The 2020 edition of Incoterms rules is essential for trading today. They are standard sets of global trade terms designed to assist businessmen, lawyers, shippers, and insurance companies when goods are bought, sold, and transported. In this article, we deeply dive into the definition of Incoterms, their purpose, and why they are so important.
What are Incoterms?
What is the definition of Incoterms? Incoterms is an abbreviation of “International Commercial Terms”. The term was first published in 1936 and constitutes a standardized set of 11 rules specifying the allocation of liability in international transactions. The latest edition is Incoterms 2020, which entered into force on 1 January 2020.
Why are Incoterms essential?
Incoterms are internationally accepted rules that clearly define who is responsible for a product during transport and for how long. By following these rules, both sellers and buyers can avoid potential misunderstandings. The rules are recognized by authorities and courts worldwide.
When goods are transferred from seller to buyer, it is important to determine who is responsible for the risks and who will arrange and pay for transportation. This significantly affects which party will engage a carrier or freight forwarder. Incoterms minimize the risk of misunderstandings in international trade, thereby reducing the likelihood of future legal disputes and unnecessary costs. The delivery condition stated in the purchase agreement determines who will be responsible for the insurance of the goods during transport and when the risks pass from the seller to the buyer.
To avoid misunderstandings, it is advisable to specify the delivery condition using a 3-digit code or the full text in English. It is also essential to state the city (and location) followed by Incoterms 2020.
What do Incoterms clarify?
- Who will be responsible for transport costs, insurance, and other related expenses.
- The specific location from or to which the transport will be carried out.
- Whether loading and unloading are included.
- When the risk is transferred from the seller to the buyer.
Read also: Which transport solution should you choose?
Who created the rules for Incoterms?
Incoterms were developed and published by the International Chamber of Commerce (ICC) and undergo revision every ten years. The ICC announced the update of the Incoterms 2020 rules in September 2019. The official documentation and guides can be purchased from the ICC Store.
Why are Incoterms rules essential for you?
Incoterms are essential to you since they ensure that you and your trading partner clearly define and agree on your respective obligations and liabilities in case of loss, damage, or accident.
What do the rules cover?
Incoterms clarify the responsibilities, risks, and costs involved in transporting goods from the seller to the buyer.
What exactly do the 11 Incoterms cover?
The eleven Incoterms rules are divided into two groups. The first seven rules apply to all modes of transport, while the last four are specific to sea and inland waterway transport.
Read also: Shipping costs: How much does international shipping cost?
The rules for all modes of transport include:
- Ex Works (EXW)
- Free Carrier (FCA)
- Carriage paid to (CPT)
- Carriage and Insurance paid to (CIP)
- Delivered At Place (DAP)
- Delivered at Place Unloaded (DPU) NEW
- Delivered Duty Paid (DDP)
The rules that apply only to transport by sea and inland waterways include:
- Free Alongside Ship (FAS)
- Free On Board (FOB)
- Cost and Freight (CFR)
- Cost Insurance and Freight (CIF)
Rules that apply to all modes of transport
Ex Works — EXW delivery terms
Ex Works (EXW) stipulates that the seller delivers the goods once they are packaged and made available to the buyer at a designated location, which could be the seller's premises or another specified place like a factory or warehouse. Under these terms, the buyer is responsible for loading the goods onto a vehicle, handling all export procedures, and transporting the goods. Additionally, the buyer bears the costs and risks associated with loading. Therefore, if you, as the seller, assist in loading the goods, it is done at the buyer's risk.
Free Carrier — (FCA delivery terms)
Free Carrier (FCA) is a versatile rule where the buyer arranges the main transport. The seller must deliver the goods to the carrier or another person designated by the buyer. If the delivery occurs at the seller's premises, the seller must load the goods onto the vehicle. It is crucial for both parties to precisely define the delivery location within the premises, as the transfer of risk from the seller to the buyer happens at this point. The seller is responsible for export clearance, while the buyer assumes all risks and costs once the goods are delivered to the specified location. FCA is particularly suitable for goods prepared for container transport.
Carriage Paid To (CPT delivery terms)
Under Carriage Paid To (CPT) terms, the seller is responsible for arranging transport to a specified destination, but not for insuring the goods to that destination. The risk transfers from the seller to the buyer when the goods are handed over to the carrier. Be mindful of potential Terminal Handling Charges (THC), which may not be included in the carrier's shipping rates. As a buyer, being aware of these charges can help you avoid unexpected costs.
