Incoterms® – an abbreviation for International Commercial Terms – are the rules first issued by the International Chamber of Commerce in 1936 as a way of unifying the shipping practices and legal interpretations between those involved in global trade around the world. As international trade has grown over the decades, so have Incoterms® rules evolved to meet the needs of sellers and buyers.
What Are Incoterms®?
Incoterms® rules have been carefully designed to provide a shared set of guidelines for all countries and companies involved in international trade. By simplifying the drafting of international contracts, trading between countries moves much easier.
Whether you export or import, buy or sell, whether you’re in purchasing, shipping, legal, or another department within a company that has an international presence, Incoterms® are in place to guide you. Understanding the rules before you ship saves time and money. On January 1, 2020, Incoterms® 2020 will become effective, so make sure you are up-to-date with the latest version of these important guidelines.
Who Uses Incoterms®?
An efficient and effective supply chain resulting in customer satisfaction requires coordination and planning. All personnel in the supply chain must have a clear understanding of their roles to ensure success. This is where the use of Incoterms® becomes critical, assigning the buyer and seller their responsibilities in the movement of goods. It is not as easy as it seems. It is more than choosing the Incoterms® that your company may have used for years. Incoterms® have become more specific over the years and must be fully understood before a term is chosen, or there can be severe consequences for sellers and buyers. Incoterms® are what defines the buyer and seller’s responsibilities along the supply chain. It also defines where risk transfers between the seller and the buyer within the transaction.
The Incoterms® rules were initially created to ease trade issues between international trading partners, but they can also be used domestically. U.S. companies can replace the U.S. Uniform Commercial Code (UCC) with Incoterms for U.S. domestic transactions. U.S. companies utilizing the UCC may see some of the same trade terms as Incoterms®, but the definitions can be very different, e.g., if you choose FOB (Free on Board) for your shipments, by the UCC’s definition, it can mean “loaded on a truck” or “delivered by a truck.” But in Incoterms®, FOB is reserved for vessels loading non-containerized cargo in a port. The Incoterms® version removes ambiguity and is more precise by far. When the UCC trade terms are used interchangeably with Incoterms, it can cause confusion, and if challenged by a customer legally, it could become a costly and time-consuming effort. Therefore, if your company does both international and domestic shipping, it is a good idea to utilize Incoterms® for both your international and domestic shipments to maintain continuity of terms.
What are the Types of Incoterms®?
There are 11 different Incoterms® for 2020. They are summarized below based on mode of transport.
Incoterms® for Any Mode of Transport
Ex Works (EXW)
Seller’s minimum obligations are fulfilled by merely having the goods available for Buyer to pick up at its premises or another named place (e.g., factory, warehouse, etc.). Buyer bears all risk and costs starting when products are picked up at Seller’s location or other named place. Seller has no obligation to load the goods or clear them for export. Buyer must arrange carriage and insurance.
Free Carrier (FCA)
Seller either makes the goods available, cleared for export, at its own premises or at a named place. If named place is Seller’s premises, goods are delivered once loaded on the Buyer’s means of transport. If other named place, seller transports goods and places at Buyer’s disposal ready for unloading.
This term has changed under the new Incoterms® 2020 rules. Previously, when the seller was responsible for loading the goods on a truck or some other transport hired by the Buyer and not directly on the international carrier, problems could arise. If the Seller and Buyer had agreed on using a letter of credit as the payment method for this transaction, oftentimes banks would require the Seller to present a bill of lading with an on-board notation before they would be paid.
International carriers don’t typically provide Sellers who don’t present goods directly to them with such a bill of lading. However, under the new Incoterms® 2020 rules, FCA allows parties to agree in their sales contract for the Buyer to instruct its carrier to issue a bill of lading with an on-board notation to the Seller.
