Incoterms 2020 - all you need to know !

The Incoterms rules or International Commercial terms are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) widely used in international commercial transactions. A series of three-letter trade terms related to common sales practices, the Incoterms rules are intended primarily to clearly communicate the tasks, costs and risks associated with the transportation and delivery of goods. The Incoterms rules are accepted by governments, legal authorities and practitioners worldwide for the interpretation of most commonly used terms in international trade. They are intended to reduce or remove altogether uncertainties arising from different interpretation of the rules in different countries. First published in 1936, the Incoterms rules have been periodically updated, with the ninth version - Incoterms 2020 - having been published as ICC celebrated its Centenary in 2019. "Incoterms" is a registered trademark of the ICC.

International Commercial Terms, known as "Incoterms", are internationally accepted terms defining the responsibilities of exporters and importers in the arrangement of shipments and the transfer of liability involved at various stages of the transaction. Incoterms do not cover ownership or the transfer of title of goods. It is crucial to agree on an Incoterm at the start of a negotiation/ quotation of a sale, as it will affect the costs and responsibilities involved in shipping, insurance and tariffs. The new Incoterms 2020 rules were revised by the International Chamber of Commerce and became effective January 1, 2020.
In any sales transaction, it is important for the seller and buyer to agree on the terms of sale and know precisely what is included in the sale price. Exporters should choose the Incoterm that works best for their company, but also be prepared to quote on other terms. Inexperienced exporters may want to use the Incoterm "Ex Works" (EXW), because this term carries the least burden for them. Under EXW, an exporter's responsibility ends at their facility's loading dock, which includes making the goods available for pick up and providing any product information needed for filing the Electronic Export Information (EEI). The importer's agent (i.e. their designated U.S. freight forwarder) will arrange and pay for the pre-carriage, shipping, insurance and any additional costs from the exporter's door. A sale based on the Incoterm "CIF", on the other hand, requires the exporter to arrange and pay for the pre-carriage, shipping, and insurance to a named port. In this case, the sale price (invoice) includes not only the (C)ost of goods, but also (I)nsurance and (F)reight costs that the importing buyer pays the exporting seller. When designating the Incoterm on a commercial invoice or a quotation to the buyer, the term should be followed by the city or port of load/discharge, such as "EXW Factory, Richmond, VA" or "CIF Rotterdam". Using the actual address is better to avoid any confusion or misinterpretation. Communication throughout the entire process is crucial. For example, under Ex Works, the shipper should notify the importer when the goods are ready and after they have been picked up by the importer's selected carrier. The exporter's freight forwarder often provides the vessel and sail date, or air cargo service used, and any ocean bill of lading or airway bill number to keep the parties informed of the arrangements and status of the shipment (even though technically under Ex Works the exporter's responsibility ends at their loading dock). The most burdensome Incoterm for the exporter is Delivered Duty Paid (DDP), because all arrangements and costs are borne by the exporter, usually with the assistance of agents (freight forwarders and customs house brokers). With DDP, the exporter bears all risks and costs of transportation, including duties and tariffs, until the goods are received by the importer, usually at the importer's factory or warehouse. Since DDP represents the maximum obligation to the seller, it is not recommended for companies that are new-to-export.

One rule of the 2010 version ("Delivered at Terminal", DAT) was removed, and is replaced by a new rule ("Delivered at Place Unloaded", DPU) in the 2020 rules.
The modifications affect obligations, risk transfer, and cost sharing for the seller and buyer, resulting in better clarification and application of the eleven (11) Incoterms, and consistent with the way global trade is actually conducted since the last update in 2010.

FAS - Free Alongside Ship:

The seller delivers when the goods are placed alongside the buyer's vessel at the named port of shipment.
This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that moment.
The FAS term requires the seller to clear the goods for export, which is a reversal from previous Incoterms versions that required the buyer to arrange for export clearance. However, if the parties wish the buyer to clear the goods for export, this should be made clear by adding explicit wording to this effect in the contract of sale.
This term should be used only for non-containerized seafreight and inland waterway transport.

FOB - Free On Board:

Under FOB terms the seller bears all costs and risks up to the point the goods are loaded on board the vessel.
The seller's responsibility does not end at that point unless the goods are "appropriated to the contract" that is, they are "clearly set aside or otherwise identified as the contract goods". Therefore, FOB contract requires a seller to deliver goods on board a vessel that is to be designated by the buyer in a manner customary at the particular port. In this case, the seller must also arrange for export clearance.
On the other hand, the buyer pays cost of marine freight transportation, bill of lading fees, insurance, unloading and transportation cost from the arrival port to destination.
FOB should only be used for non-containerized seafreight and inland waterway transport. However, FOB is commonly used incorrectly for all modes of transport despite the contractual risks that this can introduce.

