Incoterms is a set of predefined international trade rules published by the International Chamber of Commerce (ICC).
These rules specify the contractual clauses to be used and define the conditions of freight transport, including the buyer and seller's different responsibilities.
Their inclusion in sales contracts significantly reduces the possibility of misunderstandings that could lead to legal complications.
The purpose of the Incoterms 2020 rules and terms remains to facilitate the conduct of global trade by providing a standard set of conditions that clearly define the seller and buyer obligations.
One of the more essential parts is the delivery parity clauses. They decide when the responsibility and risks in selling goods pass from the seller to the buyer.
Incoterms is a globally recognized standard on the use of domestic and international trade terms. The goal of Incoterms is to provide retailers around the world with security and clarity in doing business.
It is essential because it allows trading partners to use clauses to regulate: costs and responsibilities for any transport route, place and time of goods delivery, and liability and safety obligations in case of damage or loss of goods.
As the nature of international trade changes, so does the need to update the basic rules and regulations that govern them. The rules are revised every ten years, taking into account world trade trends.
The delivery terms (parities) of Incoterms 2020 came into force on 1 January 2020. The new Incoterms 2020 rules replace the current Incoterms 2010. They are described more simply so that industry users, not just lawyers, can understand them.
For companies, this means changes to the general trade clause and essential innovations that need to be taken into account when preparing international trade agreements.
What you need to know to integrate the new rules into your business
The latest Incoterms update includes eleven rules that are divided into two classes. You can apply the first class of rules to any mode of transportation. The second class of rules implements if seaports or river ports are the places of delivery of the goods.
Seven Incoterms® 2020 rules for all modes of transport:
DPU (Delivered at Place Unloaded)
In addition to the 11 Incoterms 2020 rules so far, the DPU rule is a novelty. DPU Incoterms replaces the old DAT, with an additional requirement for the seller to unload the goods from the incoming means of transport.
A significant change in Incoterms® 2020 compared to the 2010 edition is the renaming of the DAT clause (Delivered at Terminal) in the DPU (Delivered at Place Unloaded).
The DPU retains all features of the DAT conditions. The name is changed to make it easier to define the place of delivery - it is no longer a "terminal" but a "place". The seller assumes the additional risk of delivery and unloading of the goods at the designated destination. It is the only rule that requires the seller to unload the goods at the destination.
FCA (Free Carrier)
The most significant change in the Incoterms 2020 rules relates to the FCA (Free Carrier). The FCA now allows the issuance of a Bill of Landing after loading goods on a ship.
The FCA Incoterms 2020 rule provides a potential solution - the buyer and seller may agree in the sales contract that the buyer instructs the carrier to deliver the requested bill of lading to the seller. Still, there is no guarantee that the carrier will do so. Even if he does, the document will not be issued before the goods are loaded.
CIF (Cost Insurance and Freight) i CIP (Carriage and Insurance Paid To)
The Incoterms 2020 rules for CIF (Cost Insurance Freight) and CIP (Carriage Insurance Paid) set out new standard insurance contracts and different minimum insurance protection. The distribution of costs between buyer-seller is specified more precisely in one article, which describes values for which both the seller and the buyer are responsible.
Under Incoterms 2020 rules, the seller is responsible for purchasing a higher level of insurance. For CIF, insurance requirements have not changed.
FCA (Free Carrier), DAP (Delivered at Place), DPU (Delivered at Place Unloaded) i DDP (Delivered Duty Paid)
Under the FCA, DAP, DPU, and DDP clauses, the buyer or seller can transport with their means of transport. The FCA (Free Carrier), DAP (Delivered at Place), DPU (Delivered at Place Unloaded) and DDP (Delivered Duty Paid) now consider the transport organization by the buyer and seller instead of using a third party.
EXW (Ex Works) i FCA (Free Carrier)
The novelty of the EXW and FCA clauses is that the seller must (at the buyer's expense and risk) assist the buyer in arranging the transport (organization). In all F clauses (FAS, FCA and FOB), it is now valid for the seller to arrange transportation for the buyer.
Incoterms 2020 has clear rules for sharing responsibilities and associated costs. It is now precisely agreed who bears the costs of export customs clearance for each clause and who bears the costs of import customs clearance.
Except in the EXW and DDP clause, the rule is that the seller bears the costs of export customs clearance and related possible licenses. The buyer assumes all import costs and related permits.
Four Incoterms® 2020 rules for maritime and inland waterway transport:
FAS (Free Alongside Ship)
FAS means that the seller has fulfilled his obligation when the goods are located next to the vessel (for example, on the waterfront) designated by the buyer at the designated port of departure.
The buyer is responsible for loading the goods in his transport and everything else needed to get the products to their destination.
FOB (Free on Board)
FOB means the seller fulfilled his obligation when the goods are loaded on the vessel nominated by the buyer at the named port of shipment.
The seller has responsibility for loading the products on the transport and the buyer is responsible for everything else necessary to get the goods to the final destination.
