Incoterms 2020
The Importance of Incoterms®
The International Chamber of Commerce (ICC) in Paris has been issuing "International Rules for the Interpretation of Trade Terms" since 1936, known as Incoterms (International Commercial Terms). Since then, the Incoterms have been continuously adapted to changing trade practices.
The current version of Incoterms® 2020 came into effect on January 1, 2020.
Incoterms® are globally recognized, standardized contract and delivery terms that enable parties to a purchase agreement to have a standardized process in international and domestic trade. Incoterms® determin the allocation of costs, distribution of risks, and obligations between the contracting parties. The significance of the Incoterms rules lies in the clarity of mutual obligations obtained through their use. By using Incoterms, misunderstandings and costly disputes can be prevented, thus reducing the risk of legal complications for both parties. However, legal issues such as contract formation, transfer of ownership, payment processing, or the consequences of contract breaches are not regulated by Incoterms. These are governed by the contractual provisions or the underlying law of the contract.
Functions of Incoterms®
Incoterms® primarily regulate the relationship between the buyer and seller:
- Obligations for the transportation route
- Costs for the transportation route
- Risk coverage
From these, the following aspects arise:
- Who needs to obtain the shipping documents
- Who bears the costs for it
- Who has to pay any customs duties that may arise
- Who needs to obtain and bear the costs for specific transport documents
- Who needs to insure the goods for whom, and who bears the costs
- Who needs to inform the other party, when, and about what
- Who needs to carry out the inspection of the goods, and who bears the costs for it
- How the goods need to be packed, and who pays for the packaging
The Eleven Clauses of Incoterms® 2020
Incoterms® 2020 follows the same structure and classification as Incoterms 2010. The clause DAT (Delivered at Terminal) has been changed to DPU (Delivered at Place Unloaded).
EXW - Ex Works
EXW - Ex Works
FCA - Free Carrier
FAS - Free Alongside Ship
FOB - Free On Board
CFR - Cost and Freight
CIF - Cost, Insurance and Freight
CPT - Carriage Paid To
CIP - Carriage, Insurance Paid To
DAP - Delivered at Place
DPU - Delivered at Place Unloaded
DDP - Delivered Duty Paid
The Classification of Incoterms® 2020
Incoterms® 2020 can be classified in two ways:
Classification by Mode of Transport
Clauses that apply to any mode of transport include: EXW, FCA, CPT, CIP, DAP, DPU, DDP.
Clauses that apply only to maritime and/or inland waterway transport include: FAS, FOB, CFR, CIF.
Each group is characterized by the same basic principle of cost and risk allocation within the group. Additionally, the seller's obligations increase with each group, while the buyer's obligations decrease accordingly.
Clauses that apply only to maritime and/or inland waterway transport include: FAS, FOB, CFR, CIF.
Each group is characterized by the same basic principle of cost and risk allocation within the group. Additionally, the seller's obligations increase with each group, while the buyer's obligations decrease accordingly.
Classification by Type of Transaction
The classification is divided into four groups:
Group E - Departure Clause (EXW)
Group F - Shipment Clauses without the seller bearing the transportation costs (FCA, FAS, FOB)
Group C - Shipment Clauses with the seller bearing the transportation costs (CFR, CIF, CPT, CIP)
Group D - Arrival Clauses (DAP, DPU, DDP)
The Main and Secondary Functions of Incoterms®
The transportation of goods from the place of shipment to the destination is divided into two segments based on the agreed point of transfer by the contracting parties. The Incoterms regulate the respective obligations of the contracting parties for each segment. In general, the seller is responsible for the segment up to the transfer point, while the buyer is responsible thereafter.
