Corporate and Business Law (Global) · International trade, international legal regulation and conflict of laws

International Trade and Incoterms Explained for ACCA Corporate and Business Law

Updated 11 October 2026 · Fact-checked

Incoterms are standard trade terms published by the International Chamber of Commerce. When a sale contract adopts one, it fixes who arranges and pays for carriage, who bears risk of loss, and where delivery happens. To solve questions, identify the term, the named place, then split duties between buyer and seller.

Understand International Trade and Incoterms

International trade means a seller and buyer in different countries make a contract for goods. Goods travel far, pass through carriers and ports, and cross customs borders. Many things can go wrong. The parties need to agree who does what, who pays, and who loses out if goods are damaged on the way.

Incoterms are rules published by the International Chamber of Commerce (ICC). They are not law. They apply only if the parties put them into their contract, usually by writing the term, the named place and the Incoterms version, for example "FOB Mumbai, Incoterms 2020". They cover only some matters. They do not deal with price, payment terms, transfer of ownership or remedies for breach. Those come from the contract and the governing law.

Each term answers three questions. First, delivery: where does the seller complete its duty? Second, risk: from which point does the buyer bear loss or damage? Third, cost: who pays for carriage, insurance, and export and import clearance? Risk and delivery normally pass together at the same point, but costs may run further. This is the key difference between FOB and CIF.

Incoterms 2020 has eleven terms in two groups. Terms for any mode of transport include EXW, FCA, CPT, CIP, DAP, DPU and DDP. Terms for sea and inland waterway transport only are FAS, FOB, CFR and CIF. In FOB (Free on Board) the seller delivers when goods are loaded on the vessel named by the buyer at the named port of shipment. Risk passes then, and the buyer pays the main sea freight. In CIF (Cost, Insurance and Freight) risk also passes on loading on board at the port of shipment, but the seller pays freight to the destination port and buys minimum insurance cover for the buyer's benefit.

At the ends of the range, EXW (Ex Works) puts almost everything on the buyer: the seller just makes goods available at its premises. DDP (Delivered Duty Paid) puts almost everything on the seller: it delivers to the named place of destination, cleared for import, with duties paid. The further along the journey delivery happens, the more the seller carries.

Key formulas to remember

Incoterms status: Incoterms apply only if incorporated into the contract; They are ICC contract terms, not legislation. Name the term, the place and the version.
Delivery = risk point: Risk passes from seller to buyer when the seller has delivered under the chosen term; Costs may still be borne by the seller beyond that point (for example, CIF freight).
FOB: FOB: delivery and risk when goods are on board the vessel at the named port of shipment; Buyer arranges and pays main carriage. Sea and inland waterway only.
CIF: CIF: delivery and risk on board at the port of shipment; seller pays freight and insurance to destination port; Risk passes at shipment even though the seller pays carriage. Insurance is minimum cover under 2020 rules.
EXW: EXW: delivery when goods are made available at the seller's premises; buyer bears all other costs and risk; Minimum obligation for the seller.
DDP: DDP: seller delivers to the named destination, import-cleared, duty paid; seller bears all costs and risk until then; Maximum obligation for the seller.
Scope limit: Incoterms do not govern price, payment, transfer of ownership or remedies; These matters rest on the contract and applicable law.

How to solve International Trade and Incoterms questions

Use the same method for any scenario or objective question on Incoterms.

1Read the scenario and find the Incoterm, the named place and who the parties are.
2Check the group: is it a sea-only term (FAS, FOB, CFR, CIF) or any-mode term? Note a mismatch, such as FOB used for container goods handed to a carrier.
3Fix the delivery point: where does the seller finish its duty under that term?
4State where risk passes. It normally passes at delivery.
5List who pays for carriage, insurance and export or import clearance.
6Apply the facts: when did the loss happen, before or after the risk point?
7Give the result and the reason in one sentence, naming the term.
8Remember what Incoterms do not cover, such as price, payment or ownership.

Quickest way: Three-line Incoterm check

When to use it: Use in Section A or B-style objective questions where you have about two minutes per question.

Find the term. Ask: where does delivery happen?
Mark loss before or after that point. Before means the seller bears the risk. After means the buyer does.
Then check who pays carriage and insurance. Only then choose the option.