CFR (Cost and Freight)
Seller clears the goods for export and delivers them when they are onboard the vessel at the port of shipment. The risk of loss or damage to the transfer of goods is when the products are on board.
The seller bears the freight cost to the named port of destination. The buyer assumes the goods' risk from the time goods delivers onboard the vessel at the port of shipment.
In the CFR, the seller has no obligation to purchase insurance for the buyer. It would be a good idea for the buyer to purchase additional insurance policies himself.
CIF (Cost Insurance and Freight)
The seller delivers goods to the buyer on board at the port of shipment. The risk of loss or damage during the transfer of goods is when the products are on board.
The seller fulfills the obligation when he delivers the goods to the carrier and not when the goods arrive at the destination. The seller also bears the cost of transportation and insurance to a specific destination port.
The buyer has responsibility for clearing goods for import and for costs associated with unloading the goods at the named port of destination. Once the products are on board the vessel at the port of shipment, the risk passes from seller to buyer.
All international trade transactions have two essential sides: the buyer and the seller.
Depending on which party you belong to, you have to look out for your interests and protect them, which means you want to trade on favorable terms. The Incoterms under which the transaction will take place must always be defined in any international commercial contract.
Specific Incoterms rules go in your favor if you are a buyer or cargo importer of cargo. It would be best if you chose the Incoterms that give you the most control over shipping costs. Selecting the best Incoterms for the customer is not an easy task because the final decision depends on the relationships with the seller and the resources you have.
Best Incoterms for buyers
FOB (Free on Board)
FOB is a sign that the seller has fulfilled his delivery obligation when he delivers the exported goods through the ship's railing at the designated port. From that moment on, all costs and risks assume the buyer. This term is used exclusively for sea and river transport.
The advantage of choosing FOB Incoterms is its flexibility. You can choose the time and time of shipment and negotiate prices with your freight forwarder. FOB is the most commonly recommended Incoterms for importers and buyers.
EXW (Ex Works)
EXW means that the seller has delivered the goods when he makes them available to the buyer in his facility or other designated place (warehouse, workshop). The seller does not have to clear the goods for export or load them on any means of transport.
This term represents the minimum obligations for the seller who does not bear any other costs. The buyer carries all expenses, risks and responsibilities of taking over the goods at the seller's premises.
Although it is a good option for buyers, extra care should be taken when trading under EXW Incoterms. It should be used only in cases where the buyer is familiar with the import laws of the country.
DAP (Delivered at Place)
The seller should make the goods available to the buyer on an incoming means of transport prepared for unloading. The seller shall bear the cost and risk until the goods have been delivered, including customs export formalities and transit through a third country.
The buyer must take over the goods and bear the risk and cost after delivery. Prices include unloading, import formalities, customs, taxes and other post-import charges.
The changes in Incoterms 2020 try to meet two goals. The first goal is to achieve better clarity to allow parties to choose the most favorable commercial terms. The second goal is to address several industry issues that have emerged since the last edition of Incoterms 2010.
Incoterms rules do not replace a sales contract. They only define the following: which party to the sales contract must organize the delivery, the time limit within which the seller needs to deliver the goods to the buyer, and the costs borne by each party.
Incoterms cannot resolve all terms of sale, method, or time of payment agreed between the seller or buyer. It cannot determine which documents the seller must provide to the buyer to facilitate the customs clearance process in the buyer's country, the responsibility for delayed delivery, nor the dispute settlement mechanisms.
The main benefit of Incoterms is to reduce a risk
Countries have different business cultures and languages, so it is crucial to have a clearly-written contract to reduce misunderstandings.
The main benefit of Incoterms is the reduced risk in transactions. If you don't know how Incoterms affect your freight, it creates a risk that could cost you from a few thousand dollars to the complete bankruptcy of your business.
Each Incoterms provides clear rules to exporters and importers to help them understand their responsibilities and clarify gray areas of contracts. Used properly, they can significantly facilitate your business. Incoterms reduces the risk of legal complications by giving buyers and sellers a unique basis for trading practices.
If your company trades internationally, delivers or receives shipments from overseas markets, you should be aware of International Commerce Terms (Incoterms).
Incoterms are trade rules that dictate the exact delivery terms between two parties. The terms include how the goods will be delivered, who pays, who is responsible for insurance and who acts in specific procedures, such as loading and unloading of the goods.
The latest version of the new Incoterms® 2020 rules is available on the International Chamber of Commerce (ICC) website. The Incoterms application is also available. The ICC has protected the revised rules by copyright and they reflect the latest developments in commercial transactions.
The information in this blog serves only as a source for learning about the new Incoterms® 2020 rules and is not an official legal or full definition of any Incoterms. When pursuing a specific export transaction, we encourage you to conduct your in-depth supervision and to consult legal counsel.
You can also contact us at Hubbig because we are a digital platform that follows trends, applies new technologies, and provides our customers with more accessible communication and fast-ordering freight.