What are Incoterms® & Incoterms® 2020?

On January 1, 2020, the International Chamber of Commerce (ICC) released the latest edition of its International Commercial Terms, Incoterms® 2020. Incoterms® are a set of globally recognized standards or rules that define the responsibilities of sellers and buyers in the transportation and delivery of goods.

First published in 1936, Incoterms® were created as a method of preventing misunderstandings and disputes between sellers and buyers trading between different countries with different trade practices. As international trade evolved, so did transportation modes, import/export regulations, and technology. The ICC continues to update Incoterms® to reflect these changes, with Incoterms® 2020 being the ninth edition.

The following provides an overview of Incoterms®, the benefits of using them, and the changes made in the 2020 edition. It is only a summary to provide a general understanding of the terms and how they apply to international shipping. Incoterms® are copyright of the International Chamber of Commerce and we recommend visiting ICC’s website to order the official Incoterms® 2020 rules.
 
What are the Benefits of Using Incoterms® in International Trade?

When shipping products or equipment internationally there are many points and costs along the way that either the seller or the buyer are responsible for. Unless specified in a contract of sale, the points at which each party is liable may be unclear or open for misinterpretation. Incoterms® clearly identifies the points at which liability for transportation, risk, and cost transfers from the seller to the buyer.

Incoterms® defines the points at which liability for transportation, risk, and cost transfers from the seller to the buyer.

For example, imagine you are a Canadian retailer or Procurement Manager purchasing products or equipment from a seller in Europe. You have agreed upon a purchase price and payment terms and the product is being manufactured or prepared for shipping. But when negotiating your sales contract, did you determine who is responsible for:

  • Arranging the transportation of the goods from Europe to Canada?
  • Pick up and pre-carriage to the shipping or airport terminal?
  • Preparing and filing documentation for export clearance and paying the associated fees?
  • Loading the goods onto the cargo ship?
  • Arranging and paying for cargo insurance on your goods or equipment?
  • Delivery of your goods to your warehouse or project site?
  • Customs clearance for the import of the product into Canada?

Each of these points in the shipping journey have associated costs and risks. Incorporating Incoterms® into your sales contracts ensures these questions are answered and each party understands their responsibilities. In fact, including Incoterms® in your sales contracts provides many benefits:

  • Better planning for both buyer and seller;
  • Faster delivery of the goods to the buyer and payment to the seller;
  • A healthy business relationship between the buyer and seller;
  • Avoidance of disputes and misunderstandings (and the potential for increased costs!)

 
What Incoterms® are NOT

It’s important to understand that Incoterms® are not law – they are a set of standards that are globally recognized and accepted by the international trade community. Accordingly:

  • Incoterms® do not apply to the contract of carriage with the carrier.
  • Incoterms® are not a contract of sale and, therefore, do not establish the terms of a contract of sale, such as:
    • Description of Goods
    • Transfer of Ownership
    • Price Payable
    • Method of Payment
    • Liability
    • Remedies for Dispute Resolution
    • Breach of Contract

Note: While they are not law, Incoterms® are legally binding if incorporated into a commercial sales contract signed between the buyer and the seller.
 
How Incoterms® Works

Incoterms® 2020 includes 11 terms divided into two groups according to method of transport:

  1. Seven (7) terms are applicable to Any Mode of Transport / Multimodal (e.g. containerized goods)
  2. Four (4) terms are used specifically for Sea and Inland Waterway Transport (e.g. bulk / non-containerized goods).

Each Incoterms® rule indicates each party’s responsibilities and point at which risk transfers from the seller to the buyer.

The term selected should be appropriate for the goods and method of transportation and should clearly state whether the parties want to include additional responsibilities (e.g. arranging insurance coverage).

To incorporate Incoterms® into your contract of sale:

  1. Choose the appropriate rule;
  2. Specify your place or port of delivery as specific as possible;
  3. Specify the version of Incoterms® you are using.

For example:

FCA example under Incoterms® 2020

Note: Previous versions of Incoterms® (e.g. 2010) may still be used. Always indicate the version you are using to avoid uncertainty.

Remember! Incoterms® do not define every aspect of the transaction. Any other instructions that modify or clarify the terms can be written into the contract of sale.
 
Overview of the 11 Incoterms®

Rules for Any Mode of Transport / Multimodal

Ex Works (EXW)

Ex Works provides the absolute minimum obligation and risk to the seller and the highest to the buyer. The buyer bears all risks and costs as soon as he collects the goods at the seller’s location. The seller must only make the goods available to the buyer (the seller does not even have to load the goods onto the buyer’s truck!)

Free Carrier (FCA)

Under FCA, the buyer arranges and pays for transport and the seller delivers the goods (export-cleared) to the buyer’s chosen carrier. The seller’s responsibilities end either:

  1. When the goods are loaded onto the buyer’s truck at the seller’s premises; or
  2. When they are placed at the buyer’s disposal (unloaded) at a cargo terminal named by the buyer.

The buyer then assumes all risks and costs associated with the delivery of the goods to destination.

