Incoterms® 2020 Explained – The Complete Guide

INTERNATIONAL COMMERCIAL TERMS (INCOTERMS)

When you’re shipping goods internationally, there are a few terms that you should recognize and understand. INCOTERMS are used in 31 different languages, and you can find them in sales contracts as well as letters of credit.

WHAT ARE INCOTERMS?

INCOTERMS are property of the International Chamber of Commerce and can be broken down into 4 categories: E, F, C, and D terms. Each INCOTERM is a code represented by three letters and a location. E terms refer to situations where the buyer can access the goods at the seller’s premises, while F terms involve the seller delivering the goods to a carrier. With C terms, the exporter arranges the shipping of the goods but isn’t responsible for damage. When the seller is responsible for both cost and risk, D terms are used.

HOW ARE INCOTERMS USED?

Language is important when you’re making a deal, but things can get confusing when each party speaks a different one. INCOTERMS keep everyone on the same page and describe the nature of the transaction. Different INCOTERMS would be employed for different types of transport. Some work for any kind of transportation, while others are only applicable to water transportation.

WHY INCOTERMS ARE IMPORTANT?

It’s crucial that you are as clear as possible when working on a deal that involves international shipping, INCOTERMS lay out the costs and risks in each transaction and define what each party is responsible for. These terms help keep both sides on the same page, and they help to ensure that the goods are delivered safely and efficiently.

BASICS OF INCOTERMS:

• Owned by International Chamber of Commerce
• Standard Trade Definitions, available in 31 languages
• Used by customs and banks
• Found in sales contracts and letter of credit
• Current edition is INCO 2020

INCOTERMS are a set of three-letter standard trade terms most commonly used in international contracts for the sale of goods. First published in 1936, INCOTERMS provide internationally accepted definitions and rules of interpretation for most common commercial terms.

WHAT IS THE IMPORTANCE OF INCOTERMS WHEN QUOTING?

Provides clarity about the underlying commercial transaction. INCOTERMS inform the sales contract by defining the respective obligations, costs and risks involved in the delivery of goods from the Seller to the Buyer.

INCOTERMS rules are grouped into 4 categories:

1. The “E” term: (EXW) – The only term where the seller/ exporter makes the good available at his own premises to the buyer/ importer.
2. The “F” terms: (FCA, FAS and FOB) – Terms where the seller/ exporter is responsible to deliver the goods to a carrier named by the buyer.
3. The “C” terms: (CFR, CIF, CPT and CIP) – Terms where the seller/ exporter/ manufacturer is responsible for contracting and paying for carriage of the goods, but not responsible for additional costs or risk of loss or damage to the goods once they have been shipped.
4. The “D” terms: (DAF, DES, DEQ, DDU and DDP) – Terms where the seller/exporter/manufacturer is responsible for all costs and risks associated with bringing the goods to the named place of destination.

INCOTERMS RULES EXAMPLE

Three letters followed by location: i.e. FOB Shanghai

Not all INCOTERMS are appropriate for all modes of transport. Some terms were designed with sea vessels in mind while others were designed to be applicable to all modes.

The following table sets out which terms are appropriate for each mode of transport.

EXW Ex Works

• The seller/exporter makes the goods available to the buyer in their own warehouse and is only responsible for packing the goods.
• The buyer/importer therefore bears all of the costs and responsibilities from the moment the goods cross the warehouse prior to loading. Insurance is not mandatory but should it be required it would be taken out by the buyer as they bear the risk.

This Incoterm should not be used if the seller hands the goods over anywhere other than their own premises.

FCA Free Carrier

• The seller delivers the goods to an agreed place and bears the costs and risks up to the point of delivery of those goods at the agreed place, including the cost of export clearance. The seller is responsible for inland transport and export customs clearance unless the designated place is the seller’s premises (FCA warehouse), in which case the goods are delivered there and loaded onto the means of transport arranged by the buyer at the buyer’s expense.
• The buyer bears the costs from loading on board to unloading, including insurance if taken out because they bear the risk when the goods are loaded onto the first means of transport.

New for FCA, with respect to Incoterms 2010, is that in shipping the buyer can ask their carrier to issue a Bill of Lading to the seller specifying “on board” as proof of delivery of the goods, thus facilitating the use of documentary credits. The credit is afforded to the seller by bank guarantee although they are not party to the contract of carriage.

