Incoterms 2020 - The Complete Guide
Incoterms 2020 – The Complete Guide
International trade involves businesses from countries all around the world, where people use different languages. Incoterms serve as common ground to help avoid ambiguity. If you plan to start importing or exporting goods, you may expect to come across one or more Incoterms in your dealings. This guide aims to give you all the information you need in order to make the shipping process as smooth as possible.
What are Incoterms?
International Commercial Terms, also commonly referred to as Incoterms are a set of internationally recognized and standardized rules and guidelines that help facilitate trade. They clarify the costs, risks, and tasks for importers and exporters. Even though the use of Incoterms is voluntary, all parties involved in trade transactions use them routinely.
Incoterms are issued by The International Chamber of Commerce (ICC) and amended periodically. Incoterms 2020 make for the ninth version.
Who Uses Incoterms?
Businesses that are involved in international trade tend to rely on these globally used terms to prevent confusion in trade contracts. Incoterms clearly lay out obligations of both parties so they may understand just what’s required under any given business arrangement. While some Incoterms apply only to the maritime industry, others cater to other modes of transportation as well.
Commonly used in international commercial transactions and procurement processes, they find favor with trade councils, international lawyers, and courts alike.
How Did We Get to Incoterms 2020?
The ICC released its initial work surrounding Incoterms in 1923. However, it published the first edition only in 1936. Subsequent amendments came in:
- 1953
- 1967
- 1976
- 1980
- 1990
- 2000
- 2010
- 2019
While the ICC released the last round of amendments in September 2019, the latest versions are referred to as Incoterms 2020 because they came into effect on January 1, 2020.
What Are the Differences Between 2010 and 2020 Incoterms?
Incoterms 2020 came with rather few substantive changes. However, there have been amendments surrounding how the rules are presented and sequenced. There has been no new addition, although the ICC has renamed one rule. Newly introduced explanatory notes at the start of each rule aim to help users understand the latest edition accurately.
Given the limited number of changes from Incoterms 2010, and the fact that rules from 2010 still form an intricate part of complex trade agreements, not many might move forward with adopting the new rules in a hurry. Besides, organizations that have established reliable Incoterms 2010 practices don’t have to undergo major retraining exercises any time soon.
Here are the changes that warrant your attention:
- Determining costs is simplified.
You no longer have to go through multiple articles to determine costs. Sellers may now find all costs allocated to specific Incoterm rules in A9, and buyers can view them in B9. - Increase in level of insurance cover.
There has been no change under the Cost, Insurance, and Freight (CIF) rule. There has been an increase in required cover under the Carriage and Insurance Paid to (CIP) rule – going from Institute Cargo Clauses (C) in 2010 to Institute Cargo Clauses (A) in 2020. - DAT becomes DPU.
The Delivered at Terminal (DAT) rule is now renamed to Delivered at Place Unloaded (DPU). It emphasizes that the place of destination does not have to be a terminal, and can be any other place. - Increased security requirements.
This is clearly illustrated through the detailed security requirements laid out for every Incoterm rule. Non-compliance by any party may lead to additional costs and delays. - Using own vehicles.
Incoterms 2020 cover the scenario where buyers or sellers transport goods using their own vehicles – without employing the services of third-parties. - Using the FCA rule with a letter of credit.
Upon agreement by both parties, buyers can now instruct sellers to issue bills of lading with on-board notations. Banks often need this document to issue letters of credit. - Finding the right rules becomes easier.
The new matrix comparison tool that is part of ICC Academy’s Incoterms 2020 Certificate simplifies how even novices can find the right rules that apply on their transactions.
An Overview of Incoterms 2020
Incoterms still comprise of 11 rules. Seven rules are meant for use with different modes of transportation, whereas four remain maritime-specific.
CFR (Cost and Freight).
The seller bears responsibility for transporting cargo to the buyer’s port. Upon arrival, the responsibility shifts to the buyer. This includes unloading the cargo, completing all import-related formalities, and transporting the cargo to its final destination.
CIF (Cost, Insurance, and Freight).
The seller bears the cost of insuring and shipping the cargo to the buyer’s port. Upon arrival, the buyer takes all responsibility surrounding unloading, importing, and any further transportation costs. The seller has to pay for freight insurance.
CIP (Carriage and Insurance Paid).
Under this rule, sellers are required to cover costs involved in insuring and shipping cargo to a predefined place of delivery. Upon the cargo’s unloading and delivery at the terminal, the buyer holds responsibility of the shipment. The buyer needs to complete the importing process and transport the cargo to its final destination. As with CIF, the seller needs to buy freight insurance.
CPT (Carriage Paid To).
Other than shipping the cargo, the seller is also obligated to unload it at the place of delivery. The responsibility of the shipment transfers to the buyer after unloading, who is then required to import the cargo and transport it to its final destination.
DAP (Delivered at Place).
The seller is responsible for delivering the shipment to the final predefined destination. The cargo transfers to the buyer after delivery. Responsibility of unloading the cargo and getting customs clearance as well as paying import duty and taxes rests with the buyer.
DDP (Delivered Duty Paid).
