Incoterms, short for "International Commercial Terms," are pre-defined commercial terms published by the International Chamber of Commerce (ICC) correlating to international commercial law. Since its first release in 1936, they have been utilized in international contracts for the sale of goods to help traders avoid costly misunderstandings by clarifying the tasks, responsibilities, costs, and risks involved in delivering goods from Sellers to Buyers. It has been updated periodically since then along with the recent updates of still applicable Incoterms® 2010, and recently published Incoterms® 2020, both of which many still find confusing and difficult to understand. This article will provide a brief overview of each term and shine a light on a few changes made from the 2010 and 2020 incoterms.
11 Incoterms® 2020 Overview
EXW (Ex Works): The seller makes the goods available at their premises, or at another named place. The buyer is responsible for all costs and risks involved in taking the goods from the seller's location to the destination.
FCA (Free Carrier): The seller hands over the goods into the custody of the first carrier at a named place. This term applies to all modes of transport.
CPT (Carriage Paid To): The seller pays for the carriage of the goods up to the named destination. However, risk transfers to the buyer once the goods have been handed over to the first carrier.
CIP (Carriage and Insurance Paid to): Similar to CPT, the seller also has to procure insurance against the buyer's risk of loss or damage to the goods during the carriage.
DAP (Delivered at Place): The seller delivers the goods, ready for unloading, at the named place of destination. The seller bears all risks involved in bringing the goods to the specified place.
DPU (Delivered at Place Unloaded): Previously known as DAT (Delivered at Terminal), this term requires the seller to unload the goods at the destination. It’s the only Incoterm that requires the seller to unload goods at the destination.
DDP (Delivered Duty Paid): The seller delivers the goods to the buyer, cleared for import, and not unloaded from the arriving means of transport at the named place of destination. The seller bears all costs and risks, including duty.
FAS (Free Alongside Ship): The seller places the goods alongside the ship at the named port of shipment. From that point, the buyer bears all costs and risks of loss or damage.
FOB (Free On Board): The seller must load the goods on board the ship nominated by the buyer, cost and risk are divided when the goods are actually on board of the vessel.
CFR (Cost and Freight): The seller must pay the costs and freight necessary to bring the goods to the named port of destination, but risk is transferred once the goods cross the ship's rail.
CIF (Cost, Insurance, and Freight): Essentially the same as CFR, but with the addition that the seller has to procure marine insurance against the buyer's risk of loss or damage to the goods during the carriage.
2010 and 2020 Incoterms® Changes
Insurance rules for Carriage Insurance and Freight (CIF) and Carriage and Insurance Paid (CIP):
2010 - Incoterms® determines that under CIP and CIF, the seller pays for the carriage of goods up to the named place of destination and is required to insure the goods for 110% of their value at the least minimum ICC coverage (Cargo C). Both relinquish the risk to the buyer once the goods are delivered to the carrier and the necessary documents (minimum: BOL, insurance policy, & invoice) are handed over to the buyer. The difference between the terms is that CIP is for all modes of transport while CIF is for non-containerized maritime transport only.
2020 - Incoterms® sustains the identical insurance requirements for CIF for 2010. On the other hand, CIP now requires higher insurance coverage, ICC insurance Cargo Clauses (A), or similar clauses, paid by the buyer. Primarily due to the reason that CIP terms are used for manufactured goods that require a higher level if not additional insurance coverage.
It is recommended to conduct further research on the coverages when using CIF or CIP.
2. DAT converted to DPU
2010 - Incoterms® DAT is defined as goods that are delivered once unloaded at the named terminal, but the word 'terminal' in the definition has caused consistent confusion to many who have used the term since not all modes of transportation have a terminal.
2020 - Incoterms® renamed DAT to DPU, meaning delivered at a place unloaded, allowing for clarification on any unloading location depending on the mode of transportation
3. Bill Of Lading
2010 - there is a shift of sellers using FOB, rather than FCA which is a much more viable option when considering the risk sellers have with FOB. Sellers still took the risks by being responsible for the loading because it gave them a higher chance to attain an onboard bill of lading to provide to the bank for a letter of credit.
2020 - Incoterms® changed FCA to allow agreement between buyer and seller to grant the seller an onboard bill of lading.
4. Security Requirements:
Incoterms® 2020 emphasized Cargo Security by providing detailed security requirements stated in A4 and A7 for each Incoterms 2020 rule along with costs under A9/B9
5. Private Transportation Options:
2010 - Incoterms® were arranged with the assumption of 3rd party logistics providers involved with the transportation.
2020 - Incoterms® allows for the buyer and seller to have their means of transport which only applies to the following Terms: DAP, DPU, DDP, and FCA,
6. Clarifications on Task and Fees Responsibilities:
2020 - Incoterms® have clarified both buyer and seller's responsibilities on the processes, payments, transfer of risk, and insurance, to make the rules globally comprehensible and enforceable.
To see a sample of the Incoterms® 2020 summarized breakdown of the terms, rules, task and fee responsibilities, and changes. Click to download the button
Note: The content of this article and chart is only for general information purposes and shall not in any circumstances be considered bespoke legal advice or as an alternative for professional counsel.
Questions Commonly Asked About Incoterms® 2020
How Often Does Incoterms® Update?
Incoterms® updates roughly every 10 years, since 1923, to keep up with the technological advancements and changing tides in international transportation and commerce.
Lastly, is the Incoterms® 2020 Required?
Incoterms® 2020 is currently being adopted for international trade, but there is still the flexibility to utilize Incoterms® 2010 or older, as long as the transportation agreement clearly states the terms and which version/year in use with acknowledged by both parties.
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