Carriage Paid To (CPT)
Seller clears the goods for export and delivers them to the carrier or another person nominated by the seller at a named place of shipment, having paid the cost of carriage necessary to bring the goods to the place of shipment, at which point risk transfers to the buyer. Seller contracts main carriage. Seller is not responsible, however, for procuring insurance against Buyer’s risk of loss/damage during the carriage.
Carriage and Insurance Paid To (CIP)
Seller clears the goods for export and delivers them to the carrier or another person nominated by the seller at a named place of shipment, having paid the cost of carriage necessary to bring the goods to the place of shipment, at which point risk transfers to the buyer. Like, CPT seller contracts main carriage. Seller is, however, additionally responsible for procuring insurance against Buyer’s risk of loss/damage during the carriage.
In the new Incoterms® 2020 rules for CIP, Seller is now responsible for purchasing a higher level of insurance coverage complying with Institute Cargo Clauses (A) or similar coverage.
Delivered at Place (named place of destination) (DAP)
Seller clears the goods for export and bears all risks and costs associated with delivering the goods to the named place of destination to the point that the goods are ready for unloading by the Buyer. The Buyer is responsible for all costs and risks associated with unloading the goods and clearing customs to import the goods into the named country of destination.
Delivered at Place Unloaded (DPU)
Previously named Delivered at Terminal (DAT), this Incoterm has been renamed Delivered at Place Unloaded (DPU) because the Buyer and/or Seller may want the delivery of goods to occur somewhere other than a terminal.
This term can be used for consolidated containers with multiple consignees, and it is the only term where the Seller is responsible for unloading the goods. Seller clears the goods for export and bears all risks and costs associated with delivering the goods and unloading them at the terminal at the named port or place of destination. Buyer is responsible for all costs and risks from this point forward including clearing the goods for import at the named country of destination. This can be a complicated term for the Seller, not just from the standpoint of providing a carrier with the proper paperwork, but now also providing the means for moving a container, or providing the extra labor to do so, or providing a forklift and pallet jack for moving goods within a container. Perhaps additional insurance and workplace safety issues will need to be considered. This contract may not be an easy one to negotiate.
Delivered Duty Paid (DDP)
This term represents the maximum obligation to the Seller and should not be used if the Seller is unable to directly or indirectly obtain the import license. The Seller bears all risks and costs associated with delivering the goods to the named place of destination ready for unloading and cleared for import including payment of duties, taxes, and customs fees.
Incoterms® for Sea and Inland Waterway Transport
Free Alongside Ship (FAS)
Seller clears the goods for export and delivers them when they are placed alongside the vessel at the named port of shipment. Buyer assumes all risks/costs for goods from this point forward.
Free on Board (FOB)
Seller clears the goods for export and delivers them when they are on board the vessel at the named port of shipment. Buyer assumes all risks and cost for goods from this moment forward.
Cost and Freight (CFR)
Seller clears the goods for export and delivers them when they are on board the vessel at the port of shipment. Seller bears the costs and freight necessary to deliver the goods to the named port of destination. Buyer assumes all risks for the goods from the time the goods have been delivered on board the vessel at the port of shipment.
Cost, Insurance and Freight (CIF)
Seller clears the goods for export and delivers them when they are on board the vessel at the port of shipment. Seller bears the cost of freight and insurance to the named port of destination. The seller is required to purchase the minimum level of marine insurance against Buyer’s risk of loss/damage during the carriage. This requirement is unchanged from Incoterms 2010.
Buyer is responsible for all costs associated with unloading the goods at the named port of destination and clearing goods for import. Risk passes from seller to buyer once the goods are on board the vessel at the port of shipment.
Get Your Incoterms Down Cold
Incoterms® aren’t overwhelming, but they are intricate. Regardless of where you are in the trade industry, there are seminars and webinars designed to help you break down Incoterms® rules into manageable bits of usable information.
Take advantage of all the resources available to you to help you increase your company’s profits.We have first-hand knowledge and trained, experienced professionals to help you get the best education and help you get started in the right direction.Visit Incoterms Incoterms® 2020
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