Incoterms 2020 Explained

The updates to Incoterms 2020 explain the roles in trade contracts. They help parties understand the costs and risks of orders and shipments. But what are these updates, and how will they affect global trade?

The 2020 revision includes several important changes designed to address emerging issues and improve clarity. In this article, we’ll explain Incoterms’ meaning and provide key updates on Incoterms 2020. We will also discuss how these changes will influence businesses’ management of their global trade operations.

What are Incoterms?

Incoterms (International Commercial Terms) are rules used in global trade. They explain the duties of buyers and sellers when shipping goods.
They outline who is in charge of tasks, including paying for shipping, insurance, and transportation. They also state when the responsibility and risk for the goods move from the seller to the buyer.

These rules help make global trade easier by providing clear terms that everyone understands. Certain types of transport, like sea or air, use some Incoterms, while others apply to any type of transportation.

What do Incoterms cover?

Incoterms are standard trade terms used in international contracts. They help clarify the responsibilities of buyers and sellers. They help define key aspects of the transaction, ensuring both parties understand their obligations. Incoterms cover the following important areas:

1. Delivery Points: These are the places where we will deliver the goods. They also show when the seller’s responsibility ends and the buyer’s begins.
2. Transfer of Risk: Incoterms define when the risk of loss or damage to goods moves from the seller to the buyer. This helps both parties know their responsibilities.
3. Obligations like Insurance and Customs Duties explain who must buy insurance for the goods. They also include customs duties and other rules that people must follow.
4. Separation of Costs: Incoterms explain who pays for shipping, transportation, handling, and other related costs.
5. Mode of Transportation: Some Incoterms are for specific types of transport, such as sea freight or air cargo. Others can be used for any mode of transport, such as road, rail, or multimodal shipping.

Overview of Incoterms 2020

After understanding the meaning of Incoterms, these rules are essential for clarifying each party’s tasks, costs, and risks. This makes international transactions easier and more predictable. Familiarizing yourself with these terms can help you better understand who is responsible for what at each transaction step.

The Incoterms 2020 rules have been updated and are grouped into two categories based on the mode of transport:

Incoterms 2020 for Any Mode(s) of Transport:

EXW (Ex Works):

Under EXW, the seller makes the goods available at their premises or another agreed location. Once the goods are ready, the buyer takes on all responsibility. This includes transportation, costs, and risks. It also covers export formalities and delivery to the final destination.

FCA (Free Carrier):

In FCA, the seller delivers the goods to a carrier nominated by the buyer at a specified location. The seller fulfills their obligation when they hand over the goods to the carrier. From this point, the buyer assumes responsibility for the transport and any associated risks.

CPT (Carriage Paid To):

With CPT, the seller covers the cost of transportation to an agreed-upon destination. However, the buyer assumes the risk once the carrier receives the goods. The seller manages the shipping, and the buyer assumes liability during transit.

CIP (Carriage and Insurance Paid To):

CIP is like CPT, but it includes insurance. The seller pays for this insurance to protect the goods during transportation. The risk goes to the buyer when the goods are with the carrier. However, the seller’s insurance offers extra protection.

DAP (Delivered at Place):

In DAP Incoterms, the seller must deliver the goods to a specific place and prepare them for unloading. The seller pays all transportation costs and risks. However, the buyer must handle import duties and taxes when the goods arrive.

DPU (Delivered at Place Unloaded):

DPU requires the seller to deliver the goods, unloaded, at a named destination. The seller assumes all costs and risks until they deliver and unload the goods. Once unloaded, the buyer assumes responsibility for any further risks and costs.

DDP (Delivered Duty Paid):

DDP incoterms put all responsibility on the seller. The seller must pay for all costs. This includes transportation, import duties, taxes, and risks.

The seller is responsible until the goods reach the buyer at the agreed destination. This term provides maximum convenience for the buyer.

Incoterms 2020 for Sea and Inland Waterway Transport:

FAS (Free Alongside Ship):

Under FAS, the seller delivers the goods alongside the ship at the named port of loading. The buyer takes responsibility for the goods when they place them next to the ship. They also take on all costs and risks from that moment.

FOB (Free on Board):

In FOB, the seller delivers the goods on board the ship at the port of loading. The seller assumes all costs and risks until the goods load onto the ship. Once on board, the buyer assumes responsibility for transportation and any additional risks during transit.

