ICC Incoterms® 2020

 

Get to Know …
… and understand ICC Incoterms® 2020 !
Master the risks and costs of your international operations !

 

What Are Incoterms?

Incoterms are an internationally recognized set of terms that define the responsibilities and obligations of the parties involved in the transport of goods. Incoterms are used to clearly communicate the division of the cost of carriage and risks associated with the international transportation and delivery of goods between the seller to the buyer.

Incoterms were first introduced in 1936 by the International Chamber of Commerce (ICC) as different practices and legal interpretations between traders around the world necessitated a common set of rules and guidelines for interpreting the most commonly used terms in foreign trade. Incoterms are revised periodically, roughly every 10 years, by the ICC to conform to changing trade practices.

What Incoterms Do

It is important to note that the Incoterms of a contract for sale pertain only to the delivery terms (carriage freight costs) and insurability of the product. Incoterms define the respective obligations, costs and risks involved in the delivery of goods.

What Incoterms Do Not Do

Incoterms by themselves do NOT:

Specify the amount of the contract or the terms of financing,Supersede the law governing the contract, Address the transfer of ownership of the goods, Will not release funds for the delivered goods, Determine when revenue is recognized, Address the consequences of a breach of contract or exemptions of liability.
These items are defined by the terms of the sales contract and the governing law.

OBLIGATIONS, DELIVERY AND TRANSFER OF RISK

USE IN PRACTICE ICC Incoterms® 2020

Prepare for ICC Incoterms® 2020

• Identify what ICC Incoterms your business typically uses
• Check to see if the changes introduced by ICC Incoterms® 2020 has any impact on your business
• Consider if you are using the right ICC Incoterms – many businesses continue to use an Incoterm which is no longer suitable or relevant to their business needs
• Update your standard contracts to refer to ICC Incoterms® 2020

Be Specific

When using Incoterms in a Contract for Sale or a Purchase Order, identify the appropriate Incoterm Rule (e.g., FCA, CIP, etc.), specify the place or port as precisely as possible, and state ICC “Incoterms 2020” (e.g., FCA, Logan International Airport, Boston, MA, INCOTERMS 2020).

Understand Who Has the Responsibility for Loading and Unloading Charges

For DAP, DPU or DDP terms, the Seller is obligated to place the goods on the carrier which will deliver the goods to the named place of destination. The Buyer is responsible for unloading. For CPT, CIP, CFR or CIF terms, the seller completes delivery when the goods reach the port or place of destination. Once the good have been delivered to the agree upon port or place, the Buyer takes over responsibility from that point forward. Under FCA, the seller’s obligations are satisfied once the goods have been handed over to the the carrier named by the buyer at the agreed place, either the first truck or the port of origin. The buyer is responsible for inland freight, unloading at the port of origin, and loading on the ocean carrier/airline.

Know where the Risk of Loss Transfers

For EXW, risk transfers at the Seller’s facility or the agreed place, which is typically the first truck. For FAS or FOB, risk transfers at the port of loading, once the cargo reaches the shipyard/terminal or is loaded on board the vessel/aircraft respectively, while FCA can either be the first carrier or the port of loading. A common misconception buyers make when the seller pays the cost of freight is assuming that the seller takes on all the risk of loss until the goods have been delivered to the named place of destination or to the port specified on the air waybill or the bill of lading. When using CFR, CIF, CPT, or CIP, risk transfers to the buyer when the goods are handed over to the carrier at origin, which could be when the goods are loaded onto the first truck. For DPU, DAP, or DDP risk transfers once the goods have been delivered to the place of destination.

Know Who is Responsible for U.S. Customs Entry Declarations

DDP is the only Incoterm that requires the seller to perform all U.S. Customs entry declarations. For ocean freight imports to the U.S., it is important to note that an Importer Security Filing (ISF) must be electronically submitted to Customers 24 hour before the cargo is loaded onto the vessel. Buyers should specify in the contract either (a) the shipper is responsible for the ISF or (b) the seller is responsible for providing the required data in a timely manner (i.e., 72 hours period to lading) to the Buyer’s appointed Customs Broker. The buyer should also indemnify against the penalties for filing a late, inaccurate or incomplete ISF.

Where can I get a copy of ICC Incoterms® 2020?