Carriage Paid To (CPT)

The seller is responsible for export clearance and arranging pre-carriage and international transportation to the named place of destination. However, they are not responsible for insurance on the goods. Under CPT there are two critical transfer points:

  1. The point where the seller arranges and pays for carriage; and,
  2. The point where risk transfers from the seller to the buyer.

In addition to the onward transport and customs clearance at destination, the buyer is responsible for insurance and bears all risk once the goods have been handed over to the international carrier at the port of origin.

Carriage and Insurance Paid To (CIP)

Similar to CPT, the seller is responsible for export clearance and arranging transport to the named place of destination. The buyer still bears all risk once the goods have been handed over to the international carrier, however the seller is now responsible for insurance coverage.

Delivered at Place (DAP)

Under DAP, the seller arranges and bears all the costs and risks associated with export clearance and delivering the goods to the named place of destination ready for unloading. The buyer is responsible for customs clearance and offloading.

Delivered at Place Unloaded (DPU)

A new Incoterms® 2020 rule, DAP replaces Delivered at Terminal (DAT) to recognize that delivery of goods may take place somewhere other than a cargo terminal. The seller is responsible for all transport, risk, and cost and unloading the goods at the destination with the exception of import clearance.

Delivered Duty Paid (DDP)

This term exposes the seller to the highest risk and costs and is the absolute lowest obligation and risk for the buyer. The seller is responsible for transport, risk, and costs and unloading the goods at the destination. It is also the only term in which the seller arranges for customs clearance and pays import duties. Note: Goods and Services Tax (GST) is not covered under the DDP term; a separate clause on the invoice should indicate the party responsible for payment of GST.

DDP sounds appealing for the buyer, however, they have little control of the type of transport selected, delays, and duties/taxes, contributing to additional transport or duty/tax costs.

Rules for Sea and Inland Waterway Transport

Free Alongside Ship (FAS)

The seller clears the goods for export and delivers the goods when they are placed alongside the cargo ship selected by the buyer at the named port of loading. The buyer is responsible for loading the goods onto the ship and all transport, costs, and risks from that point forward.

Free on Board (FOB)

The seller is responsible for clearing the goods for export, delivering them to the port of shipment, and loading them on board the ship. Once the goods are on board, costs and risks transfer to the buyer.

Cost and Freight (CFR)

The seller clears the goods for export and delivers the goods when they are onboard the ship. They are responsible for the costs of transport to the named port of destination. However, the buyer bears the risk for the goods as soon as they are loaded onto the ship at the port of origin.

Cost, Insurance and Freight (CFR)

Similar to CFR, except now the seller must also arrange and pay for minimum insurance coverage. They clear the goods for export and deliver the goods when they are onboard the ship. They are responsible for the costs of export clearance, transport, and insurance coverage to the named port of destination. The buyer still bears the risk for the goods as soon as they are loaded onto the ship at the port of origin.

Changes Introduced in Incoterms® 2020

DAT Changed to DPU

Recognizing delivery of goods may take place somewhere other than a cargo terminal, Delivered at Terminal (DAT) has been changed to Delivered at Place Unloaded (DPU).

FCA On-Board Bill of Lading

One of the biggest drawbacks of the FCA term has been the seller’s ability to obtain a bill of lading with on-board notation to satisfy banking requirements under a Letter of Credit (so they can get paid!).

Under FCA, delivery is completed when the seller loads the goods onto the buyer’s transport for pre-carriage. As the seller does not directly load the goods onto the international carrier, the carrier (or buyer’s freight forwarder) has no obligation to provide proof of loading to the seller. Incoterms® 2020 allows the buyer to instruct the international carrier to issue the on-board notation to the seller. The seller then forwards the Bill of Lading to the buyer so that they do not take on the responsibility of the contract of carriage with the carrier.

Increased Insurance Coverage

Incoterms® 2020 requires the seller to obtain a higher level of insurance under the CIP term. Increasing from minimum coverage under Institute Cargo Clause C, the seller is now responsible for purchasing total (all risk) coverage under Clause A. However, the seller and buyer are open to negotiate higher or lower levels of coverage.

As CIP is generally used in multimodal transport (containerized, manufactured goods), this change has been made to allow for flexibility in insurance dependent upon the type and transport mode of the goods.

Consideration for Use of Own Transport

Previous versions of Incoterms® assumed the seller or buyer would be hiring a third party for transport. Incoterms® 2020 allows sellers and buyers using their own trucks to establish a Contract of Carriage.

Increased Emphasis on Security

Due to increased security measures in the shipping industry, Incoterms® 2020 puts greater emphasis on responsibilities and costs associated with security requirements.

Better User Experience

Incoterms® 2020 introduces formatting changes to make the terms and associated responsibilities clearer for sellers and buyers. The order has been changed to make it easier to identify the differences between terms. Cost allocations between the seller and the buyer have been clarified under one section. Guidance Notes are now called “Explanatory Notes” and have been expanded to include better descriptions (and illustrations) of Incoterms® and how they should be used.
 
We Can Help

Incoterms® can be complex and are often applied incorrectly, costing the buyer or seller time and money. We can assist in selecting the appropriate terms for your contracts and answer any questions you may have about Incoterms® or international shipping. Contact our Freight Forwarding Department or your local PF Collins office today for assistance.

 

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.