Main Functions of Incoterms®
Within their scope, Incoterms primarily govern:
- The obligations each party must assume for their respective segment
- The costs each party must bear for their respective segment
- Who covers which risks
Secondary Functions of Incoterms®
In addition, Incoterms also regulate:
- Who needs to obtain the shipping documents, who bears the costs for it, and who needs to pay any customs duties that may arise
- Who needs to obtain the transport documents and who bears the costs for it
- Who needs to insure the goods for whom, and who bears the costs
- Who needs to inform the other party, when, and about what
- Who needs to carry out the inspection of the goods, and who bears the costs for it
- How the goods need to be packed and who pays for the packaging
The Individual Clauses
E Group
In the only clause of the E Group, costs and risks transfer to the buyer from the moment the goods are made available at the named place.
EXW - Ex Works
The EXW clause is a pure departure clause. It only defines the minimum obligation of the seller to make the products available for pickup at the named place. The seller does not bear any transportation costs. Moreover, loading and clearing for export are not the seller's responsibility. The goods only need to be packaged and labeled.
The EXW clause should be used with caution for the following reasons: If export regulations in the country of exportation restrict the export procedures and require exporters to handle export declarations and necessary permits, the EXW clause is unsuitable. This is because the EXW clause places the full export obligations on the buyer. However, the buyer may often be unable to export the goods without the seller's assistance, especially if they lack necessary information. In such cases, it is generally advisable to use the FCA clause.
The EXW clause is a pure departure clause. It only defines the minimum obligation of the seller to make the products available for pickup at the named place. The seller does not bear any transportation costs. Moreover, loading and clearing for export are not the seller's responsibility. The goods only need to be packaged and labeled.
The EXW clause should be used with caution for the following reasons: If export regulations in the country of exportation restrict the export procedures and require exporters to handle export declarations and necessary permits, the EXW clause is unsuitable. This is because the EXW clause places the full export obligations on the buyer. However, the buyer may often be unable to export the goods without the seller's assistance, especially if they lack necessary information. In such cases, it is generally advisable to use the FCA clause.
F Group
Within the F Group, the buyer bears the cost of the main carriage, and the risk transfers to the buyer when the goods are handed over to the main carrier.
FCA - Free Carrier
The seller must deliver the goods to the place designated by the buyer. The seller is responsible for packaging, inspection, and clearing the goods for export at their own cost. Depending on the designated place of delivery, the seller may also need to load the goods. The buyer is responsible for the main transportation, transit, and import. This clause is applicable to all modes of transport and is well-suited for container transportation.
The seller must deliver the goods to the place designated by the buyer. The seller is responsible for packaging, inspection, and clearing the goods for export at their own cost. Depending on the designated place of delivery, the seller may also need to load the goods. The buyer is responsible for the main transportation, transit, and import. This clause is applicable to all modes of transport and is well-suited for container transportation.
FAS - Free Alongside Ship
The seller must pack the goods and transport them at their own cost to the designated port of shipment specified by the buyer and clear them for export. Delivery is considered complete when the goods are placed alongside the ship at the named port of shipment. This clause is only applicable to sea or inland waterway transportation.
The seller must pack the goods and transport them at their own cost to the designated port of shipment specified by the buyer and clear them for export. Delivery is considered complete when the goods are placed alongside the ship at the named port of shipment. This clause is only applicable to sea or inland waterway transportation.
FOB - Free On Board
Free on Board means that the seller fulfills their delivery obligation when they deliver the goods on board the ship at the named port of shipment. The seller is responsible for packaging the goods and clearing them for export at their own cost. This clause is also only applicable to sea or inland waterway transportation. However, it is not suitable if the goods are handed over to the carrier before they are on board the ship.
Free on Board means that the seller fulfills their delivery obligation when they deliver the goods on board the ship at the named port of shipment. The seller is responsible for packaging the goods and clearing them for export at their own cost. This clause is also only applicable to sea or inland waterway transportation. However, it is not suitable if the goods are handed over to the carrier before they are on board the ship.
C Group
The common characteristic of the C Group is that the seller bears the main carriage at their own cost, but the risk transfers to the buyer upon delivery of the goods to the main carrier.
