Introduction to Incoterms 2020

After a series of studies conducted in the 1920s, the International Chamber of Commerce (ICC) discovered several discrepancies in the interpretation of commercial trade terms used by traders from different countries. To remove altogether (or at least reduce) the number of uncertainties arising from different interpretations of the rules in different countries, a common protocol for importers and exporters everywhere was drafted for the first time in 1936. These terms were named Incoterms or International Commercial Terms. Even a small misunderstanding with the shipping terms or even an incorrectly used shipping term could lead to disputes over payment of overseas freight, insurance or several other costs involved in the shipment of goods. These rules are periodically updated, Incoterms 2010 being the 8th version and Incoterm 2020 being the latest. Although Incoterms 2020 is the latest edition, Incoterms 2010 is still in effect today as long as it is agreed upon by both parties of the trade.

Incoterms are a series of predefined three-letter commercial terms related to common contractual sales practices widely used in procurement processes, shipping management or International commercial transactions. Incoterms rules are primarily intended to clearly communicate the tasks, costs, and risks associated with the transportation and delivery of goods and are regularly incorporated into sales contracts worldwide. The Incoterms rules will guide you whether you are filing a purchase order, labeling and packaging a shipment for transport, or preparing a certificate of origin at a port. 

Basically, Shipping terms indicate three things. 

1. Which party arranges for transport and the carrier. 
2. Which party pays for transport. 
3. Where/when does the ownership of goods transfer from seller to buyer. 

Incoterms rules do not include trade terms codified for national purposes, such as “less than truckload shipping” (LTL) rule of the United States. Before we get an insight on what these terms are, we must understand what are the charges that are involved in the entire shipping process. The following list details all charges involved from the seller’s premises to buyer’s final destination.

• Export Packaging 
• Export Formalities
• Loading at Point of Origin
• Origin Inland Freight
• Origin Port charges 
• Forwarder Fees 
• Ocean / Air Freight 
• Destination Port Charges 
• Customs Clearance 
• Import Duties & Taxes 
• Delivery Charges to Final Destination

When the seller places goods at the disposal of the buyer at the seller’s premises or at other named places like a factory or warehouse. Buyer bears the risks and costs for loading and transporting the goods to their final destination. The seller neither bears the responsibility of loading the goods onto the collecting vehicle nor has to provide for any export clearance of the goods. The seller can choose to load the goods onto the collecting vehicle upon the buyer’s request and expense. However, the seller is obligated to assist the buyer with any necessary documentation and export approvals (at the buyer’s request and expense). After collecting the goods, the buyer must provide the seller with proof that they collected all the goods from the seller’s premises.

This shipping term is often used for making an initial quotation for the sale of goods without any costs included.

The seller fulfills their obligation to deliver when the shipment is handed over, properly packaged, and cleared for export to any person nominated by the buyer or a carrier(appointed by the buyer) at a named place (possibly including seller’s premises). The seller’s responsibility is to load the goods only if the delivery is made on the seller’s premises or named place. However, the responsibility of unloading the said goods depends upon the location of unloading; If the location of unloading is the seller’s premises, then it’s their responsibility to unload. Otherwise, the buyer bears the responsibility.

The seller may arrange a freight contract upon the buyer’s request or if the buyer fails to arrange for transport by the scheduled date of delivery. The buyer shall bear the cost and risks of the said transport. In such a case, the seller is obligated to inform the buyer of the delivery arrangements in time for the buyer to arrange for insurance.

Incoterms 2020 permits the buyer and seller to agree in their contract that the buyer’s carrier must supply the seller with a bill of lading (with an onboard notation). This will allow the seller to meet the terms of a letter of credit.

Delivery is fulfilled when the seller makes the goods available to a carrier or any person appointed by the buyer at a destination jointly agreed upon by both parties (usually, it is either the end destination such as the buyer’s facilities or a port of destination). 

The seller has to pay for the origin costs (such as export clearances, loading, inland freight, port charges) and the ocean/air freight. Even though the seller bears the carriage costs, it does not have to pay the cost of insuring the freight during transport. The transported goods’ responsibility is transferred from the seller to the buyer when the freight reaches the destination port. From here onwards, the buyer is responsible for the port charges, customs, import duties, and transport of the goods to the final destination. If multiple carriers are being used, the goods are considered delivered when handed over to the first or main carrier.

Incoterm CIP should be considered in case the buyer requires the seller to obtain insurance.

CIP is quite similar to CPT, the seller has the same responsibilities as CPT, but in addition, the seller is also required to bear the insurance charge until the goods reach the agreed-upon location. 

As per Incoterms 2010, the seller was only obliged to procure a minimum (110% of the contract value) level of insurance coverage of Institute Cargo Clauses (C) or a similar set of clauses. However, with Incoterms 2020, the insurance cover level that the seller must provide has increased, and it must now be compliant with Institute Cargo Clauses (A) or a similar set of clauses. In both cases, if the buyer wants an additional insurance cover, they are responsible for arranging it themselves.

The policy should be made out in the same currency as that of the contract. It should allow both the involved parties and anyone else with an insurable interest to make a claim.

Delivery is fulfilled when the seller places the goods at the buyer’s disposal on the arriving means of transport, ready to be unloaded at the pre-agreed destination (usually buyer’s destination port or terminal). The seller bears no obligation to transport the goods to the final destination of the buyer.

The seller shall assume all risks and cover all costs such as origin costs, transport (export fees, carriage, destination port charges), and unloading charges at import location. All charges after the unloading (import duty, taxes, customs, and on-carriage) are borne by the buyer. 

