What You Need to Know About Incoterms® 2020

The International Chamber of Commerce has released Incoterms® 2020 trade terms for the delivery of goods, which will go into effect on January 1, 2020.

 

"The Incoterms® rules are the world’s essential terms of trade for the sale of goods. Whether you are filing a purchase order, packaging and labeling a shipment for freight transport, or preparing a certificate of origin at a port, the Incoterms® rules are there to guide you." - International Chamber of Commerce

 

A Summary of Incoterms® Changes

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With Incoterms® correctly applied in your contracts and documentation, the trade, transport, and delivery of your goods will flow more easily, costs will be assigned more accurately, and the risks clearly managed.

 

2020 Updates include:

        • Delivered at Terminal (DAT) has been changed to Deliver at Place Unloaded (DPU), in order to better reflect actual use in the trade around unloading responsibility.

        • Free Carrier (FCA) has added clarity and instruction in relation to letters of credit. The BUYER an now instruct its carrier to issue a bill of lading with an on board notation to the SELLER to satisfy the terms of a letter of credit.

        • Cost Insurance and Freight (CIF) and Carriage and Insurance Paid to (CIP) outline different levels of insurance coverage. CIP assigns the SELLER as responsible for purchasing a higher level of insurance coverage, at least 110% of the value of the goods.

        • Free Carrier (FCA), Delivery at Place (DAP), Delivery at Place Unloaded (DPU), and Delivered Duty Paid (DDP) include arrangements for carriage with own means of transport.

        • Identifies specific security-related requirements and assigns responsibility within carriage obligations and costs.

        • FCA, DAP, DPU, and DDP recognize SELLERS who may use their own transport to deliver goods and expressly state that SELLERS can make a contract for carriage or simply arrange for the necessary transportation.

 

All terms include enhanced explanatory notes for users, identify specific security-related requirements, and assign responsibility within carriage obligations and costs. For further information on changes to Incoterms®, skip down to ‘Incoterms® 2020 Changes’ below.

 

Incoterms® Origins

After World War I, growth in cross-border trade exposed differing practices and legal interpretations between traders of different countries, highlighting the need for a common set of rules.

Influenced today by the United Nations Convention on Contracts for the International Sales of Goods (CISG), the concept of standard trade terms was initiated in 1923 by merchants determined to bring economic prosperity.

Established by the International Chamber of Commerce (ICC) in 1936, Incoterms® are country-neutral rules created to address concerns about the responsibility of carriage, cost, and risk and prevent misunderstandings, disputes, and litigation.

Over time, Incoterms® rules have been fine-tuned with changes in the practice of trade and transportation. Amendments and additions have been made in 1953, 1967, 1976, 1980, 1990, 2000, 2010 and now 2020. The complete history can be found on the ICC's website.

 

What they do:

      • Divide costs, risks, and responsibilities between SELLERS and BUYERS
      • Act as a checklist for SELLERS and BUYERS against the existing contract or guide parties
      • Guide both parties into contracts to further define carriage or insurance

 

These and other specific issues need to be covered in the contract of sale:

      • Price of goods
      • Method of payment used in the transaction
      • Title or transfer of ownership of the goods
      • Revenue recognition
      • Dispute resolution, breach of contract, or choice of law
      • Product quality and liability

 

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How Terms are Organized

Incoterms® are referenced as a three-character acronym and accompanying geographic place to define the responsibilities of SELLERS and BUYERS for the delivery of goods for international trade. They don’t supersede any laws, nor are they all-inclusive.

 

These rules are organized into four main groups:

E – Departure (EXW)
F – Main Carriage Unpaid (FCA, FAS, FOB)
C – Main Carriage Paid (CPT, CIP, CFR, CIF)
D – Arrival (DAP, DPU, DDP)

 

Each term distinguishes the stages that determine whether the SELLER and BUYER arranges carriage or transfers risks and cost. They follow the same format and act as a guide for assigning discrete tasks. The rules are ordered to outline the general obligations, delivery, risk transfer, carriage, insurance, documentation, import/export clearance, packing & marking, costs and notices specific to each party.

 

How to Apply Incoterms®

Application of the Incoterms® that match the agreement should be cited within a contract and on the accompanying trade documentation with named geographic place or address and version included.

 

For clarity, follow this standard format:

[Incoterms®], [Named port, place, or point], [Incoterms® version]

 

Examples of use include:

CIF, Shanghai, Incoterms® 2020
DAP, 123 ABC Street, Portland, Oregon, Incoterms® 2020

 

The use of previous versions of Incoterms®, like Incoterms® 2010, is permissible but could cause confusion if the version is not referenced in contracts and the documentation used throughout the transaction.

 

Incoterms® 2020 Changes

 

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Each of the eleven Incoterms® 2020 terms are summarized below, separated into two parts: by any mode of transport and sea and inland waterways only. For the complete list of responsibilities for each term, refer to the official ICC Incoterms® 2020 book or download the Incoterms® mobile app

 

For any mode of transport:

EXW (EX WORKS)

The SELLER fulfills its obligations by having the goods available for the BUYER at the named place (e.g. the factory or warehouse). The BUYER bears all risk and costs starting when it loads the products at the named place until the products are delivered to the destination.

This term is not recommended for use in most cases since the SELLER has no visibility of cargo routing, with exposure to export compliance risk, and the BUYER is wholly responsible for arranging loading and pick-up.