This is the only Incoterm that puts the onus of paying all import-related charges on the seller. The seller holds responsibility for the cargo’s delivery to its final destination, getting customs clearance, as well as paying import duty and taxes. Upon the cargo’s arrival, responsibility to cover unloading costs rests with the buyer.
DPU (Delivered at Place Unloaded).
This Incoterm requires that the seller bear responsibility for delivery and unloading of cargo at its final destination. Once unloaded, the seller is responsible for getting customs clearance as well as paying import duty and taxes.
EXW (Ex Works or Ex-Warehouse).
The seller holds responsibility for packaging of goods and making them available. The buyer takes responsibility for the cargo while it is still at the seller’s location, and then needs to export, ship, and import the cargo to its final destination.
FCA (Free Carrier).
The seller is required to transport the cargo to a predefined destination – typically a shipping terminal – in the seller’s country. Upon its arrival, the buyer is required to pay freight charges and complete the import and delivery process. Cargo might be exported by sellers or buyers depending on the location.
FAS (Free Alongside Ship).
The seller is responsible for handling the export process until the cargo is alongside the ship or any other chosen mode of transportation. Then, the buyer holds responsibility for the loading of the cargo and its shipping to the final destination.
FOB (Free On Board).
The buyer holds the responsibility of managing the export process until loading of the cargo onto a vessel is complete. The responsibility transfers to the buyer once the cargo is loaded. The buyer needs to pay freight and import costs, and transport the cargo to its destination.
What is the Terminology Used in Incoterms?
Some terms used within Incoterms hold special meaning and touch upon different responsibilities and obligations. The more important ones include:
- Arrival.
This highlights the point until which carriage has been paid. - Carrier.
This refers to any party who – under contract of carriage – takes responsibility for transporting cargo by sea, inland waterway, air, rail, road, or a combination of these modes. - Free.
This implies that the obligation of delivering goods to a predefined place for further transfer to a carrier rests with a seller. - Freight forwarder.
This is any business entity that provides or assists in providing shipping services. - Point of delivery.
This indicates the point during the transaction when responsibility of the shipment shifts from a seller to a buyer. - Terminal.
A terminal can be any covered or uncovered place such as a cargo terminal, a container yard, a dock, or a warehouse.
Every Incoterm defines a few important aspects, some of which include:
- Responsibility of transportation costs.
This section highlights which party is obligated to pay transportation costs. It is typically characterized as Freight Collect or Freight Prepaid. - Requirements for export and import.
In this section, you get to know if the seller or buyer holds responsibility for the cargo’s export and import as well as its associated costs. - Responsibility for freight insurance.
Some Incoterms come with a freight insurance requirement. In these cases, the terms define which party is responsible to pay for the same.
What Aspects Incoterms Don’t Cover?
While use of Incoterms in contracts of sale is fairly common, they don’t touch upon a variety of aspects. These include, but do not limit to:
- All conditions of a transaction
- Identification of goods being traded and their contract price
- Timing or method of payment as negotiated between two parties
- Transfer of title or ownership of goods
- Documents that a seller needs to give a buyer for facilitating customs clearance at the destination country
- Liability in case of failure to provide goods as per the contract of sale
- Liability in instances of delayed delivery
- Dispute resolution
Which Incoterms Are Used Only for Sea and Inland Waterway Transport?
Incoterms used only for sea and inland waterway transport include:
- CFR (Cost and Freight)
- CIF (Cost, Insurance, and Freight)
- FAS (Free Alongside Ship)
- FOB (Free on Board)
Which Incoterms Can Be Applied to Any Mode of Transportation?
Incoterms that you may apply for any mode of transport include:
- CIP (Carriage and Insurance Paid to)
- CPT (Carriage Paid to)
- DAP (Delivered at Place)
- DDP (Delivered Duty Paid)
- DPU (Delivered at Place Unloaded)
- EXW (Ex Works)
- FCA (Free Carrier)
Which Incoterms Should Sellers and Buyers Use?
Unless a buyer specifically requests for the use of particular Incoterms, sellers tend to have preferred ones that suit their requirements. Buyers who have specific preferences may convey the same to sellers, after which both can come to a consensus surrounding which ones to include in their contract.
To hold contractual validity, Incoterms should be mentioned in purchase agreements, sales contracts, and sales invoices. All the terms should be put on paper, and neither party should rely on verbal communication surrounding international shipment of goods. In some instances, Incoterms might change during an order’s processing. For instance, there can be a change in Incoterms if the mode of transport switches from sea to air for any reason.
Conclusion
Incoterms help formulate binding agreements between sellers and buyers – outlining the responsibilities and obligations of both parties when it comes to delivery of goods. While it is not mandatory for businesses to use Incoterms when trading internationally, they help avoid ambiguity surrounding different aspects such as shipping costs, freight insurance, and customs clearance.
Since language barriers are fairly common in international trade, Incoterms provide a uniform set of rules and guidelines that help simplify otherwise complicated processes. If you’re new to the world of imports and exports, working with a professional freight forwarding company might be in your best interest, as it can help you steer clear of expensive misunderstandings.