However, any delay, demurrage, or detention charges will generally be borne by the seller. The seller must note that although insurance is not mandatory, they must be wary of the number of risks involved in the process.

DAT (Delivered at Terminal) was replaced with the term DPU in Incoterms 2020 to remove the confusion that arose in the past. ‘Delivery at Terminal (unloaded), however, required the word “terminal” that caused the aforementioned confusion. The new term Delivery at Place Unloaded eliminates this problem by covering any unloading place.

Delivery is fulfilled when the seller places the goods at the buyer’s disposal on the arriving means of transport, ready to be unloaded at the pre-agreed destination. DAP slightly differs from DPU because DAP dictates that the seller must also pay for the on-carriage cost of goods till their final destination.

All the necessary packing for shipment, necessary legal formalities in the exporting country are to be completed by the seller. The cost and risk of which are to be borne by the same. Under DAP terms, the seller also has to pay for the carriage, terminal expenses (if any applicable), and the necessary unloading cost upon arrival of goods at the final destination. The buyer bears no shipment costs apart from bearing the cost of customs clearance and import duties and taxes. Any delay or demurrage charges during shipping are to be borne by the seller.

Delivery is made when the seller makes the goods available for the buyer, cleared for import, and ready for unloading at the final destination of the buyer. The seller is responsible for paying all costs in bringing the goods to the destination, including import duties (customs formalities and duties) and taxes. Simply put, the seller has to bear all the responsibilities and costs of shipment of the goods. 

On the polar opposite end of EXW, the term DDP places maximum obligations on the seller and minimum obligations on the buyer.

The seller delivers when the goods are suitably packaged and cleared for export placed alongside (e.g., a quay or a barge) the buyer’s vessel at the agreed upon port of shipment. At this point, the responsibility of the seller is transferred onto the buyer, and the buyer has to bear all costs and risks of loading the goods(onto the vessel) and any further cost from here on. The seller is required to pay for the export terminal charges. The seller may arrange a freight contract upon the buyer’s request or if the buyer fails to arrange for transport by the scheduled date of delivery. The buyer shall bear the cost and risks of the said transport. The seller must inform the buyer of the delivery arrangements in time so that the buyer can sort out insurance arrangements

FAS should be used only for non-containerized sea freight and inland waterway transport.

The seller delivers when the goods are suitably packaged and cleared for export, placed safely loaded aboard the buyer’s vessel at the agreed upon port of shipment. The buyer bears all further costs (such as insurance, freight, and import) and risks after the goods are loaded aboard their vessel. The seller must pay for the export terminal charges and the loading of goods onto the buyer’s vessel. The seller may arrange a freight contract upon the buyer’s request or if the buyer fails to arrange for transport by the scheduled date of delivery. The buyer shall bear the cost and risks of the said transport. The seller must inform the buyer of the delivery arrangements in time so that the buyer can sort out insurance arrangements.

FOB should only be used for non-containerized sea freight and inland waterway transport. However, If a supplier insists on using FOB for containerized goods, the buyer should ensure that the selected insurance covers the goods’ warehouse to warehouse’.

The seller delivers when the goods are suitably packaged and cleared for export, placed safely loaded aboard the buyer’s vessel at the agreed upon port of shipment. The seller must pay for the carriage of goods up to the agreed-upon port of shipment. Once the goods are safely stowed on board, their responsibility is transferred onto the buyer even though the seller is paying for the freight contract.

Incoterm CFR must be used only for non-containerized sea freight and inland waterway transport; for all other modes of transport, it must be replaced with Incoterm CPT.

CIF is quite similar to CFR, the seller has the same responsibilities as CFR, but in addition, the seller is also required to bear the insurance charge until the goods reach the agreed upon port of shipment. This term must only be used for maritime transport.

As per Incoterms 2010, the seller was only obliged to procure a minimum (110% of the contract value) level of insurance coverage of Institute Cargo Clauses (C) or a similar set of clauses. However, with Incoterms 2020, the level of insurance cover that the seller must provide has increased, and it must now be compliant with Institute Cargo Clauses (A) or a similar set of clauses. In both cases, if the buyer wants an additional insurance cover, they are responsible for arranging it themselves.

Updated Costs and Listings

Owing to some carriers changing their pricing, the sellers were often faced with new terminal handling charges. Incoterms 2010’s ambiguity on the subject led to the 2020 version now providing much more detail around costs. This now appears under the A9/B9 sections of the rule which clearly state the costs that are allocated to each party.

Increased Security Requirements, Allocations and Costs

Incoterms 2020 rules now provide more details around security allocations and necessary costs. For each Incoterm rule, the security allocations have been added to A4/A7, and the associated costs have been added to A9/B9.

Buyer’s and Seller’s Own Transport

Earlier it was assumed that all transport would be undertaken by a third party provider, but Incoterms 2020 allows for the buyer or seller to arrange for their own means of transport. 

This allows the buyer to arrange for their own means of transport under the FCA rule and the same for the seller under DAP, DPU, and DDP.

One must have a complete and an in depth understanding of all the shipping terms and proactively take some time to assess the impact periodic updation of Incoterms might have on one’s business. Should any troubling issue arise with any of your orders or shipments due to updation of Incoterms or incorrectly used shipping term, invariably consider seeking professional legal advice before making any changes to your business. Although Incoterms rules are detailed, they do not address every contingency of an international transaction, leaving some terms to the discretion of the parties involved.