INCOTERMS ® 2020 – The Basic Guide

INCOTERMS ® 2020 – The Basic Guide
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  • Post last modified:October 6, 2020
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Different Incoterms meet different needs for buyers and sellers – whether you’re taking control of your cargo straight from the seller’s warehouse, or at the final port of destination – there’s an Incoterm to suit your situation.

What are Incoterms®?

Incoterms (International commercial terms) are the world’s essential terms of trade for the sale of goods. They are used to clearly define the obligation of cost, risk and responsibility of the transportation of goods between a buyer and seller.

Incoterms are helpful because they mean you don’t have to spend all your time negotiating and agreeing every detail of risk and responsibility during a cargo’s journey.

Different Incoterms meet different needs for buyers and sellers – whether you’re taking control of your cargo straight from the seller’s warehouse, or at the final port of destination – there’s an Incoterm to suit your situation.

As described on the ICC website, “The Incoterms® rules are the world’s essential terms of trade for the sale of goods. Whether you are filing a purchase order, packaging and labelling a shipment for freight transport, or preparing a certificate of origin at a port, the Incoterms® rules are there to guide you. The Incoterms® rules provide specific guidance to individuals participating in the import and export of global trade on a daily basis.”

An overview of Incoterms® 2020

The Incoterms® is a part of the trade agreement, does not establish a complete contract. in order to use it in an agreement, should using it in the form of following,

[The chosen Incoterm® rule] [Named port, place or point] Incoterms® 2020

For instance, EXW London or FOB Felixtove Incoterms® 2020

In a sales contract, Incoterms® sets out the primary responsibilities and functions of the buyer and the seller, including:

  • Where the cargo is delivered
  • When the delivery takes place
  • Custom clearance or insurance responsibilities
  • Where or when the risks of the supply chain is transferred from seller to buyer

As we mentioned above Incoterms® does not cover all details of a trade agreement such as:

  • Price of subjected goods or cargo
  • Payment terms or way of payment
  • Vessel of way of transport requirements
  • The currency of the agreement
  • Shipment documents and when to share them
  • Force majeure circumstances or termination details of the agreement
  • Compliances

Importantly, the exporter and/or importer may or may not be the seller or buyer. Exporter and importer status are specifically governed by the particular laws of the country of export and country of import.
Incoterms identify risk and cost to the seller and buyer, but do not identify title transference.

Incoterms per groups

Currently, there are 11 incoterms divided in groups according to the way the goods are delivered, and the means of transportation involved.

Group E: Buyer responsible for all carriage

EXW – Ex Works – seller delivers when it places goods at disposal of the buyer. They do not need to load goods or clear them for export.

Group F: Buyer arranges main carriage

FAS – Free Alongside Ship – the seller delivers when the goods are placed alongside the vessel (e.g., on a quay or a barge) chosen by the buyer. The risk of loss of or damage to the goods passes to the buyer when the goods are alongside the ship.

FCA – Free Carrier – seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises or another specifically named place.

FOB – Free On Board – the seller delivers the goods on board the vessel chosen by the buyer at the named port of shipment. The risk of loss of or damage to the goods passes to the buyer when the goods are on board the vessel.

Group C: Seller arranges main carriage, but risk passes before main carriage

CFR – Cost and Freight – follows the same procedure as “Free On Board” but the seller must contract for and pay the costs of freight necessary to bring the goods to the named port of destination.

CIF – Cost, Insurance and Freight – follows the same procedure as “Cost and Freight” but the seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage.

CPT – Carriage Paid To – seller delivers the goods to the carrier or another person nominated by the seller. The seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.

CIP – Carriage And Insurance Paid To – the same as “Carriage Paid To” but the seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage.

Group D: Seller arranges main carriage, risk passes after main carriage

DPU – Delivered At Place Unloaded (replaces Incoterm® 2010 DAT) – Delivered At Terminal – the seller delivers when the goods, once unloaded from transport, are placed at the disposal of the buyer at a named terminal at the named port or place of destination. The seller bears all risk until that point.

DAP – Delivered At Place – the seller delivers when the goods are placed at the disposal of the buyer before being unloaded at the named place of destination. The seller bears all risks involved in bringing the goods to the named place.

DDP – Delivered Duty Paid – the seller delivers when the goods are placed at the disposal of the buyer and cleared for import, before being unloaded at the destination. The seller has an obligation to clear the goods not only for export but also for import, to pay any duties and to carry out all customs formalities. DDP is just opposite of EXW.

Rules for sea and inland waterway transportRules for any mode of transport
FAS – Free Alongside ShipEXW – Ex Works
FOB – Free On BoardFCA – Free Carrier
CFR – Cost and FreightCPT – Carriage Paid To
CIF – Cost, Insurance and FreightCIP – Carriage and Insurance Paid To
DPU – Delivered at Place Unloaded
DAP – Delivered at Place
DDP – Delivered Duty Paid

Under each Incoterm the ten articles have been restructured as shown below:

  • A1/B1 General obligations
  • A2/B2 Delivery/Taking delivery
  • A3/B3 Transfer of risks
  • A4/B4 Carriage
  • A5/B5 Insurance
  • A6/B6 Delivery/transport document
  • A7/B7 Export/import clearance
  • A8/B8 Checking/packaging/marking
  • A9/B9 Allocation of costs
  • A10/B10 Notices
Photo by chuttersnap on Unsplash

What are the key changes in Incoterms® 2020

  • The Incoterms® FCA (Free Carrier) now provides the additional option to make an on-board notation on the Bill of Lading prior loading of the goods on a vessel.
  • The costs now appear centralized in A9/B9 of each Incoterms® rule.
  • CIF now requires at least an insurance with the minimum cover of all risks, subject to the cargo.
  • CIP requires at least an insurance with the minimum cover of listed risks, subject to the cargo.
  • The rule Delivered at Terminal (DAT) has been changed to Delivered at Place Unloaded (DPU) to clarify that the place of destination could be any place and not only a “terminal”.
  • The Incoterms® 2020 now explicitly shifts the responsibility of security-related requirements and ancillary costs to the seller.

Can Incoterms® be used in the United Kingdom?

The United Kingdom is not the authorize party of the INCOTERMS, hence trade is regulated by the Uniform Laws of the Sale of Goods Act 1979 and case laws. Nevertheless, trade agreements can be agreed upon by both parties before the trade. This meaning, the trading contract will serve the buyer and seller’s best interests when drafting the contract either following the ICC guidelines or the Sale of Goods Act 1979’s enactments.

Get a copy of the official ICC Incoterms® 2020 book

You can purchase the official Incoterms® 2020 book from the International Chamber of Commerce here.

Foodnomy is here to help

Incoterms also help us in our job, because if an issue does occur – for example if your cargo didn’t get on the vessel it was scheduled to board – then Incoterms let us know who takes responsibility for any risks or extra costs involved.

Our customer care team is award-winning and we pride ourselves on supporting customers and keeping you informed throughout all the shipping processes and stages.

Got any more questions? Get in contact with our team today and see how we can help you!

Articles referenced

Full Incoterm descriptions– https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-rules-2010/

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