Incoterms

 

Incoterms 2020

 

Incoterms 2020  is the  ninth  set  of  international contract  terms  published  by the  International Chamber of Commerce, with the first set having been published in 1936. Incoterms 2020 defines 11 rules, the same number  as defined by Incoterms 2010. 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 insurance  to be provided  under  terms  CIF and CIP has also changed,  increasing from Institute Cargo Clauses(C) to Institute Cargo Clauses (A). Under the CIF Incoterms® rule, which is reserved  for use in maritime trade and is often used in commodity trading, the Institute Cargo Clauses (C) remains the default level of coverage, giving parties the option to agree to a higher level of insurance cover. Taking into account feedback from global users, the CIP Incoterms® rule now requires a higher level of cover, compliant with the Institute Cargo Clauses (A) or similar clauses.

 

In prior  versions,  the  rules  were  divided  into  four  categories,  but  the  11  pre-defined  terms  of Incoterms 2020 are  subdivided  into two  categories  based  only on method  of delivery. The larger group of seven rules may be used regardless  of the method  of transport, with the smaller group of four being applicable only to sales that solely involve transportation by water where the condition of the goods can be verified at the point of loading on board ship. They are therefore not to be used for containerized freight, other combined transport methods,  or for transport by road, air or rail.

 

Incoterms 2020 also formally defines delivery. Previously, the term had been defined informally but it is now defined  as the  point in the  transaction  where  "the  risk of loss or damage  [to the  goods] passes from the seller to the buyer".

 

Defined terms in Incoterms

 

There  are  certain  terms  that   have  special  meaning  within  Incoterms,  and  some  of  the  more important  ones are defined below:

 

    Delivery: The  point  in the  transaction   where  the  risk of loss or  damage  to  the  goods  is transferred from the seller to the buyer

        Arrival: The point named in the Incoterm to which carriage has been paid

        Free: Seller has an obligation to deliver the goods to a named place for transfer to a carrier

    Carrier: Any person  who, in a contract  of carriage, undertakes to perform  or to procure  the performance of transport by rail, road, air, sea, inland waterway  or by a combination of such modes

        Freight forwarder: A firm that makes or assists in the making of shipping arrangements;

    Terminal: Any place, whether  covered or not, such as a dock, warehouse, container  yard or road, rail or air cargo terminal

        To clear for export: To file Shipper’s Export Declaration and get export permit

 

Variation of Incoterms

 

Parties adopting  Incoterms should be wary about  their intention  and variations. The desire  of the parties should be expressed  clearly and casual adoption  should be refrained.  Also, making additions or variations to the meaning of a certain term should be carefully done as parties'  failure to use any trade term at all can produce unexpected results.

Rules for any mode of transport

 

1.   EXW – Ex Works (named place of delivery)

 

The seller makes the goods available at their premises, or at another  named  place. This term places the maximum obligation on the buyer and minimum obligations on the seller. The Ex Works term is often used while making an initial quotation for the sale of goods without any costs included.

 

EXW means  that  a buyer incurs the risks of bringing the goods to their final destination.  Either the seller does not load the  goods on collecting vehicles and does not clear them  for export, or if the seller does load the  goods, they do so at buyer's  risk and cost. If the  parties  agree  that  the  seller should be responsible for the loading of the goods on departure and to bear the risk and all costs of such loading, this must be made clear by adding explicit wording to this effect in the contract of sale.

 

There is no obligation for the seller to make a contract of carriage, but there  is also no obligation for the  buyer  to  arrange  one  either  - the  buyer  may  sell the  goods  on  to  their  own  customer  for collection from the original seller's warehouse. However, in common practice the buyer arranges the collection  of the  freight  from  the  designated  location,  and  is responsible  for clearing the  goods through  Customs.  The  buyer  is also  responsible   for  completing  all  the  export  documentation, although  the  seller does  have  an obligation to  obtain  information  and  documents  at  the  buyer's request  and cost.

 

These documentary requirements may result in two principal issues. Firstly, the  stipulation  for the buyer  to  complete  the  export  declaration  can  be  an  issue  in certain  jurisdictions  (not  least  the European Union) where  the customs  regulations  require  the declarant  to be either  an individual or corporation  resident  within the jurisdiction. If the buyer is based outside of the customs jurisdiction, they will be unable  to clear the  goods for export, meaning  that  the  goods may be declared  in the name  of the  seller by the  buyer, even though  the  export  formalities are the  buyer's  responsibility under the EXW term.

 

Secondly, most  jurisdictions require  companies  to provide proof of export  for tax purposes.  In an EXW shipment, the buyer is under no obligation to provide such proof to the seller, or indeed to even export the goods. In a customs  jurisdiction such as the European Union, this would leave the seller liable to a sales tax bill as if the goods were sold to a domestic  customer.  It is therefore of utmost importance  that  these  matters are discussed with the  buyer before  the  contract  is agreed.  It may well be that  another  Incoterm, such as FCA seller's premises,  may be more suitable, since this puts the onus for declaring the goods for export onto the seller, which provides for more control over the export process.

