Incoterms
Incoterms – International Commercial Terms
- DEFINITION
- FUNCTIONS
- INCOTERMS 2020
- RULES FOR ANY MODE OF TRANSPORTATION
- RULES FOR SEA AND INLAND WATERWAY TRANSPORT
- CHART: INCOTERMS 2020
DEFINITION
The international commercial operations have their origin in a contract of purchase and sale made between the importer and the exporter, which stipulates the clauses by which the respective commercial operation will be regulated. INCOTERMS (International Commercial Terms) can be considered as a set of optional international rules that the International Chamber of Commerce has gathered and defined based on the practices more or less standardized by traders. The INCOTERMS basically define the place where the seller is responsible for the merchandise and what the expenses are for him and which, therefore, will be included in the price.
FUNCTIONS
The aims of INCOTERMS are essentially as follows:
Define the transfer of expenses. The seller knows exactly when and how much to pay for his contract of sale and thus includes them in the price. This procedure allows the buyer to recognize exactly the expenses that must be added to the purchase price in order to compare with other national and international offers.
Define the transmission of risk. The buyer knows exactly the time and place from which the risks in which the goods incur during transportation are at his own expense. For this reason, the INCOTERMS define the time and place from which the responsibility of the seller ends and begins with that of the buyer. This data is extremely important to secure the merchandise.
Define the location from which the goods will exit. Indicating the exact place where the seller must deposit the merchandise and, thus, the place where the buyer will raise it.
INCOTERMS 2020
There are, fundamentally, two main changes in Incoterms® 2020, compared to the 2010 edition:
- DAT (Delivered at Terminal) is now called DPU (Delivered at Place Unloaded).
- FCA (Free Carrier) now allows Bills of Lading to be issued after loading.
Other changes include:
- CIF (Cost, Insurance and Freight) and CIP (Carriage and Insurance Paid to) establish new standardized insurance contracts, but the level of insurance remains negotiable between the buyer and the seller.
- When referring, the cost allocation between the buyer and the seller is more accurately stated – an article refers to all costs for which the seller and the buyer are responsible.
- FCA (Free Carrier), DAP (Delivered at Place), DPU (Delivered at Place Unloaded) and DDP (Delivered Duty Paid) now take into account that the buyer and seller organize their own transport, instead of using a third party .
- Security-related obligations are now more prominent.
- “Explanatory Notes for Users” for each Incoterm® have replaced the Guidance Notes for the 2010 edition and are designed to be simpler for users.
- CIP currently requires ICC A or equivalent insurance coverage as a standard. In Incoterms® 2010 it was ICC C. The insurance coverage required for CIF remains.
Rules for any Mode of Transport
The seven rules defined by Incoterms 2020, for any mode of transport are:
EXW – Ex Works (named place of delivery)
The seller places the goods available on his premises. This term states the buyer’s maximum obligation and the seller’s minimum obligations. The seller does not need to load the goods on any collecting vehicle, nor does it need to clear the goods for export. EXW means that the seller makes the goods available at their premises or at another named place (works, factory, warehouse etc). The buyer pays all transportation costs and also assumes the risks to deliver the goods to their final destination. The seller does not load the goods for transportation or release them for export. If the seller loads the goods, they do so at the total cost and risk of the buyer. If the parties wish for the seller to be responsible for loading the goods at the time of departure and assume the risk and all loading costs, this should be made clear by adding an explicit expression to that effect in the sales contract.
FCA – Free Carrier
The seller delivers the goods, cleared for export, at the disposal of the first carrier (appointed by the buyer), at the named place. The seller pays for transportation to the named place of departure, and the risk is transferred when the goods are delivered to the first carrier.
CPT – Carriage Paid To (named place of destination)
Seller pays shipping costs. The risk is transferred to the buyer after the goods are delivered to the first carrier.
CIP – Carriage Paid to
The multimodal transport in containers equivalent to CIF. The seller pays for transportation and insurance to the named destination point, but the risk is transferred when the goods are delivered to the first carrier.
DAT – Delivered at Terminal
The seller pays for transport to the terminal, with the exception of costs related to importation (customs clearance), and assumes all risks up to the point at which the goods are unloaded at the terminal.
DPU – Delivered at Place Unloaded (named place of destination)
The seller delivers the goods – and transfers the risk – to the buyer when the goods, after being unloaded from the arriving means of transport, are made available to the buyer at a designated place of destination or an agreed point within that place, if such a point is agreed upon. The seller bears all risks associated with bringing the goods to the place of destination and unloading them. In this Incoterms rule, the delivery and arrival at the destination are considered the same. DPU (Delivered at Place Unloaded) is the only Incoterms rule that requires the seller to unload the goods at the destination. Therefore, the seller must ensure that they are in a position to arrange for the unloading at the designated place. If the parties understand that the seller should not bear the risk and cost of unloading, they should avoid using the DPU rule and instead opt for DAP (Delivered at Place).
DDP – Delivered Duty Paid (named place of destination)
The 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. This term places maximum obligations on the seller and minimal obligations on the buyer.
Rules for Sea and Inland Waterway Transport
The four rules defined by Incoterms 2020 for international trade where transport is entirely carried out by water are:
FAS – Free Alongside Ship
The seller delivers when the goods are placed alongside the vessel (e.g., on a quay or a barge) nominated by the buyer at the named port of shipment. The risk of loss of or damage to the goods passes when the goods are alongside the ship, and the buyer takes on responsibility for all costs from that moment onwards. The seller must take care of all bureaucratic aspects to release the goods for export. Suitable only for maritime transportation, but NOT for multimodal container transportation (see Incoterms 2020). This term is commonly used for heavy or significantly-sized cargoes.
FOB – Free on Board
The seller delivers the goods on board the vessel. The risk of loss of or damage to the goods passes when the goods are on board the vessel.The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination. Costs and risks are divided when the goods are on board the ship (this rule is new!). The seller must release the goods for export. The term is applicable for maritime and inland waterway transportation only, but NOT for multimodal container transportation (see Incoterms 2020). The buyer must instruct the seller regarding the details of the vessel and the port where the goods should be loaded, and there is no reference to, or provision for, the use of a carrier or freight forwarder. This term has been widely misused over the past three decades, since the Incoterms of 1980 clarified that FCA should be used for container transportation.
CFR – Cost and Freight
The seller must pay the costs and freight to transport the goods to the destination port. However, the risk is transferred to the buyer as soon as the goods are loaded on board the ship (this rule is new!). The maritime transport and insurance for the products are not included. This term is formally known as CNF (Cost and Freight).
CIF – Cost, Insurance and Freight
The term you are referring to is “CIF” (Cost, Insurance, and Freight). It is exactly the same as CFR, except that the seller is also responsible for paying the insurance. Only applicable to sea transport.