You can buy the ICC Incoterms® 2020 book at the International Chamber of Commerce’s website located at www.iccwbo.uk/pages/incoterms.

COMPLETE SET OF DEFINITIONS WITH DESCRIPTION - ICC Incoterms® 2020

  EXW: Ex Works  FCA: Free Carrier  CPT: Carriage Paid To  CIP: Carriage & Insurance Paid To  DPU: Delivered at Place Unloaded  DAP: Delivered At Place  DDP: Delivered Duty Paid  FAS: Free Alongside Ship  FOB: Free on Board  CFR: Cost & Freight  CIF: Cost Insurance & Freight 

• EXW: Ex Works
• FCA: Free Carrier
• CPT: Carriage Paid To
• CIP: Carriage & Insurance Paid To
• DPU: Delivered at Place Unloaded
• DAP: Delivered At Place
• DDP: Delivered Duty Paid
• FAS: Free Alongside Ship
• FOB: Free on Board
• CFR: Cost & Freight
• CIF: Cost Insurance & Freight

Under EXW, the seller minimizes its risk by only making the goods available at its premises or other named place (e.g., factory, warehouse, etc). The seller is not responsible for clearing the goods for export or loading them on the collecting vehicle.
EXW term represents the minimum obligation for the seller. The buyer is responsible for all costs and risks involved in taking the goods from the seller’s premises, or other named place, to the final destination.
If the parties wish the seller to bear the risk and cost for loading the goods on the collecting vehicle, as well as export clearance requirements, then the FCA term should be used.

This term may be used for all modes of transportation.
x Carriage to be arranged by the buyer.
xx Risk transfers from the seller to the buyer when the goods are at the disposal of the buyer at the named place.
xxx Cost transfers from the seller to buyer when the goods are at the disposal of the buyer at the named place.

WHAT HAS CHANGED IN THE NEW VERSION - ICC Incoterms® 2020

While it may seem that not much has changed, ICC Incoterms® 2020 was revised to make the terms easier to understand in order to avoid situations were Incoterms are misinterpreted or mis-used, often with costly consequences.

1. DAT is Replaced with DPU

In Incoterms 2010, DAT (Delivered at Terminal) deemed the goods to be delivered once they had been unloaded at the named terminal. In Incoterms 2020, the term has been deleted and replaced with the DPU (Delivered at Place Unloaded) term in order to make the place of delivery more general.

2. FCA and Bills of Lading

The FCA term was changed to allow the parties to agree to issue a Bill of Lading (BOL) to the Seller for shipments financed by a letter of credit. The BOL can now be exchanged when the goods arrive at the port, once delivery has been deemed to occur.

3. Change of Insurance

The CIP term has been changed to require the seller to procure a higher level of insurance coverage – from the “minimum” coverage to “nearly maximum” Clause A (Institute of Cargo Clauses) coverage. CIF keeps the same insurance requirements, which is the basic “minimum” level Clause C (Institute of Cargo Clauses).

4. Costs are Clarified

Costs have been clarified to respond to user feedback that there were increasing disputes over the allocation of costs between the seller and buyer, especially those at the port or place of delivery. The broad principle is that the seller is responsible for costs incurred up to the point of delivery while the buyer is responsible for costs beyond that. The allocation of costs now appear in the A9/B9 section of each rule.

5. Security Requirements

Cargo security has become increasing important since 9/11, and the 2020 rules now address many of the security-related requirements. Security requirements have been updated to make security obligations, such as mandatory cargo screening, more prominent. Security-related allocations have been added to the A4 and A7 section for each rule.

6. Own Transport

Incoterms 2010 assumed that the transport of goods would be carried out by a third party carrier. They did not deal with instances where the transport was provided by the seller or buyer (e.g., seller’s own truck). The terms now expressly state that sellers and buyers can provide their own transport for carriage from the named place of delivery. Buyers can contract for carriage or arrange their own transportation using the FCA rule while sellers should use any of the D rules.

7. Improved Presentation

The terms have been updated to include pictures and Explanatory Notes, which explain the fundamentals of each Incoterm, such as when the term should be used, when the risk passes from the Seller to the Buyer, and how costs and obligations are allocated between the parties. The Incoterms have also been reordered so that the delivery obligation is now more prominent.