Incoterms 2020 – What are they?
What are Incoterms? Incoterms are a standard set of terminology, created by the International Chamber of Commerce (ICC), used universally, defining the key parts of freight forwarding. In 1936 the ICC first defined the INternational COmmerce Terminology (INCO Terms), and we have summarised the 11 Incoterms which have recently been revised by the ICC Incoterms Drafting Committee for 2020.
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Incoterms is a registered trademark of the International Chamber of Commerce.
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- About TFG
- Multi Modal Incoterms
- EXW – Ex Works
- FCA – Free Carrier
- CPT – Carriage Paid To
- CIP – Carriage And Insurance Paid To
- DAP – Delivery at Place
- DPU – Delivered at Place Unloaded
- DDP – Delivered Duty Paid
- Sea and Inland Waterway Incoterms
- FAS – Free Alongside Ship
- FOB – Free on Board
- CFR – Cost and Freight
- CIF – Cost, Insurance and Freight
- Contact Us
Incoterms 2020 [Updated]
The substance of Incoterms 2020 has not changed considerably, but the small subtle changes are absolutely crucial for trade specialists.
7 Key changes to Incoterms 2020
- DAT Incoterm changed to DPU
- Insurance points are clarified in CIF and CIP incoterms rules
- Costs and cost structures are now clarified
- Security in relation to transport is now clearly detailed
- Provisions to allow for own transport rather than assuming 3rd party transport
- FCA, FOB and Bills of Lading
- Presentation and design is much more user friendly
Who uses incoterms?
Incoterms 2020 are used today by practitioners and traders, anyone involved in the supply chain of delivering goods overseas will probably come across incoterms, including:
What do Incoterms cover?
The language that was agreed by incoterms guidance covers the following areas of international commerce and trade by the International Chambers of Commerce:
- Tasks involved in shipping
- Which parties hold contract
- Responsibility of risk
- Delivery of goods (buyers and sellers)
- Insurance duties
- Customs and taxes
What is the purpose of Incoterms?
The main purpose of Incoterms is to provide a uniform, constant and authentic interpretation of the commercial terms of delivery of goods, most frequently used in International transactions, and, by means of their application, removing any uncertainty due to divergent interpretations.
Operators from different countries, with different legislations, can at last rely on uniform, unambiguous and authentic interpretive sources for properly and fairly sharing the costs and the risks arising from the delivery of the goods.
The use of such clauses is discretionary and, for the sake of their validity, both parties of a salescontract have to agree upon in advance through a specific mention on suche contract.
The field of action and the function of Incoterms is identified through the acknowledgement of four “moments”:
- Who pays for the main transport?
- Where does the delivery take place?
- Where and when the risk is transferred from the Seller to the Buyer?
- Who bears all the fees arising from transporti.e. issue of documents, unloading of goods at destination, customs clearance when neccessary, insurance of goods etc.
Seller versus Buyer – Risk Transfer
The subject of Incoterms is restricted to the aspects relating to the rights and obligations of the parties, Seller and Buyer, of a commercial contract with reference to the delivery of the goods.
It is essential for the Seller / Exporter not to misunderstand the actual application of Incoterms 2020 that refer to the sales contract and NOT to the transport contract, even though, in order to make a sale of goods, there are correlations with aspects and contracts that will be finalized later, such as transport, insurance, financing etc.
It is furthermore important to keep in mind that Incoterms shall not be considered “laws” as their legal effect lies in the will of both parties to opt for them in their commercial transactions by making explicit written mention on.
In short, Incoterms 2020:
- are optional rules, not laws;
- do not affect the transport contract, as they relate with the sales contract;
- do not concern the property transfer or any other sales right;
- do not govern all of the obligations undertaken by the parties of a sales contract, as they are confined to the delivery of the goods;
- do not concern the breach of the contract, with the relevant consequences for the party in breach.
ICC, i.e. the International Chamber of Commerce, grouped the obligations of the Seller and the Buyer in 10 points, marked by the “A”, for the Seller, and by the letter “B”, for the Buyer, so that each point (title) related with the Seller, under the letter “A”, matches with the position of the Buyer, under the letter “B”.
Obligations of the parties under Incoterms 2020
|Seller’s obligations||Buyer’s obligations|
|A 1. General obligations||B 1. General obligations|
|A 2. Delivery||B 2. Taking Delivery|
|A 3. Transfer of risks||B 3. Transfer of risks|
|A 4. Carriage||B 4. Carriage|
|A 5. Insurance||B 5. Insurance|
|A 6. Delivery / transport document||B 6. Proof of Delivery|
|A 7. Export / import clearance||B 7. Export / import clearance|
|A 8. Checking / packaging / marking||B 8. Checking / packaging / marking|
|A 9. Allocation of costs||B 9. Allocation of costs|
|A 10. Notices||B 10. Notices|
Therefore, the obligations governed by the Incoterms 2020 are the following:
- the Seller shall make the goods available for the Buyer, or his carrier, for transportation and delivery to the agreed destination.
- the breakdown of the risks between Seller and Buyer, as for the transportation of goods from the place of origin to the final destination.
- the obligation to clear customs in export and import.
- the obligation by the Buyer to take over the goods
Although Incoterms deal with a large number of specific obligations, they do not govern the following aspects:
- transfer of property or any other sales right;
- breach of the contract, with the relevant consequences for the party in the breach;
- liabilities, financial conditions in connection with the execution of the main legal transaction;
Incoterms 2020 do not belong to “international contracts”. Instead, they only refer to the sales contract signed the Seller and the Buyer.
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Rules for all modes of transport
Figure 1: Incoterms Infographic. SOURCE: O.Berk 101 Shipping Terms, Visual.ly
1. EXW Ex Works
Ex Works (EXW) is the term used to describe the delivery of goods to an available designation at their place of business, normally in their factory, offices or warehouse.
