Corporate and Business Law (Global) · Transportation documents and means of payment

Incoterms and Transfer of Risk in International Sales

Updated 11 October 2026 · Fact-checked

Incoterms are standard trade terms published by the ICC. Each one states who arranges and pays for carriage, insurance and customs, where the seller delivers, and the point at which risk of loss passes to the buyer. To solve questions, find the term, then the delivery point, then who bears each cost.

Understand Incoterms and Transfer of Risk in International Sales

An international sale involves long journeys, several carriers and different legal systems. The buyer and seller must agree who arranges transport, who pays for it, who insures the goods and when the buyer takes the risk of loss or damage. Incoterms are a set of three-letter rules published by the International Chamber of Commerce (ICC) that answer these questions in a standard way.

Incoterms are not law. They apply only if the parties include them in the contract, for example "FOB Mumbai Incoterms 2020". They do not deal with transfer of ownership (title), the price, payment terms or the remedies for breach. Those are decided by the contract and the governing law, such as the CISG where it applies.

Each term does three jobs. It fixes the place of delivery. It fixes the point where risk passes from seller to buyer. It splits costs and tasks: carriage, insurance, export clearance and import clearance. In most terms, risk passes at the same point as delivery. The key point to remember is that risk and cost can pass at different places in some terms (CFR, CIF, CPT and CIP).

Incoterms 2020 has eleven rules in two groups. Rules for any mode of transport: EXW, FCA, CPT, CIP, DAP, DPU and DDP. Rules for sea and inland waterway only: FAS, FOB, CFR and CIF. Think of them as a ladder: under EXW the seller does the least, and under DDP the seller does the most.

FOB versus CIF is the classic comparison. Under both, the seller delivers by placing goods on board the vessel at the port of shipment, and risk passes then. Under FOB the buyer arranges and pays for sea freight. Neither party has a contractual duty to insure for the other, so the buyer, who carries the risk on the voyage, will usually choose to insure. Under CIF the seller pays for freight to the destination port and buys minimum insurance for the buyer's benefit, but the buyer still carries the risk during the voyage.

Key formulas to remember

What Incoterms govern: Incoterms = delivery point + risk transfer point + split of costs and tasks; They do not govern title, price, payment or remedies for breach.
EXW (Ex Works): Delivery and risk pass when goods are placed at the buyer's disposal at the seller's premises; Buyer bears almost everything, including loading and export clearance. Any transport mode.
FCA (Free Carrier): Delivery and risk pass when goods are loaded on the buyer's collecting transport, if the named place is the seller's premises. If the named place is elsewhere, they pass when the goods, on the seller's vehicle and ready for unloading, are placed at the disposal of the buyer's carrier or other nominated person; Seller clears goods for export. Any transport mode.
FAS (Free Alongside Ship): Delivery and risk pass when goods are placed alongside the vessel at the named port; Sea and inland waterway only. Seller clears for export.
FOB (Free on Board): Delivery and risk pass when goods are on board the vessel at the named port of shipment; Sea and inland waterway only. Buyer pays main carriage. Neither party has a duty to insure for the other; the buyer bears the risk after loading and will usually insure.
CFR (Cost and Freight): Seller pays freight to destination port; risk passes when goods are on board at the port of shipment; Sea and inland waterway only. Cost and risk pass at different places. No seller duty to insure.
CIF (Cost, Insurance and Freight): CFR + seller buys insurance; risk passes when goods are on board at the port of shipment; Sea and inland waterway only. Seller's insurance is minimum cover for the buyer's benefit under Incoterms 2020.
CPT (Carriage Paid To): Seller pays carriage to the named destination; risk passes when goods are handed to the first carrier; Any transport mode. No seller duty to insure.
CIP (Carriage and Insurance Paid To): CPT + seller buys insurance; risk passes at handover to the first carrier; Any mode. Under Incoterms 2020 the seller's insurance must be wide cover (Institute Cargo Clauses A) unless agreed otherwise.
DAP (Delivered at Place): Delivery and risk pass when goods are ready for unloading on the arriving transport at the named destination; Seller bears risk to destination. Buyer unloads and clears import.
DPU (Delivered at Place Unloaded): Delivery and risk pass when goods are unloaded at the named destination; Seller must unload. This replaced DAT in Incoterms 2020.
DDP (Delivered Duty Paid): Delivery and risk pass at the named destination, with import clearance and duties paid by the seller; Maximum seller obligation. Any mode.

How to solve Incoterms and Transfer of Risk in International Sales questions

Use this method for any Incoterms question, whether it is an MCQ or a scenario with five questions.

1Identify the three-letter term and the named place. Check whether it names a port or another place.
2Check the transport mode. FAS, FOB, CFR and CIF are for sea and inland waterway only. The others suit any mode.
3Find the delivery point and the risk transfer point. In most terms they are the same. In CFR, CIF, CPT and CIP, cost is paid further than the point where risk passes.
4List who arranges and pays main carriage, who arranges insurance, and who handles export and import clearance.
5Apply the facts: where was the loss or damage when it happened? Compare that location with the risk transfer point.
6State the result: who bears the loss, who must pay the cost, or who is in breach.
7Remember what Incoterms do not cover: title, price, payment and remedies. Use the contract or the CISG for those.

Quickest way: The ladder and the risk line

When to use it: Use this in Section A or B objective questions when you have under two minutes per question.