CFR (Cost and Freight):

CFR requires the seller to cover the cost of transporting goods to the destination port. However, the buyer takes on the risk once the seller loads the goods onto the ship at the port of origin. The seller arranges and pays for the shipping, but the buyer takes on liability during the journey.

CIF (Cost, Insurance, and Freight):

CIF is similar to CFR but requires the seller to arrange and pay for insurance during transit. The buyer assumes the risk when the goods are loaded onto the ship. However, the seller provides insurance to protect the goods during the trip.

Major Incoterms changes for 2020

The Incoterms 2020 updates introduce several important changes aimed at improving clarity and flexibility in international trade. These revisions address issues such as cost allocation, security obligations, and transport responsibilities while also enhancing usability.

Here are the five key changes in the 2020 update:

• DAT is now DPU. The term Delivered at Terminal (DAT) has changed to Delivered at Place Unloaded (DPU). This means that someone can deliver goods to a place other than a terminal. The seller will unload the goods at the agreed location.
• Clear Cost Allocation: The rules now state that the seller pays for costs until delivery. After that, the buyer takes on the costs. This change helps reduce arguments about who pays what.
• New Transport Security Rules: The Incoterms now include new security requirements, like mandatory container screenings. This change makes security obligations clearer. It also helps reduce delays and extra costs.
• Responsibilities for Seller/Buyer Using Their Transport: The FCA (Free Carrier) Incoterm has specific rules. If the seller or buyer uses their transport, the buyer is responsible for delivery. The buyer must arrange and pay for the delivery from the specified location.
• Improved Usability and Tools: The 2020 update has clearer notes and better-organized terms. It highlights delivery obligations. A new tool to compare Incoterm elements across all rules is also available, making it easier to understand and use them correctly.

Why are Incoterms vital in International Trade?

Incoterms are crucial in international trade. They provide a clear framework that defines the roles of buyers and sellers.

Here’s why they are so important:

Clarifying Responsibilities

Incoterms clearly define the tasks each party must do. This includes arranging transport, handling customs duties, and getting insurance. This clarity helps both parties avoid misunderstandings and understand clearly what is expected of them.

Minimizing Risk and Uncertainty

By clearly stating when the risk moves from the seller to the buyer, Incoterms helps prevent disputes about responsibility. This clarity helps protect both parties and provides a more predictable trading environment.

Ensuring Smooth Logistics and Delivery

Incoterms establish a mutual understanding of how goods should be transported and delivered, including the exact delivery location, transport method, and necessary documentation. This simplifies logistics operations and ensures a smoother flow of goods.

Facilitating International Trade

Incoterms provide a standardized language for international transactions, making negotiating and executing contracts easier for companies in different countries. This standardization helps ensure compliance with global trade regulations and fosters trust between trading partners.

Avoiding Legal Disputes

By providing clear guidelines for cost allocation, delivery terms, and risk transfer, Incoterms helps prevent legal disputes. This reduces the potential for costly litigation and promotes better business relationships between global partners.

How do I use Incoterms?

Using Incoterms effectively in international trade involves understanding their rules, selecting the appropriate one for your specific transaction, and clearly outlining it in your contract.

Here’s a step-by-step guide to ensure proper usage:

1. Understand the Incoterms Rules

Familiarize yourself with the 11 Incoterms 2020 rules, which are categorized into:

• Any Mode(s) of Transport (e.g., EXW, FCA, DDP)
• Sea and Inland Waterway Transport (e.g., FOB, CFR, CIF)

Each rule specifies the responsibilities of both parties regarding transportation, risk, delivery points, and costs. Understanding the details of these rules is crucial in choosing the one that fits your transaction.

2. Select the Appropriate Incoterm

Choose the best Incoterm based on your shipping method (sea, air, road, rail), destination, and role (buyer or seller). Key factors to consider:

• Mode of Transport: Pick a rule that matches your chosen mode (land, air, sea, multimodal).
• Risk and Responsibility: Clarify who is responsible for shipping costs, insurance, and risk at each delivery stage.
• Delivery Point: Ensure the Incoterm specifies the correct delivery location.

3. Incorporate Incoterms into the Contract

Once you’ve selected the right Incoterm, make sure to clearly state it in the contract. Be sure to include:

• The specific Incoterm (e.g., FOB, DDP)
• The exact delivery location (e.g., “FOB Alexandria Port”)
• The year (e.g., “Incoterms 2020”)
  For example, ” The Seller agrees to deliver the goods FOB Alexandria Port by Incoterms 2020.”