The seller does not need to then load items onto a truck or ship, and the remainder of the shipment is the responsibility of the buyer (e.g. overseas shipment and customs duty). EXW is therefore more favourable to the seller as they do not need to worry about the freight once it has left their premises.
2. FCA Free Carrier
Unlike EXW, Free Carrier pushes the responsibility of delivering the goods to the buyers nominated premises onto the seller, so they have to organise shipping and various export documents.
3. CPT Carriage Paid To
“Carriage Paid To”, or CPT, goes into a little more detail than FCA, specifying that the seller bears the costs for transporting the goods to the nominated place that the buyer requests.
Carriage Paid To can be used in any transport mode, and the risk transfers from the seller to the buyer as soon as the goods reach the nominated destination and the carrier takes charge of these.
4. CIP Carriage Insurance Paid To
“Carriage and Insurance Paid to”, or CPI, specifies that the seller needs to pay the costs of transport as well as the insurance cover for the goods in transit (by any transport mode) to the destination named by the buyer.
In terms of level of insurance, the cover level can be minimum, defined by the ICC’s INCO Terms, and should they request a higher level of insurance, this would need to be agreed on the contract.
The risk is then transferred from the seller onto the buyer once the goods reach the nominated point.
5. DAT Delivered At Terminal
“Delivered at Terminal”, or DAT, means that all of the costs up until the point of delivery to a nominated terminal (e.g. a port or a quay) need to be covered. As in the table above, the buyer would need to arrange Duties and Taxes and clearing goods through customs. With DAT, the seller is also responsible for unloading the goods at the terminal.
It’s advisable to ensure the terminal, hub or port is clearly specified, given the size of many terminals.
6. DAP Delivered At Place
“Delivered at Place”, or DAP, can also be used for any mode of transport. An extension of DAT, the seller delivers the goods at a named destination, specified by the buyer, although under the ICC rules, the unloading of the goods are the responsibility of the buyer.
The buyer is also required to sort out duties and taxes, as well as clearing the goods through customs.
7. DPU Delivered at Place Unloaded
“Delivered at Place Unloaded”, or DPU, can be used for any mode of transport. The seller delivers the goods and transfers the risk to the buyer when goods once unloaded from the arriving means of transport are placed at the disposal of the buyer at a named destination at the agreed point within that place. The seller bears all risks involved in bringing the goods to and unloading them at the named place of destination. Therefore the delivery and arrival at the destination are the same.
8. DDP Delivered Duty Paid
“Delivered Duty Paid”, or DDP, can be used for any mode of transport. The seller delivers the goods and transfers the risk to the buyer when the goods are placed at the disposal of the buyer, cleared for import, on the arriving means of transport, ready for unloading at the named place of destination. The seller bears all risks involved in bringing the goods to the named place of destination or to the agreed point within that place.
The ICC INCO Terms also have a section specifically for goods transported by sea or inland waterway.
Figure 2: Incoterms Infographic. SOURCE: O.Berk 101 Shipping Terms, Visual.ly
8. FAS Free Alongside Ship
“Free Alongside Ship”, or FAS, is used in situations when the seller can place the goods alongside other non-containerised goods (e.g. on a vessel or barge).
The seller might do this if they have access to sea or inland waterway routes and want to place the goods en route to the buyer alongside other goods on the ship. It’s not recommended for goods that can be placed in a container (more on this below, see FCA).
The risk of transporting the goods ‘alongside ship’ move from the seller to the buyer once the goods are delivered to a terminal or port and unloaded.
9. FOB Free On Board
“Free On Board”, or FOB, occurs when the seller delivers the goods to the port of shipment, at which then it becomes the responsibility of the buyer once unloaded onto a vessel. If the goods are damaged when on board the vessel, it’s the responsibility of the buyer.
10. CFR Cost and Freight
“Cost and Freight”, or CFR, incurs more risk and responsibility onto the seller. The seller delivers the goods up and takes all responsibility and cost right up until the ship has docked at the end point and the goods have been unloaded. The seller will also cover the cost of insurance at atleast the minimum level.
11. CIF Cost, Insurance and Freight
“Cost, Insurance and Freight”, also known as CIF, is also restricted to sea or inland waterway modes of transport. In this case, the seller insures the goods transported up until they arrive at the port, but it becomes the responsibility of the buyer (in terms of risk and insurance).
Figure 3: Incoterms Infographic. SOURCE: O.Berk 101 Shipping Terms, Visual.ly
What is the History of Incoterms?
1936 – First Incoterms were agreed and published, these include FAS, FOB, C&F, CIF, Ex Ship and Ex Quay
1953 – As the rise of rail during the war increased, DCP – Delivered Costs Paid, FOR – Free on Rail and FOT – Free on Truck were added to bring clarity to new forms of transportation. To further revision of incoterms were published in 1967 to cover off some common misinterpretations in these terms
1974 – FOB Airport was introduced in the newer publication of ICC incoterms to account for increased goods travelling by air
1980 – With the containerisation revolution at full swing, more details were added to incoterms rules to define destination points (e.g. shipping shore ports and container yards)
1990 – Previous incoterms that were added to account for rail and air transport made the terms very complex, particularly when goods were transported using more than one transport node. So the ICC scrapped a few of the F incoterms (FOR; Free on Rail, FOT; Free on Truck, and FOB Airport; Free on Board Airport) to simplify and completely renew the language of incoterms
2000 – The terms were amended to account for further changes in customs requirements and to comply with global changes
2010 – The most radical of reforms of the ICC Incoterms, where D terms were consolidated from: DAF, DES, DEQ to DDU, DAT and DAP
2020 – A new revision of incoterms is underway – see the latest updates here.