FAS Free Alongside Ship

• The seller delivers the goods to the port of origin loading dock and bears the costs up to delivery as well as being responsible for export customs procedures.
• The buyer is responsible for loading on board, stowage, freight and other costs up to delivery at destination, including import clearance and insurance, if taken out as it is not mandatory. The buyer also bears the risk once the goods are in the loading dock prior to being loaded onto the ship.

This Incoterm is only valid for shipping and is generally used for special goods that have particular loading requirements, not usually for palletised cargo or containers.

FOB Free On Board

• The seller bears the costs until the goods are loaded onto the ship, at which point the risks are transferred as well as responsibility for export clearance and costs at origin. The seller also arranges the transport although the buyer bears the cost.
• The buyer is responsible for the cost of freight, unloading, import clearance and delivery at destination as well as insurance should they take it out. The transfer of risk occurs when the goods are on board.

This Incoterm is only used for shipping. It should not be used for goods in containers because responsibility is transferred when goods are loaded on board the ship (the goods are in physical contact with the ship’s deck) and containers are not loaded on entering the terminal, therefore, if the goods were to suffer any damage inside the container it would be very difficult to establish when the damage occurred.

CFR Cost and Freight

• The seller is responsible for all costs until the goods arrive at the destination port, including export clearance, costs at origin, freight and usually unloading costs.
• The buyer is responsible for import procedures and transport to destination. They also bear the risks from the moment the goods are on board, hence, although it is not mandatory the buyer usually takes out insurance.

This Incoterm is only used in shipping.

CIF Cost, Insurance and Freight

• As with CFR the seller bears all the costs up to arrival at the destination port, including export clearance, costs at origin, freight and usually unloading. However, unlike CFR, the seller must also arrange insurance even though the risks transfer to the buyer once the goods are loaded on board.
• The buyer bears the import and transport to destination costs.

New in the 2020 version of this Incoterm is that the seller must arrange insurance cover in line with what is stipulated in Institute Cargo Clauses (C). In other words, the goods must be covered until their arrival at the destination port. This Incoterm is only used in shipping. It is widely used as it determines the customs value.

CPT Carriage Paid To

• The seller bears the costs until the goods are delivered to an agreed place, i.e., they are responsible for all of the costs at origin, export clearance, the main transport and usually, costs at destination.
• The buyer is responsible for import procedures and insurance if taken out as it is not mandatory. The risk is transferred to the buyer once the goods are loaded onto the first means of transport arranged by the seller.

This Incoterm is valid for any means of transport.

CIP Carriage and Insurance Paid To

• The seller bears the costs up to delivery at an agreed place at destination, i.e., the costs at origin, export clearance, freight and also insurance which is mandatory.
• The importer is responsible for import clearance and delivery at destination and takes on the risk when the goods are loaded onto the first means of transport.

What is new in this Incoterm with respect to Incoterms 2010 again relates to insurance cover. In this instance, apart from being mandatory, insurance must contain the same coverage as what is stipulated in Institute Cargo Clauses (A), the goods must be insured until their delivery to the carrier at destination.

DPU Delivered at place Unloaded

• The seller bears the costs and risks arising at origin, packing, loading, export clearance, freight, unloading at destination and delivery at the agreed point.
• The buyer is responsible for import clearance procedures.

This Incoterm is new and replaces DAT. In effect, it increases delivery options since DAT stated that delivery must take place at the terminal, whereas with the new DPU delivery can take place at an agreed place other than the terminal.

DAP Delivered At Place

• The seller bears all the costs and risks of the operation apart from import clearance and unloading at destination, i.e., all costs at origin, freight and inland transport.
• The buyer is only responsible for import clearance and unloading.

This Incoterm is valid for all means of transport. Insurance is not mandatory but if taken out the seller bears the cost.

DDP Delivered Duty Paid

• The seller bears all costs and risks from packing and checking in their warehouses to delivery at final destination, including export and import clearance, freight and insurance, if taken out.
• The buyer only has to receive the goods and usually unloads them, although this can also be done by the seller.

This Incoterm is the exact opposite of EXW, the seller bears all the costs and risks.

If you encounter any confusion regarding Incoterms 2020 in international trade, we highly recommend reaching out to the expert team at Sunday Game. Our professionals can provide you with a comprehensive explanation of the terms, helping you understand the responsibility allocations for each delivery term. This will enable you to mitigate potential risks and ensure smooth transactions throughout your business operations. By partnering with our team, you’ll gain a clearer understanding and effective application of Incoterms 2020, optimizing your international trade experience.