Industry Insights · 10min read
What Are the Incoterms® 2020?
Understand the different responsibilities, risks and costs for buyers and sellers according to the eleven Incoterms®.
In 1936, the International Chamber of Commerce (ICC) introduced the first set of Incoterms® rules in an effort to standardise definitions and rules connected to the trading of goods internationally. Since then, the ICC has updated these terms [every few years] to keep up with changes that evolve within trade. The most recent update came into effect on January 1, 2020. In the age of globalisation, standardised terms and agreements such as these are perhaps more critical than ever. By defining, recognising and adhering to these legal terms, buyers and sellers around the globe are able to trade goods seamlessly. There are 11 Icoterms® in total, seven of which apply to any mode of transport.
The allocations of risk, obligations and point of delivery for the buyer and seller of Incoterms 2020.
EXW – Ex-Works or Ex-Warehouse
EXW refers to scenarios in which the buyer picks up the goods from the seller. The location can be a factory, warehouse, store or other similar place pre-defined by the seller. All costs and risks lie with the buyer from the moment the goods are retrieved.
FCA – Free Carrier
In Free Carrier agreements, the buyer defines the carrier or location to which the seller must deliver the goods. The risk lies with the seller until the goods have been loaded onto the buyers’ mode of transport, at which point the risk is passed to the buyer. This term was optimised in 2020 to encompass the option of agreeing that the buyer directs the carrier to issue a bill of lading with an onboard notation for banks in cases where the payment method is a letter of credit.
FAS – Free Alongside Ship
In Free Alongside Ship, the buyer selects a vessel in the port, and the seller delivers the goods alongside the respective vessel (e.g., to a jetty). The seller bears the risk until the goods have been placed next to the vessel at which point the risk is transferred to the buyer.
FOB – Free On Board
According to Free On Board, the buyer selects a vessel, and the seller then delivers the goods onto this vessel. Once the goods are on the vessel, the costs and risks are transferred from the seller to the buyer.
CFR – Cost and Freight
Similar to Free on Board, in Cost and Freight, the seller selects a vessel and delivers the goods on board. However, in CFR, the seller is then still responsible for paying the costs and freight that are incurred by bringing the goods to the port of destination. Meanwhile, the seller transfers the risks to the buyer from the moment the goods are on the vessel in the port of shipment.
CIF – Cost, Insurance and Freight
In Cost, Insurance and Freight the seller delivers the goods onto a vessel selected by the seller, however, covers all freight, costs and insurance until the goods reach the port of destination. For this, the seller is legally required to ensure the minimum insurance cover. The responsibility for costs incurred for unloading the goods lies with the buyer. The buyer assumes all risk once the goods are on the vessel.
CPT – Carriage Paid To
The buyer selects an agent or carrier to which the seller delivers the goods. The seller is responsible for covering the costs of international carriage for the goods through to the place of destination.
CIP – Carriage And Insurance Paid To
In addition to the responsibilities that apply to the seller in Carriage Paid To, the seller must take out a high level of insurance for the goods—at minimum 110% of the value—during carriage that covers the buyer’s risk of loss or damage. The risk is passed from the seller to the buyer at the place of shipment.
DAP – Delivered At Place
In Delivered at Place contracts, the seller is responsible for all risks and costs until the point of unloading of goods at the country of destination. The buyer assumes the responsibility of importing the goods, which encompass the risks and costs of unloading the goods and clearing them at customs.
DPU – Delivered At Place Unloaded (replaces Incoterm® 2010 DAT)
Delivered At Place Unloaded is a newly introduced Incoterm® 2020 which replaced Incoterm® 2010 Delivered At Terminal (DAT). The wording was changed because buyers can request that the goods be unloaded at a destination that is not a terminal. With DPU, the seller assumes all risks and costs for the goods until they have been unloaded. This is the only Incoterm® in which the seller is responsible for unloading the goods. The risks and costs of importing the goods are transferred to the buyer once the goods have been unloaded.
DDP – Delivered Duty Paid
In Delivered Duty Paid, the seller assumes all risks and costs associated with bringing the goods to the place of destination. It is thereby the duty of the seller to clear the products for both export and import, pay any duty which may be incurred at either end and clear the goods for customs. The buyer assumes all risks and costs from the point of unloading.
Purchase the Incoterms 2020 rules book (hardcopy/ebook) from the International Chamber of Commerce.
Sources & further reading:
Imagery: (1) Shaah Shahidh, (2) Shunya Koide, and (3) Andres Canavesi for unsplash.com