In an export order, one issue matters as much as the price: where the cargo will reach the buyer and at whose cost. The rules that determine this are the Incoterms rules published by the International Chamber of Commerce (ICC). The current version is Incoterms 2020 and it consists of eleven rules.
Incoterms is a term of the sales contract; it is not a contract of carriage. In other words, it decides how cost and risk are shared between seller and buyer, but it does not regulate the form of payment or when ownership of the goods passes. The contract with the carrier runs separately.
Which rules are used in road transport?
Seven of the eleven rules in Incoterms 2020 can be used for any mode of transport: EXW, FCA, CPT, CIP, DAP, DPU and DDP. The remaining four (FAS, FOB, CFR, CIF) are only for sea and inland waterway transport. This is why these four rules should not be used for road shipments; writing FOB for road cargo creates uncertainty in the contract.
Summary of the seven rules
EXW (Ex Works): The seller makes the goods available at its own premises. Loading, export clearance and all transport cost and risk belong to the buyer. It is the lowest obligation for the seller.
FCA (Free Carrier): The seller delivers the goods at the named place to the carrier nominated by the buyer and clears them for export. What comes after delivery is the buyer’s responsibility. It is often preferred in road transport because export clearance rests with the seller.
CPT (Carriage Paid To): The seller pays for carriage to the named destination and clears the goods for export. Risk, however, passes to the buyer when the goods are handed to the first carrier; so the party that pays the cost and the party that bears the risk are different.
CIP (Carriage and Insurance Paid To): Like CPT, but the seller also arranges insurance. In Incoterms 2020 the default insurance cover for CIP is the widest cover, ICC (A), instead of ICC (C) in the previous version.
DAP (Delivered at Place): The seller carries the goods to the named place of destination and delivers them ready for unloading on the arriving vehicle. Unloading and import clearance belong to the buyer.
DPU (Delivered at Place Unloaded): Similar to DAP; the difference is that the seller’s obligation also includes unloading the goods at the place of destination. This rule replaced DAT (Delivered at Terminal) from Incoterms 2010; the place of destination no longer has to be a terminal.
DDP (Delivered Duty Paid): The seller delivers the goods bearing all costs, including import clearance in the buyer’s country. It is the highest obligation for the seller. Because import duties and formalities belong to the seller, the seller must be able to carry out these formalities in that country.
Which rule to choose when?
The choice depends on the experience of the parties and how much they want to manage themselves:
- For buyers who want to manage transport and customs themselves, EXW or FCA is suitable. In EXW export formalities rest with the buyer; for a foreign buyer this can be difficult, so FCA is usually more practical.
- If you want the seller to organise transport, CPT or CIP is used.
- If you want the seller to take on all responsibility up to the buyer, DAP, DPU or DDP is used.
Common mistakes
- Not writing the place. Every rule is tied to a specific place. Writing “DAP” is not enough; the place should be written clearly, such as “DAP Belgrade, warehouse address”.
- Using sea rules in road freight. Rules such as FOB and CIF are not designed for road transport.
- Mixing up the insurance obligation. In CPT insurance is not the seller’s duty; in CIP it is compulsory.
- Leaving customs responsibility unclear. Making clear in the contract who is responsible for export and import clearance prevents cargo being held at the border.
- Not stating the version of the rule. Writing “Incoterms 2020” prevents argument between the parties.
What to expect from the carrier
You decide the delivery term; the carrier plans how the cargo is collected and delivered according to that term. When asking for a quote, stating the Incoterms term in your sales contract and the delivery place is one of the most important pieces of information for correct pricing and document preparation.
This article is for general information; for contract provisions, refer to the official ICC Incoterms 2020 text and to your legal adviser.