Carriage and Insurance Paid to (CIP delivery terms)
Carriage and Insurance Paid To (CIP) stipulates that the seller is responsible not only for arranging transport but also for insuring the goods. However, the seller is required to obtain only minimum insurance coverage. Similar to CPT terms, the delivery, and the transfer of risk from the seller to the buyer occur when the goods are handed over to the carrier. This arrangement underscores the importance of understanding the level of insurance coverage provided under CIP terms.
Similar to CPT, you should be aware of any terminal handling charges (THC) that are not always included in the carrier's shipping cost. Again, buyer beware is important!
Delivered at Place (DAP delivery terms)
Delivered at Place (DAP) means that the seller is responsible for transporting and delivering the goods to a specified location, but not for unloading them. The responsibility for unloading rests with the buyer, marking the point of risk transfer from the seller to the buyer. Additionally, the buyer is responsible for import clearance, as well as any local taxes or import duties that may apply.
Delivered at Place Unloaded (DPU delivery terms)
Introduced in 2020, Delivered at Place Unloaded (DPU) terms require the seller to be responsible not only for transporting but also for unloading the goods at the specified location. The transfer of risk from the seller to the buyer occurs once the goods have been unloaded from the transport vehicle.
It is crucial that the delivery location—and consequently the unloading location—be specified as precisely as possible. For instance, specifying “loading dock 2 at the buyer's facility” provides a more precise location than a general street address, ensuring clarity and reducing potential disputes over delivery specifics.
Delivered Duty Paid (DDP delivery terms)
What does DDP stand for? It signifies Delivered Duty Paid. Under DDP terms, the seller assumes full responsibility for transporting the goods to a specified location, clearing them through customs, and paying all associated taxes and duties, including VAT. This is the only Incoterm that requires the seller to manage duties and taxes. The risk transfers to the buyer when the goods are available and ready for unloading at the destination.
However, this term can pose challenges for sellers due to the complexity and bureaucratic nature of import regulations. If you are the seller, it is often advisable to let the buyer handle import duties to avoid potential complications.
Read more about Bertling's transport options: air freight, road freight, sea freight, and rail freight.
Rules for sea and inland waterways only
Free Alongside Ship (FAS Shipping Terms)
The FAS rule is ideally suited for situations where the seller has direct access to the ship, such as with bulk or non-containerized goods. For containerized shipments, the Free Carrier (FCA) terms might be more appropriate.
Under FAS terms, the seller is responsible for delivering the goods, cleared for export, alongside the vessel at the designated port. At this point, risk transfers to the buyer, who then assumes responsibility for loading the goods onto the vessel and for all subsequent costs.
Free on Board (FOB delivery terms)
Similar to Free Alongside Ship (FAS), Free on Board (FOB) is most suitable when the seller has direct access to the vessel for loading. For shipments involving containerized goods, the Free Carrier (FCA) terms may be more advantageous.
Under FOB terms, the seller is responsible for delivering and loading the goods, which have been cleared for export, onto the vessel at the designated port. Once the goods are loaded, the risk transfers to the buyer, who then assumes responsibility for all subsequent costs.
Cost and Freight (CFR delivery terms)
Like Free on Board (FOB) and Free Alongside Ship (FAS), Cost and Freight (CFR) is best suited when the seller has direct access to the vessel for loading. For containerized goods, however, the Carriage Paid To (CPT) terms may be more suitable.
Under CFR terms, the seller is responsible for arranging and paying for transportation to a designated port, delivering the goods cleared for export, and loading them onto the vessel. Although the seller handles these tasks, the risk transfers to the buyer as soon as the goods are loaded onto the vessel, before the main transport commences. It's important to note that the seller is not responsible for insuring the goods during the main transport.
Cost, Insurance, and Freight (CIF delivery terms)
Similar to Free on Board (FOB), Free Alongside Ship (FAS), and Cost and Freight (CFR), the CIF terms are suitable when the seller has direct access to the vessel for loading, such as with bulk or non-containerized goods. However, for scenarios where insurance is a concern, Carriage and Insurance Paid To (CIP) might be more applicable.
Under CIF terms, the seller is obligated to arrange and cover the costs of transportation to the specified port, including handling the goods’ export duties and loading them onto the vessel. Like with CFR, the risk transfers to the buyer once the goods are loaded onto the vessel before the main transport begins.
Additionally, under CIF terms, the seller must also arrange and pay for the insurance of the goods during transport to the designated port, although only minimum coverage is required, similar to the CIP terms.
Contact us for more information about Incoterms 2020 and assistance in choosing delivery conditions suitable for your transport.
