Three letters in a purchase order — FOB, CIF, DDP — can decide who pays thousands of dollars in freight, who bears the loss when a container goes overboard, and who is responsible when goods sit in customs. Yet many California businesses pick an Incoterm by habit rather than by design. Here is what these terms actually do, and how to choose one deliberately.
What Incoterms are — and what they are not
Incoterms are standardized trade terms published by the International Chamber of Commerce. The current edition, Incoterms 2020, defines eleven three-letter rules that allocate the core logistics of an international sale: who arranges and pays for carriage, where risk of loss transfers from seller to buyer, who clears goods for export and import, and who pays duties. They apply only because the parties incorporate them, so a well-drafted contract says so expressly — for example, "FCA Port of Long Beach, Incoterms 2020."
Just as important is what Incoterms do not decide. They say nothing about the price, the transfer of title, payment terms, warranties, remedies for defective goods, or governing law. A contract that consists of a purchase order plus an Incoterm still leaves the hardest questions open, which is why the term should sit inside a real sales agreement rather than substitute for one.
The four terms you will see most
- EXW (Ex Works). The seller merely makes goods available at its own premises. The buyer bears every cost and risk from that point, including export clearance. It is seller-friendly on paper, but a foreign buyer often cannot clear U.S. exports efficiently, so EXW can create compliance problems for both sides.
- FOB (Free On Board). The seller delivers the goods on board the vessel at the named port; risk transfers when the goods are on board. FOB is designed for bulk and non-containerized ocean freight.
- CIF (Cost, Insurance and Freight). The seller pays freight and minimum-level insurance to the destination port, but — counterintuitively — risk still transfers at the port of shipment. If the cargo is lost mid-ocean, the buyer generally must pursue the insurer or carrier rather than claim against the seller merely for non-delivery.
- DDP (Delivered Duty Paid). The seller bears nearly all delivery costs and risks, including import clearance and duties, to the named destination, although the seller is not responsible for unloading. It is the most buyer-friendly term and the riskiest for a seller shipping into a country whose customs regime it does not know.
The container trap
The most common drafting mistake in modern trade is using FOB or CIF for containerized cargo. Containers are typically delivered to a terminal or consolidator days before they are loaded onto a vessel. Under FOB and CIF, the seller keeps the risk until the goods are on board — even though the seller lost physical control at the terminal gate. If the container is damaged in the yard, the seller remains at risk despite having lost physical control, creating a potential mismatch in insurance coverage. Incoterms 2020 guidance points parties using container shipments to FCA (Free Carrier), CPT, or CIP, where risk transfers when the goods are turned over to the carrier. If your goods move in containers, those are usually the right terms.
How the Incoterm interacts with U.S. law
A second trap: "FOB" also exists as a domestic shipment term under the Uniform Commercial Code, and the UCC version does not mean the same thing as the Incoterms version. If a contract says only "FOB Long Beach" without invoking Incoterms 2020, a dispute can turn into an argument about which regime the parties intended. Cross-border sales of goods may also be governed by the United Nations Convention on Contracts for the International Sale of Goods unless the contract excludes it, which changes the default rules that fill any gaps the Incoterm leaves. Stating the Incoterm edition, the named place with precision, and the governing law together removes most of this ambiguity — all standard work in a coherent international business contract.
Choosing a term deliberately
- Match the term to the transport mode. FCA, CPT, and CIP for containers and air; FOB, CFR, and CIF for bulk ocean cargo.
- Keep customs clearance on the party best placed to do it. Sellers should think hard before accepting DDP into an unfamiliar country; buyers should think hard before accepting EXW from abroad.
- Check the insurance gap. CIF and CIP require the seller to insure, but at different default coverage levels; with other terms, the party bearing the risk should arrange appropriate insurance.
- Name the place precisely. "FCA seller's warehouse, 123 Main St., Los Angeles, CA, Incoterms 2020" beats "FCA California."
- Put the term inside a real contract that also covers title, payment, quality, remedies, and the other terms Incoterms deliberately leave alone.
Talk to a California business attorney
If your business ships or sources goods across borders, a short review of your standard terms can close the risk gaps before a lost container tests them. Schedule a free consultation or call (949) 418-2113.
This article is attorney advertising and provides general information only. It is not legal advice and does not create an attorney–client relationship. Facts matter; consult a lawyer about your specific situation.
