if the sales terms appear correct, discrepancies between the letter of credit (L/C) conditions and the details on the B/L, insurance certificate, and invoice can cause discrepancies at the time of bank submission.
For instance, if the insurance certificate’s insured amount, currency, coverage start date, consignee or notify party on the B/L, freight terms, or On Board date do not match the L/C conditions, bank purchase or payment may be hindered.
In this case, it is essential to verify the L/C, B/L, insurance certificate, and invoice before shipment, rather than judging based only on Incoterms. It is important to confirm sales terms, payment terms, and shipping documents as a whole.
Summary
Incoterms are important rules that clarify the cost allocation, risk transfer, transport arrangement, customs clearance, and cargo insurance responsibilities between sellers and buyers in international trade. When using Incoterms, specifying the edition and named place is necessary.
The practical core of this article is not memorizing the Incoterm names, but confirming for each term “who arranges the transportation,” “where risk transfers,” “up to what point costs are borne,” and “who arranges insurance.”
In practice, it is important to distinguish sea-transport-only terms from multimodal transport terms, understand the use of FOB in container transport, insurance arrangements under CIF and CIP, importer responsibilities under DDP, and how these differ from ownership transfer and payment terms. Freight forwarders and NVOCCs need to connect sales terms with transport arrangements, customs clearance, insurance, B/L issuance, and cost billing during confirmation.