4. Address Any Special Arrangements

If there are any special conditions or extra terms, mention them clearly in the contract. This includes things like the buyer handling insurance or the seller covering certain costs. These details complement the chosen Incoterm and help clarify all aspects of the agreement.

5. Review and Confirm

Before finalizing, review the contract with both the buyer and seller. This ensures that everyone understands their responsibilities under the chosen Incoterm. Ensure that you clearly define and agree upon all aspects, such as costs, risks, delivery points, and obligations.

Incoterms 2020 at a Glance

Differences between Incoterms 2010 and 2020

The Incoterms 2020 rules include key updates to enhance clarity and reflect modern trade practices. Many terms are the same as in the 2010 version. However, some have made important changes. Like the introduction of DPU and updates to insurance requirements.

The table below outlines these differences:

Incoterm	2010 Version	2020 Version	Key Difference	Mode of Transport
EXW (Ex Works)	Existed	Unchanged	No changes.	Any mode of transport
FCA (Free Carrier)	Existed	Updated	Buyers can now request an onboard bill of lading for containerized goods.	Any mode of transport
FAS (Free Alongside Ship)	Existed	Unchanged	No changes.	Sea and inland waterways
FOB (Free on Board)	Existed	Unchanged	No changes.	Sea and inland waterways
CFR (Cost and Freight)	Existed	Unchanged	No changes.	Sea and inland waterways
CIF (Cost, Insurance, and Freight)	Existed	Updated	Insurance requirements remain minimal (Clause C).	Sea and inland waterways
CPT (Carriage Paid To)	Existed	Unchanged	No changes.	Any mode of transport
CIP (Carriage and Insurance Paid To)	Existed	Updated	Requires comprehensive insurance (Clause A) instead of minimal insurance (Clause C).	Any mode of transport
DAP (Delivered at Place)	Existed	Unchanged	No changes.	Any mode of transport
DAT (Delivered at Terminal)	Existed	Replaced by DPU	Renamed to DPU (Delivered at Place Unloaded) to allow delivery beyond terminals.	Any mode of transport
DPU (Delivered at Place Unloaded)	N/A	New	Introduced to replace DAT; includes unloading goods at any agreed destination.	Any mode of transport
DDP (Delivered Duty Paid)	Existed	Unchanged	No changes.	Any mode of transport

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Frequently Asked Questions

• Where Can I Find More Information About Incoterms 2020?

  To learn more about Incoterms 2020, you can visit the official ICC website. There, you will find detailed resources and guides about the rules. We also provide expert advice on importing and exporting goods. This includes full Delivered Duty Paid (DDP) shipping services.

• What Do Incoterms Not Cover?

  Incoterms mainly focus on sharing risk and responsibility during shipping. However, they do not cover all parts of a sales contract. For example, Incoterms do not specify the goods that sellers offer, nor do they include the contract price or the method and timing of payment.

  They do not specify when ownership of the goods passes from seller to buyer, explain the documents needed for customs clearance, cover liability for not delivering goods as promised or for late delivery, or provide ways to resolve disputes.

• How do Incoterms rules affect my shipment?

  Incoterms rules determine when the responsibility and risk for the transfer of the goods from seller to buyer. Three key stages exist:
  1. Pre-carriage: The transport of goods from the seller’s premises to the departure port via truck, rail, or inland waterway.

  2. Main Carriage: The longest leg of the journey, typically international transport by sea, air, or rail.

  3. On-Carriage: Transport from the arrival port to the buyer’s premises via truck¹, rail, or inland waterway.

• How can I protect myself from risk using Incoterms rules?

  To effectively protect yourself from risks, it is essential to:
  – Reassess older Incoterms arrangements to ensure they meet current needs.
  – Understand the costs and responsibilities tied to each Incoterm.
  – Work with strong, reliable international partners to minimize risk.
  – Use reputable intermediaries for added protection and guarantees for both parties.

• Are Incoterms rules a complete contract of sale?

  No, Incoterms rules are not a complete contract of sale. Incoterms are an important part of a trade agreement.

  However, they only cover certain aspects of shipping and focus on the responsibilities and risks involved. A complete sales contract should include important parts, including payment terms, details on ownership transfer, and ways to resolve disputes.