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The International Chamber of Commerce (ICC) has published Incoterms 2020, which came into effect on 1 January 2020. The International Chamber of Commerce first published Incoterms in 1936 and has been continuously updating them since then to reflect changes in the global trading environment. It is important for all parties involved in trade to understand these changes and how they apply to the global supply chain.
Incoterms play a vital role in the world of global trade. Whether it’s the 2010 or 2020 version of Incoterms, it may seem complicated, but it’s important for buyers and sellers to have a clear understanding of how Incoterms works and what their roles are throughout the supply chain. In this article, we explain the updates that have been made, along with an infographic of Incoterms 2020, providing a simple and practical explanation.
Note: The content of this article and the chart provided are for general information purposes only and should not be considered as specific or professional legal advice under any circumstances.
Simply put, Incoterms are the rules and conditions of sale that sellers and buyers of goods agree to in international transactions. These rules are accepted by governments and legal authorities around the world. Understanding Incoterms is a vital part of international trade, as these trade terms specify precisely what duties, costs, risks and delivery of goods are the responsibility of the seller and buyer in a sales contract.
Incoterms specify when the seller’s costs and risks pass from him to the buyer. It is also important to note that not all Incoterms rules apply in all circumstances. Some of these rules apply to all modes of transport or a combination of them. Transport by all modes (road, rail, air and sea) includes the rules FCA, CPT, CIP, DAP, DPU (which has replaced DAT) and DDP. However, sea and inland waterway transport specifically includes the rules FAS, FOB, CFR and CIF, which are explained below.
Incoterms, also known as International Commercial Terms, are a set of rules published by the International Chamber of Commerce (ICC) that relate to international trade law. According to the ICC, Incoterms provide “internationally accepted definitions and rules of interpretation for the most common commercial terms used in contracts for the sale of goods.”
All international purchases are processed based on an agreed Incoterm to determine which party legally bears the costs and risks. The Incoterm is clearly stated on the relevant shipping documents.
The seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises or another named place.
It is best for the parties to clearly specify the exact place of delivery at the designated location, as the risk passes from the seller to the buyer at that point.
Update 2020: It is now possible to issue a Bill of Lading with the phrase “loaded”.
Delivery alongside ship is when the seller places the goods alongside the vessel (e.g. on a quay or a barge) designated by the buyer at the named port of loading.
The risk of loss of or damage to the goods passes to the buyer when they are alongside the ship. From that moment on, all costs are the responsibility of the buyer.
Delivery on board ship is when the seller delivers or arranges for the goods to be delivered on board the vessel named by the buyer at the named port of loading.
From the moment the goods are placed on board the ship, all costs and risks are transferred to the buyer. Therefore, the buyer will be responsible for the costs of international transportation, insurance, and other subsequent costs.
Seller fees include:
Buyer’s costs include:
The seller delivers the goods on board the ship or arranges for the goods to be so delivered.
The risk of loss or damage to the goods passes to the buyer when the goods are placed on board the ship.
The seller is obliged to conclude a contract of carriage and pay the costs and freight necessary to deliver the goods to the named port of destination.
The seller delivers the goods on board the ship or arranges for the goods to be delivered in this way. The risk of loss of or damage to the goods passes to the buyer when the goods are placed on board the ship.
The seller is obliged to conclude a contract of carriage and pay the costs and freight necessary to deliver the goods to the named port of destination.
The seller must also take out an insurance contract to cover the buyer’s risks against loss or damage to the goods during transportation.
Note:
Under CIF terms, the seller is only required to provide insurance with minimum coverage. If the buyer requires insurance with more coverage, he must either expressly agree this with the seller or make his own additional insurance arrangements.
The seller delivers the goods to the carrier or another person nominated by him at the agreed place (if such place has been agreed between the parties).
The seller is obliged to conclude a transportation contract and pay the costs necessary to deliver the goods to the specified place of destination.
The seller’s obligations are similar to those of CPT, but in addition, the seller must take out insurance to cover the buyer’s risks against loss of or damage to the goods during transport.
Under CIP terms, the seller is only required to provide insurance with minimum coverage. If the buyer requires insurance with more coverage, he must expressly agree this with the seller or make his own additional insurance arrangements.
Delivery at place is when the seller places the goods at the disposal of the buyer on the incoming means of transport, ready for unloading, at the named place of destination.
The seller bears all risks associated with delivering the goods to the named place.
DPU is a new Incoterms rule that replaces the previous term DAT (Delivered at Terminal).
Delivery in this situation is when the seller makes the goods available to the buyer at the named place of destination after unloading.
The seller bears all risks associated with delivering the goods to the named place and unloading them.
Under DDP terms, the seller delivers the goods when they are placed at the disposal of the buyer, after clearance for import, on the incoming means of transport and ready for unloading, at the named place of destination.
The seller bears all costs and risks associated with bringing the goods to the place of destination. He is obliged to clear the goods not only for export but also for import, pay all export and import customs duties and carry out all customs formalities.
Under DDP terms, the seller pays all transportation costs, including import customs clearance, import duties and taxes, and any additional costs associated with delivering the goods to the named place of destination.
Incoterms rules are updated from time to time. As a result, all traders and merchants should familiarize themselves with the latest Incoterms rules and update them. Thus, there are differences between Incoterms 2010 and Incoterms 2020, and in this section, we will look at the differences between these rules and the Incoterms 2010 and Incoterms 2020 rules.
Despite its many advantages, Incoterms has limitations. The rules do not address all aspects of international contracts and do not address issues related to ownership of goods and local laws.
Furthermore, the terms of insurance of goods are not fully covered by Incoterms and the parties must specify these separately in their contracts. Although Incoterms generally help reduce ambiguities, they still require careful interpretation.
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