Published since 1936, the International Chamber of Commerce (ICC) has published a set of three letter trading terms for the use in sale and purchase contracts. These ‘Incoterms’ deal with the obligations of the buyer and seller and consistent of 11 three- letter trading terms grouped as follows:
- C rules: governs where the seller arranges and pays for carried to a named place and indicates the destination of the goods;
- D rules: governs where the seller arranges and pays for carriage to a named place, and indicates the destination of the goods and place of delivery;
- F rules: governs where the buyer pays for and usually arranges carriage;
- EXW (ex works): governs where the seller delivers to the buyer from the seller’s premises.
In the D, E and F rules, deals with the passing of risk between parties and at a named place, and such rules deals which includes but not limited to delivery of goods, transfer of risks, arranging and paying for carriage, insurance obligations, procuring of transport documents, proof of delivery, arranging export/import clearance, goods checking operations and giving of notices.
Recent changes made to Incoterms 2020 provides an update to the 2010 edition and is primarily clarifies several sections making it easier to understand, and providing less room for error, and the main changes are:
1. FCA, FOB and Bills of lading
There is a change to the FCA (free carrier) term. The 2020 FCA Incoterm now contains an option under which the buyer agrees to instruct the carrier to issue the bill of lading to the seller. In the past, the seller usually delivers the goods to the buyer before they are loaded onto a ship and may not necessarily receive a bill of lading from the carrier, so the new Incoterms 2020 makes it clearer for both parties involved.
In the past, the seller of a containerized shipment under Freight on Board (FOB) terms lost control of the goods on their arrival at the export container port but remained liable until the container was loaded onto the ship. So previous provisions exposed the seller to potential cost and risk, whilst Incoterms 2020 provides more certainty and comfort for the parties.
2. Insurance clarified in CIP/CIF
Under Incoterms 2020, a CIP (carriage and insurance paid to) seller must purchase insurance on Institute Cargo Clauses (A), which is an “all risks” policy with some exclusions, which broadens the scope of insurance than under Incoterms 2010 which would have been cover provided for a limited number of risks.
Both CIF (Cost Insurance Freight) and CIP (Carriage and Insurance Paid to) require the seller to provide a basic level of insurance for the buyers equivalent to Clause C (Institute of Cargo Clauses).
The Incoterms 2020 sought to clarify the distinction between these two terms which usually applies to different classes of goods which call for different levels of insurance coverage.
3. Renaming of DAT to DPU
DAT (Delivered at Terminal) will be replaced by Delivered at Place Unloaded (DPU) and is seem as simply a change of name with obligations and functions of both terms being almost the same.
The ICC states this change was made primarily to eliminate confusion between DAT and Delivered at Place (DAP) in terms of where and how delivery takes place. DPU is now the only Incoterm in which the goods are delivered unloaded at the place of destination. Costs such as import customs clearance and other costs, however, remain the buyer’s responsibility.
4. Customs clearance
Under Incoterms 2020 wording is more precisely explained which party, seller or buyer is responsible for carrying out customs formalities and clearance. Furthermore, the release of goods in transit is included for the first time and liability is assigned to whoever assumes the risk of transport to the place of deliver. For example, in the past the terms EXW, FCA, FAS, FOB, CPT, CFR and CIP where the risk of transport is transferred at origin and usually the country of the seller, the liability in customs transit clearance is assumed by the buyer; whilst in contrast in Incoterms DAP, DPU and DDP the risk is passed on at the destination, the seller bears the liability. Such change could have a significant impact on sales where goods must pass through customs prior to arriving at the customs of the import country.
5. Security in relation to transport is now clearly detailed
Under Incoterms 2020, liability is addressed more specifically under two instances: in relation to transport from the country of origin to that of the destination and customs clearance formalities and procedures.
Liability is assumed by the party who executes the goods contract, i.e. for sellers (CPT, CFR, CIP, CIF, DAP, DPU and DDP) or buyer (EXW, FCA, FAS and FOB). In relation to customs clearances, the safety liability lies with the party which must undertake such clearance. In summary, The ICC has expanded security related requirements in Incoterms 2020 with provisions to allocate responsibility for these between seller and buyer.
Other additional changes to incoterms include:
6. Simpler language and less legal content
7. More detailed content providing greater clarity to the text;
8. Further clarity on breakdown of cost allocation
9. Relationship between incoterms and international commercial contracts
10. Comparison to obligations between the 11 Incoterms.
In summary, the new Incoterms2020 aims to provide greater clarity for the parties, on costs, insurance and greater efficiency for international trade.
What is Incoterms
The rapidly growing and evolving transportation and logistics industry requires an understanding of regulations, legislation, insurance and supply chain management.
The main contracts in operation in the logistics industry are based around the Incoterms or International Commercial Terms, (published by the International Chamber of Commerce (ICC.)) This is because the Incoterms used have repercussions on the matching freight arrangements, letter of credit arrangements and insurance arrangements. Each type of Incoterm carries a different division of costs and risks between the parties.
The 8 terms covered by Incoterms 2010 are:
- Ex Works (EXW)
- Free Carrier (FCA)
- Free Alongside Ship (FAS)
- Free Onboard Vessel (FOB)
- Cost and Freight (CFR)
- Cost Insurance & Freight (CIF)
- Carriage Paid To (CPT)
- Carriage Insurance Paid To (CIP)
Previous terms from Incoterms 2000 which have been eliminated from Incoterms 2010 are:
- Delivered At Frontier (DAF)
- Delivered Ex Ship (DES)
- Delivered Ex Quai Duty Paid (DEQ)
- Delivery Duty Unpaid (DDU)
- Delivery Duty Paid (DDP)
While these 5 terms do not feature in the current version of Incoterms (2010), it is possible that they may be seen in sales order contracts. Care must be taken to ensure that both parties agree on their obligations in this case. If you are still using the eliminated terms from Incoterms 2000, you may benefit from a review of your contracts and updating to the new Incoterms 2010 types.
The Incoterms rules clearly communicate the tasks, costs, and risks associated with the modes of transportation(air, sea, land) and delivery of goods by defining respective maximum and minimum obligations, costs, and risks involved in the delivery of goods from the seller to the buyer. The use of intermediary agents (such as freight forwarders) where the Incoterms in use change, might expose a gap in the chain of responsibility and create a risk for an unknowing party in the transaction. Furthermore, incorrect details with the named place of delivery, destination, terminal, port of shipment can result at minimum in delays to cargo delivery, up to total cargo loss.
In addition, Parties adopting Incoterms should be wary about their intention and variations. The desire of the parties should be expressed clearly and casual adoption should be refrained. Furthermore, making additions or variations to the meaning of a certain term should be carefully done as parties’ failure to use any trade term at all can produce unexpected outcomes.
It is also important to note that Incoterms does not define where titles transfer, the price payable, currency or credit items, the breach of contract and its consequences and exclusions of liability under certain circumstances. Therefore, these are often additional terms required in commercial contracts, which should be reviewed and applied.