Incoterms® Rules 2020 (International Commerce Terms)
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.
A short, 20 page introductory guide on each Incoterms® 2020 rule.
1 page per Incoterms rule, this simple guide is designed for complete beginners to give a background and basic understanding the importance of Incoterms® Rules.
Written by Bob Ronai CDCS, a member of the ICC’s Incoterms® 2020 Drafting Group, in partnership with Trade Finance Global (TFG). This guide provides a commentary on Incoterms® 2020.
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Introduction to Incoterms Rules
Incoterms 2020 – What are the 7 Key Changes and Updates?
Rule by Rule
Incoterms 2020 Rules PDF
Transfer of Risk in Incoterms
Obligations of the Parties
Latest Incoterms News
Free Incoterms Videos
Introduction to Incoterms Rules
Incoterms 2020 Rules are used today by practitioners and traders, anyone involved in the supply chain of delivering goods overseas will probably come across incoterms, including:
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
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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 the 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 sales contract 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.
Incoterms 2020 – 7 Key Changes & Updates
What are the 7 key changes and updates for Incoterms 2020 Rules? The substance of Incoterms 2020 has not changed considerably, but the small subtle changes are absolutely crucial for trade specialists.
Here are the key differences between Incoterms 2010 and Incoterms 2020:
1. DAT Incoterm changed to DPU (Delivery at Place Unloaded)
Following on from several rounds of consultation, the Drafting Group made the choice of removing the word ’terminal’ as it often caused confusion.
DAT required Delivery at Terminal (unloaded), however, following on from feedback to the drafting committee, it was decided to change the term to DPU (Delivery at Place Unloaded), to broadly cover ‘any place, whether covered or not’.
2. Insurance cover differs between CIF and CIP
Under CIF / CIP, the seller buys insurance for the buyer. In Incoterms® 2010, insurance is required under clause C, but in Incoterms® 2020, CIP requires insurance complying with Institute Cargo Clause (A) whereas CIF requires insurance under Clause C.
Why? Because Clause A covers a more comprehensive higher level of insurance (e.g. for the manufactured goods), whereas a lower level of cover from Clause C would probably apply to the commodities world.
3. The Listing of Costs
All costs are now listed in the ‘Allocation of Costs’ sections for each rule, to avoid confusions. Because the ordering of articles within the Incoterms 2020 rules have also changed, these now appear in the A9/B9 section of each rule.
Costs were a big issue in the 2010 Incoterms®. Carriers often changed their pricing structure to deal with add ons and sellers were often surprised by being back charged terminal handling charges. The A9 sections in the Incoterms rules guide now collects together the costs, with the principle aim of clearly stating the costs to each party.
4. Security Requirements
Cargo security has been particularly important since 9/11, and the 2020 rules now address many of the security-related requirements that became so prevalent in the early part of this century. From a carriage requirements perspective, security related allocations have been added to A4 and A7 of each Incoterms rule, and the necessary costs associated have been added to A9/B9 (see 3).
5. Own transport
Incoterms 2010 rules assumed that goods carried from the seller to the buyer were via a 3rd party. Incoterms 2020 allows for own means of transport by the buyer in the FCA rules and by the seller in the D rules.
6. FCA and Bills of lading
According to FCA, part B4, ‘The buyer must contract or arrange at its own cost for the carriage of the goods’. There is a gap in delivery between FCA and FOB. If you’re selling FCA, your delivery point is different to FOB. The difference between FCA and FOB to the seller is a significant cost and risk. In the 2010 Incoterms rules, exporters of goods in containers were encouraged to use FCA, which seemed best for both parties. However, many people were using FOB when they should’ve really been using FCA.
Why? Even sophisticated sellers said they wanted to use FOB, because a standard Letter of Credit requires an onboard Bill of Lading to be presented. Therefore the sellers were often taking the risk and using FOB instead, because they wanted to get paid under the LC. The Incoterms® 2020 FCA extra provision now states that if the parties have so agreed, the buyer must instruct the carrier to issue to the seller, at the buyers cost and risk, a transport document stating that the goods have been loaded (such as a Bill of Lading with an on board notation)’
7. Presentation and design
Incoterms® 2020 rules have much more extensive explanatory notes, with better diagrams, a different structure for users and a reordering of rules to make delivery and risk more obvious. Maritime related rules still haven’t changed and remain at the back of the rule book as they still might be used for bulk commodities.
Rule by Rule
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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).
Incoterms 2020 Rules PDF
A comprehensive 96 page guide on Incoterms® 2020, to be used in conjunction with The International Chamber of Commerce’s (ICC) new book, INCOTERMS® 2020.
Written by Bob Ronai CDCS, a member of the ICC’s Incoterms® 2020 Drafting Group, in partnership with Trade Finance Global (TFG). This 94 page guide provides an article by article commentary on Incoterms® 2020.
- Introduction and layout of the rules
- A1 / B1: GENERAL OBLIGATIONS
- A2 / B2: DELIVERY
- A3 / B3: TRANSFER OF RISK
- A4 / B4: CARRIAGE
- A5 / B5: INSURANCE
- A6 / B6: DELIVERY/TRANSPORT DOCUMENT
- A7 / B7: EXPORT/IMPORT CLEARANCE
- A8 / B8: CHECKING / PACKAGING / MARKING
- A9 / B9: ALLOCATION OF COSTS
- A10 / B10: NOTICES
- Advantages and Disadvantages of each rule and whether they work with LCs
- Rules for Any Mode or Modes of Transport
- Rules for Sea and Inland Waterway Transport
Transfer of Risk in Incoterms
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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