 

2.   FCA – Free Carrier (named place of delivery)

 

The seller delivers the goods, cleared for export, at a named place (possibly including the seller's own premises).  The goods  can be  delivered  to  a carrier  nominated by the  buyer,  or to another  party nominated by the buyer.

 

In  many respects  this Incoterm  has replaced  FOB in modern  usage,  although  the  critical point at which the risk passes moves from loading aboard the vessel to the named place. The chosen place of delivery affects the obligations of loading and unloading the goods at that place.

 

If delivery occurs at the seller's premises, or at any other  location that  is under  the seller's control, the seller is responsible for loading the goods on to the buyer's carrier. However, if delivery occurs at any other place, the seller is deemed  to have delivered the goods once their transport has arrived at

the named  place; the buyer is responsible for both unloading the goods and loading them onto their own carrier.

 

3.   CPT – Carriage Paid To (named place of destination)

 

CPT  replaces  the  C&F  (cost  and  freight)  and  CFR  terms  for all shipping  modes  outside  of non- containerized sea freight.

 

The seller pays for the  carriage of the  goods up to the  named  place of destination.  However, the goods are considered  to be delivered when the goods have been  handed  over to the first or main carrier, so that  the  risk transfers  to buyer upon  handing goods over to that  carrier at the  place of shipment in the country of Export.

 

The seller is responsible  for origin costs including export clearance  and freight costs for carriage to the named  place of destination  (either the final destination  such as the buyer's facilities or a port of destination.  This has to be agreed to by seller and buyer, however).

 

If the buyer requires the seller to obtain insurance, the Incoterm CIP should be considered instead.

 

4.   CIP – Carriage and Insurance Paid to (named place of destination)

 

This term  is broadly similar to the above CPT term, with the exception that  the seller is required  to obtain insurance for the goods while in transit. 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 (which is a change from Incoterms 2010 where  the minimum was Institute Cargo Clauses (C)), or any similar set of clauses, 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.

 

5.   DPU – Delivered At Place Unloaded (named place of destination)

 

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.

 

6.   DAP – Delivered At Place (named place of destination)

 

Incoterms 2010 defines DAP as '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.

 

7.   DDP – Delivered Duty Paid (named place of destination)

 

Seller is responsible  for delivering the  goods to the  named  place in the  country of the  buyer, and pays all costs in bringing the goods to the destination  including import duties and taxes. The seller is not responsible  for unloading. This term  is often  used in place of the  non-Incoterm "Free In Store (FIS)". 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.

 

The  most  important  consideration  for DDP terms  is that  the  seller is responsible  for clearing the goods  through  customs  in the  buyer's  country,  including both  paying the  duties  and  taxes,  and obtaining the necessary authorizations  and registrations  from the authorities  in that country. Unless the rules and regulations  in the buyer's country are very well understood, DDP terms  can be a very big risk both in terms of delays and in unforeseen extra costs, and should be used with caution.

 

Rules for sea and inland waterway transport

 

To determine  if a location qualifies for these  four rules, please  refer  to 'United  Nations Code  for

Trade and Transport Locations (UN/LOCODE)'.

 

The four rules defined  by Incoterms 2010 for international trade  where  transportation is entirely conducted  by water are as per the below. It is important  to note that  these  terms are generally not suitable for shipments  in shipping containers; the point at which risk and responsibility for the goods passes is when the goods are loaded on board the ship, and if the goods are sealed into a shipping container it is impossible to verify the condition of the goods at this point.

 

Also of note  is that  the  point  at  which risk passes  under  these  terms  has  shifted  from  previous editions of Incoterms, where the risk passed at the ship's rail.

 

8.   FAS – Free Alongside Ship (named port of shipment)

 

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.

9.   FOB – Free on Board (named port of shipment)

 

Main article: FOB (Shipping)

 

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.  Since Incoterms  1980  introduced   the  Incoterm  FCA,  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.  In some  common  law countries such as the United States of America, FOB is not only connected with the carriage of goods by sea but also used for inland carriage aboard any "vessel, car or other vehicle."

 

10. CFR – Cost and Freight (named port of destination)

 

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 shipper 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.

 

11. CIF – Cost, Insurance & Freight (named port of destination)

 

This term  is broadly similar to the above CFR term, with the exception that  the seller is required  to obtain insurance for the goods while in transit. CIF requires the seller to insure the goods for 110% of the contract value under Institute Cargo Clauses (A) of the Institute of London Underwriters (which is a change from Incoterms 2010 where  the minimum was Institute Cargo Clauses (C)), or any similar set of clauses, unless specifically agreed by both parties. The policy should be in the same currency as the  contract.  The  seller must  also turn  over documents  necessary,  to obtain  the  goods from the carrier or to assert claim against an insurer to the buyer. The documents  include (as a minimum) the invoice, the  insurance  policy, and  the  bill of lading. These three  documents  represent the  cost, insurance,  and freight of CIF. The seller's obligation ends when the documents  are handed  over to the  buyer.  Then,  the  buyer  has to pay at the  agreed  price. Another  point  to consider  is that  CIF should only be used for non-containerized sea freight; for all other  modes of transport it should be replaced with CIP.