Common mistakes in International Trade and Incoterms

Thinking CIF means the seller bears risk until the goods reach the destination port.
The seller pays freight and insurance, so it feels as if the seller is responsible throughout.
Fix: Under CIF, risk passes on loading at the port of shipment. Cost and risk split at different points.
Treating Incoterms as law that applies automatically.
They are widely used and sound official.
Fix: Say they apply only if the parties incorporate them into the contract.
Assuming Incoterms decide when ownership of the goods passes.
Risk and ownership are often linked in domestic sales.
Fix: Incoterms do not deal with transfer of ownership or property. That depends on the contract and governing law.
Using FOB, CIF, CFR or FAS for any mode of transport.
Students remember the names but not the group.
Fix: These four are for sea and inland waterway transport only. For containers or air, the any-mode terms such as FCA or CIP are more suitable.
Confusing EXW with DDP, or reversing who has the heavier duty.
Both are extremes and the letters are easy to mix up.
Fix: EXW: seller does least, buyer does most. DDP: seller does most, buyer does least.
Forgetting to name the place with the term.
Students write only "FOB".
Fix: Write the term with its named place, such as FOB Mumbai. The place fixes where delivery occurs.

Worked examples

Example 1

A seller in India sells machinery to a buyer abroad on FOB Chennai terms (Incoterms 2020). The goods are loaded on the buyer's nominated vessel at Chennai. During the sea voyage, the vessel is damaged in a storm and the goods are lost. Who bears the loss, and who pays the sea freight?

Show the solution

The term is FOB with the named port Chennai, a sea-transport term.
Under FOB, delivery occurs when goods are on board the vessel at the port of shipment.
The goods were loaded on board at Chennai, so delivery was complete and risk passed to the buyer at that point.
The loss occurred after the risk point, during the voyage.
Under FOB the buyer arranges and pays the main carriage, so the buyer pays the sea freight.

Answer: The buyer bears the loss because risk passed on loading at Chennai, and the buyer pays the sea freight.

Example 2

A seller sells goods to a buyer on CIF Rotterdam terms (Incoterms 2020). The goods are damaged by a fall from a crane while being loaded onto the ship at the port of shipment, before they are on board. Explain who bears the risk, and who would normally pay for freight and insurance.

Show the solution

CIF means Cost, Insurance and Freight, used for sea transport.
Delivery and risk pass when goods are on board the vessel at the port of shipment.
The damage happened during loading, before the goods were on board, so risk had not yet passed.
The seller therefore bears the loss.
Separately, under CIF the seller contracts and pays for carriage to Rotterdam and buys insurance for the buyer's benefit.

Answer: The seller bears the loss because the goods were not yet on board. Under CIF the seller pays freight to Rotterdam and arranges the insurance.

Exam tips

Always link the term to the delivery point first. Most questions are answered once you know where delivery happens.
In FOB versus CIF questions, the trap is usually that cost and risk are split. Risk passes at loading for both; only CIF has the seller paying freight and insurance.
Look for the words "sea" and "container" in a scenario. They may signal that a sea-only term is unsuitable.
Objective questions are marked all or nothing, so read every option fully. A wrong detail makes an option wrong.
In a written answer, name the term, state the rule, apply it to the facts, then conclude.

Practice questions from International trade, international legal regulation and conflict of laws

International Trade and Incoterms: frequently asked questions

What are Incoterms in simple words?

They are standard trade terms from the International Chamber of Commerce. They tell buyer and seller who arranges transport, who pays which costs, and who bears the risk of loss. They apply only when the contract says so.

What is the difference between FOB and CIF?

In both, delivery and risk pass when goods are on board the vessel at the port of shipment. Under FOB the buyer arranges and pays sea freight. Under CIF the seller pays freight to the destination port and arranges insurance.

Do Incoterms decide who owns the goods?

No. They do not deal with transfer of ownership, price, payment or remedies for breach. Those matters depend on the contract and the governing law.

Are Incoterms the same as the CISG?

No. The CISG is an international convention on sales contracts that applies by law in certain cases. Incoterms are contractual terms that apply only if the parties choose them, and they may override CISG rules on delivery and risk.