EXW is useful for courier shipments moving on a consignees’ account, where the carrier handles loading.

 

FCA (FREE CARRIER)

The SELLER is responsible for making the goods available at its own premises or at a named place. In either case, the SELLER is responsible for loading the goods on the BUYER'S transport and is responsible for delivery to the port and export clearance including security requirements. Risk transfers once the goods are loaded on the BUYER'S transport.

This term has changed the most within Incoterms® 2020 rules.. In practice, problems had occurred with this term when the SELLER was responsible for loading the goods on a truck, or some other transport, hired by the BUYER and not directly on the international carrier.

Letter of credit: banks often require the SELLER to present a bill of lading with an on board notation before they will release the funds from escrow. An international carrier won't typically provide a SELLER, who did not present the goods directly to them, with such a bill of lading. Under the new Incoterms® 2020 rules, FCA allows the parties to agree in the sales contract that the BUYER should instruct its carrier to issue a bill of lading with the on board notation to the SELLER.

 

CPT (CARRIAGE PAID TO)

One of the best terms for SELLER, the goods are cleared for export and delivered to the first carrier contracted by the SELLER at a named place of shipment, at which point risk transfers to the BUYER. While the SELLER is responsible for the transportation costs associated with delivering goods to the named place of destination, they are not responsible for procuring insurance. The BUYER is exposed to risk during inland transit to a port of export, and contracts should carefully state which carrier or location triggers the risk transfer.

 

CIP (CARRIAGE AND INSURANCE PAID TO)

ELike CPT, the SELLER clears the goods for export and delivers them to the carrier or another person stipulated by the SELLER at a named place of shipment, at which point risk transfers to the BUYER. The SELLER is responsible for the transportation costs associated with delivering goods and procuring insurance coverage to the named place of destination.

Under Incoterms® 2020 rules for CIP, the SELLER is now responsible for purchasing a higher level of insurance coverage, at least 110% of the value of the goods. This is detailed in Clause A of the Institute Cargo Clauses and commonly known as “All Risk” insurance coverage.

 

DAP (DELIVERED AT PLACE)

The SELLER clears the goods for export and bears all risks and costs associated with delivering the goods to the named place of destination, but not unloaded. The BUYER is responsible for all costs and risks associated with unloading the goods and clearing customs to import the goods into the named country of destination.

 

DPU (DELIVERED AT PLACE UNLOADED)

Updated for Incoterms® 2020, and previously known as Delivered at Terminal (DAT), this term has been aligned with current trade practices. In practice, with an arrival term, the BUYER or SELLER may want the delivery of goods to occur somewhere other than a terminal, like a construction site.

This term is applicable to consolidated containers with multiple consignees, and it is the only term that tasks the SELLER with unloading the goods.

 

For any mode of transport:

FAS (FREE ALONGSIDE SHIP)

The SELLER clears the goods for export and delivers when they are placed alongside the vessel at the named port of shipment. The BUYER assumes all risks and costs from this point forward. This term is generally limited to non-containerized (bulk) shipments where the BUYER contracts for carriage and loading.

 

FOB (FREE ON BOARD)

The most misused term for its association with the US-based Uniform Commercial Code. The SELLER clears the goods for export and delivers when they are on loaded on-board the vessel at the named port of shipment. The BUYER assumes all risks and cost for goods from this point.

This term is not suitable for containerized shipments, as in real practice, containers are delivered to the custody of a carrier at the container yard, at a terminal, rather than when loaded. Parties should agree on what “loaded” means in their contract.

 

CFR (COST AND FREIGHT)

The SELLER clears the goods for export and delivers them when they are on board the vessel at the port of shipment. The SELLER bears the cost of freight to the named port of destination. The BUYER assumes all risks for the goods from the time the goods have been delivered on board the vessel at the port of shipment.

 

CIF (COST, INSURANCE, AND FREIGHT)

Like CFR, the SELLER clears the goods for export and delivers them when they are on-board the vessel at the port of shipment. Along with bearing the cost of freight, insurance to the named port of destination is added.

Unlike with CIP, the SELLER is required to purchase the minimum level of insurance under Clause C of the Institute Cargo Clauses, commonly known as “Free of Particular Average”. The BUYER is responsible for all costs associated with unloading the goods at the named port of destination and clearing goods for import. Risk passes from SELLER to BUYER once the goods are on-board the vessel at the port of shipment.

 

While trade can occur without reference to Incoterms®, most businesses find they are crucial to the smooth function of international transactions. In addition, many U.S. companies, because of their use of Incoterms® for international sales or purchasing, are transitioning from Uniform Commercial Code (UCC) terms to Incoterms® for domestic sales. This is equally acceptable, and their contracts should be adjusted to clarify what set of terms are applicable.

With Incoterms® correctly applied in your contracts and documentation, the trade, transport, and delivery of your goods will flow more easily, costs will be assigned more accurately, and the risks clearly managed.

 

The information above is for informational purposes only. The Incoterms® Rules are protected by copyright owned by ICC. Further information on the Incoterm® Rules may be obtained from the ICC website. Incoterms® and the Incoterms® 2020 logo are trademarks of ICC. Use of these trademarks does not imply association with, approval of or sponsorship by ICC unless specifically stated above.

 

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