Picture a ladder: E (EXW) lowest seller duty, F (FCA, FAS, FOB) next, C (CFR, CIF, CPT, CIP) next, then the D terms highest. Within the D group, DAP sits lowest, DPU sits above it (the seller also unloads) and DDP is at the top. Under DAP and DPU the seller bears risk to destination, but the buyer clears imports. Only DDP puts import clearance on the seller.
F terms: buyer pays main carriage. C terms: seller pays main carriage but risk has already passed. D terms: seller bears risk to destination.
For sea terms, ask: was the loss before or after the goods were on board at the port of shipment? Before means seller's risk. After means buyer's risk under FOB, CFR and CIF.
Only CIF and CIP oblige the seller to insure for the buyer's benefit. Under the other terms, such as FOB, CFR and FCA, neither party has a contractual duty to insure for the other. The buyer simply bears the risk once it passes and will usually choose to insure. The seller may insure its own risk if it wishes. Only DDP makes the seller clear imports.

Common mistakes in Incoterms and Transfer of Risk in International Sales

Thinking that under CIF the seller bears risk during the voyage because the seller pays freight and insurance.
Students link paying costs with carrying risk.
Fix: Remember that in C terms, cost goes further than risk. Under CIF, risk passes on board at the port of shipment. The insurance protects the buyer.
Believing Incoterms transfer ownership of the goods.
Delivery and title sound alike.
Fix: Incoterms deal with delivery, risk and costs only. Title passes under the contract and the governing law.
Using FOB, CIF, CFR or FAS for containerised or air freight.
FOB is the best-known term, so students use it everywhere.
Fix: These four are for sea and inland waterway only. For containers or multimodal transport, FCA, CPT or CIP are more suitable.
Treating Incoterms as law that applies automatically.
They are widely used and look official.
Fix: They apply only if the parties incorporate them into the contract. The ICC publishes them; they are not a statute.
Saying DDP and DAP are the same because both are delivered at destination.
Both pass risk at destination.
Fix: Under DAP the buyer clears imports and pays duties. Under DDP the seller does so. Under DPU the seller also unloads.
Confusing DAT with DPU or forgetting the 2020 change.
Older notes use DAT.
Fix: Incoterms 2020 renamed DAT as DPU, and the place can be any place, not only a terminal.

Worked examples

Example 1

Bharat Ltd in Chennai sells machinery to Orion Co in Rotterdam on FOB Chennai Incoterms 2020 terms. The machinery is damaged when a crane drops it while loading onto the vessel, before it is on board. Who bears the risk of the loss, and who must arrange sea freight?

Show the solution

The term is FOB, a sea term, with Chennai as the port of shipment.
Under FOB, delivery and risk pass when the goods are on board the vessel.
The damage occurred during loading, before the goods were on board. So risk had not yet passed.
The seller, Bharat Ltd, bears the loss.
Under FOB the buyer arranges and pays for main sea carriage. Neither party has a contractual duty to insure for the other, although the buyer, who bears the risk once the goods are on board, will usually insure. The seller clears the goods for export.

Answer: Bharat Ltd (the seller) bears the loss because risk had not passed. Orion Co (the buyer) must arrange and pay for sea freight.

Example 2

Delta Ltd sells goods to Kofi Co on CIF Mombasa Incoterms 2020 terms. The goods are loaded on board at the port of shipment. During the voyage the ship encounters a storm and the goods are lost. Explain who bears the loss and what the seller's insurance duty achieves.

Show the solution

The term is CIF, a sea term. Delivery and risk pass when the goods are on board at the port of shipment.
The goods were on board, so risk passed to the buyer, Kofi Co, before the storm.
The loss occurred after risk passed, so the buyer bears it as between the parties.
Under CIF the seller must buy insurance for the buyer's benefit, minimum cover under Incoterms 2020, and pay freight to Mombasa.
The buyer can claim under the insurance policy, within its cover. The seller is not in breach if it shipped conforming goods and insured as required.

Answer: Kofi Co bears the risk because it passed on loading, but it can claim on the insurance that Delta Ltd was required to buy. Delta Ltd is not liable for the loss if it complied with CIF.

Exam tips

Write the delivery point and the risk point next to each term in your notes. Examiners often test the difference between FOB and CIF.
Check the transport mode in the scenario. A container or air shipment with FOB is a trap.
Read the timing carefully: was the loss before or after loading on board, or handover to the first carrier?
Do not answer title or payment questions using Incoterms. Look for the CISG or contract terms instead.
For a Section C style answer, state the term, the rule, the facts applied and a conclusion in four short lines.

Practice questions from Transportation documents and means of payment

Incoterms and Transfer of Risk in International Sales: frequently asked questions

What is the difference between FOB and CIF?

Under both, the seller delivers on board the vessel at the port of shipment and risk passes then. Under FOB the buyer arranges and pays for sea freight, and neither party must insure for the other, although the buyer bears the risk and usually insures. Under CIF the seller pays freight to the destination port and buys insurance for the buyer.

Do Incoterms transfer ownership of goods?

No. Incoterms deal with delivery, risk and the split of costs and tasks. Ownership is decided by the sale contract and the governing law.

Are Incoterms 2020 compulsory?

No. They apply only if the parties incorporate them into their contract. It is best to name the term, the place and the Incoterms version.

Which Incoterms are only for sea transport?

FAS, FOB, CFR and CIF are for sea and inland waterway transport only. EXW, FCA, CPT, CIP, DAP, DPU and DDP can be used for any mode of transport.