CFR - Cost and Freight:

The seller pays for the carriage of the goods up to the named port of destination.
Risk transfers to buyer when the goods have been loaded on board the ship in the country of Export.
The seller is responsible for origin costs including export clearance and freight costs for carriage to the named port.
The shipper is not responsible for delivery to the final destination from the port (generally the buyer's facilities), or for buying insurance. If the buyer requires the seller to obtain insurance, the Incoterm CIF should be considered.
CFR should only be used for non-containerized seafreight and inland waterway transport; for all other modes of transport it should be replaced with CPT.

CIF - Cost, Insurance and Freight:

Risk passes to buyer when delivered on board the ship.
Seller arranges and pays cost, freight and insurance to destination port.
Adds insurance costs to CFR.

EXW - Ex Works:

Seller delivers (without loading) the goods at disposal of buyer at seller's premises.
Long held as the most preferable term for those new-to-export because it represents the minimum liability to the seller.
On these routed transactions, the buyer has limited obligation to provide export information to the seller.

FCA - Free Carrier:

Seller delivers the goods to the carrier and may be responsible for clearing the goods for export (filing the EEI).
More realistic than EXW because it includes loading at pick-up, which is commonly expected, and sellers are more concerned about export violations.

CPT - Carriage Paid To:

Seller delivers goods to the carrier at an agreed place, shifting risk to the buyer, but seller pays cost of carriage to the named place of destination.

CIP - Carriage and Insurance Paid To:

Seller delivers goods to the carrier at an agreed place, shifting risk to the buyer, but seller pays cost of carriage and insurance to the named place of destination.
CIP requires the seller to insure the goods for 110% of the contract value under Institute Cargo Clauses (A) of the Institute of London Underwriters, unless specifically agreed by both parties. The policy should be in the same currency as the contract, and should allow the buyer, the seller, and anyone else with an insurable interest in the goods to be able to make a claim.
CIP can be used for all modes of transport, whereas the Incoterm CIF should only be used for non-containerized sea-freight.

DPU - Delivered at Place Unloaded:

This Incoterm requires that the seller delivers the goods, unloaded, at the named place of destination. The seller covers all the costs of transport (export fees, carriage, unloading from main carrier at destination port and destination port charges) and assumes all risk until arrival at the destination port or terminal.
The terminal can be a port, airport, or inland freight interchange, but must be a facility with the capability to receive the shipment. If the seller is not able to organize unloading, they should consider shipping under DAP terms instead.
All charges after unloading (for example, import duty, taxes, customs and on-carriage) are to be borne by buyer. However, it is important to note that any delay or demurrage charges at the terminal will generally be for the seller's account.
Some uncertainty has emerged since Incoterms 2020 were adopted as to the meaning of "unloaded" when goods are delivered in a container, usually by sea, as the removal of the container from the incoming vessel may suggest that it has been "unloaded", but the goods themselves are not yet "unloaded" while they remain in the container.

DAP - Delivered at Place:

The seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination.
Under DAP terms, the risk passes from seller to buyer from the point of destination mentioned in the contract of delivery.
Once goods are ready for shipment, the necessary packing is carried out by the seller at their own cost, so that the goods reach their final destination safely. All necessary legal formalities in the exporting country are completed by the seller at their own cost and risk to clear the goods for export.
After arrival of the goods in the country of destination, the customs clearance in the importing country needs to be completed by the buyer, e.g. import permit, documents required by customs, etc., including all customs duties and taxes.
Under DAP terms, all carriage expenses with any terminal expenses are paid by seller up to the agreed destination point. The necessary unloading cost at final destination has to be borne by buyer under DAP terms.

DDP - Delivered Duty Paid

Seller bears cost, risk and responsibility for cleared goods at named place of destination at buyers disposal.
Buyer is responsible for unloading. Seller is responsible for import clearance, duties and taxes so buyer is not "importer of record".
This term places the maximum obligations on the seller and minimum obligations on the buyer. No risk or responsibility is transferred to the buyer until delivery of the goods at the named place of destination.

Determine ownership or transfer title to the goods, nor evoke payment terms.
Apply to service contracts, nor define contractual rights or obligations (except for delivery) or breach of contract remedies.
Protect parties from their own risk or loss, nor cover the goods before or after delivery.
Specify details of the transfer, transport, and delivery of the goods. Container loading is NOT considered packaging, and must be addressed in the sales contract.

Remember, Incoterms are not law and there is NO default Incoterm!