CFR - Cost and Freight
The seller delivers the goods when they are on board the ship. The seller is also responsible for the costs and freight necessary to transport the goods to the named destination port. The seller is required to package the goods and clear them for export at their own cost.
This clause is only applicable to sea or inland waterway transportation. It is not suitable for container transportation, where the handover to the carrier occurs before the goods are on board the ship. In such cases, CPT should be used.
The seller delivers the goods when they are on board the ship. The seller is also responsible for the costs and freight necessary to transport the goods to the named destination port. The seller is required to package the goods and clear them for export at their own cost.
This clause is only applicable to sea or inland waterway transportation. It is not suitable for container transportation, where the handover to the carrier occurs before the goods are on board the ship. In such cases, CPT should be used.
CIF - Cost, Insurance and Freight
The seller delivers the goods when they are on board the ship. The seller is also responsible for the costs and freight necessary to transport the goods to the named destination port. Additionally, the seller is required to arrange a transport insurance contract (with minimum coverage) at their own cost. The seller is also responsible for packaging the goods and clearing them for export.
This clause is also only applicable to sea or inland waterway transportation and is not suitable for container transportation. For the latter, CIP should be used.
The seller delivers the goods when they are on board the ship. The seller is also responsible for the costs and freight necessary to transport the goods to the named destination port. Additionally, the seller is required to arrange a transport insurance contract (with minimum coverage) at their own cost. The seller is also responsible for packaging the goods and clearing them for export.
This clause is also only applicable to sea or inland waterway transportation and is not suitable for container transportation. For the latter, CIP should be used.
CPT - Carriage Paid To
The seller must deliver the goods to the carrier designated by them. Additionally, they must bear the freight costs necessary to transport the goods to the named destination. They must also package the goods and clear them for export. This clause is applicable to all modes of transport.
CIP - Carriage, Insurance Paid To
The seller must deliver the goods to the carrier designated by them. Additionally, they must bear the freight costs necessary to transport the goods to the named destination. They are also required to arrange a transport insurance contract (again, with minimum coverage) at their own cost. The CIP clause also obliges the seller to package the goods and clear them for export. This clause is also applicable to all modes of transport.
The seller must deliver the goods to the carrier designated by them. Additionally, they must bear the freight costs necessary to transport the goods to the named destination. They must also package the goods and clear them for export. This clause is applicable to all modes of transport.
CIP - Carriage, Insurance Paid To
The seller must deliver the goods to the carrier designated by them. Additionally, they must bear the freight costs necessary to transport the goods to the named destination. They are also required to arrange a transport insurance contract (again, with minimum coverage) at their own cost. The CIP clause also obliges the seller to package the goods and clear them for export. This clause is also applicable to all modes of transport.
D Group
In the D clauses, the seller bears all costs and risks until the goods arrive at the named destination.
DAP - Delivered At Place
The seller must make the goods available to the buyer at the named destination, ready for unloading, on the arriving means of transport. The seller is required to clear the goods for export but is not obligated to clear them for import.
This clause is applicable to all modes of transport and is particularly suitable when multiple modes of transport are used within one shipment.
The seller must make the goods available to the buyer at the named destination, ready for unloading, on the arriving means of transport. The seller is required to clear the goods for export but is not obligated to clear them for import.
This clause is applicable to all modes of transport and is particularly suitable when multiple modes of transport are used within one shipment.
DPU - Delivered at Place Unloaded
Delivered at Place Unloaded means that the seller fulfills their obligation once the goods have been unloaded from the arriving means of transport and are made available to the buyer at the named destination in the destination port or location. The seller is responsible for clearing the goods for export but is not obligated to clear them for import. The seller bears all costs and risks of transporting the goods to the named destination in the destination port or location, including unloading costs. If the location is something other than a "terminal," the seller must ensure that the goods can be unloaded at the delivery location.
This clause is applicable to all modes of transport and is also suitable when multiple modes of transport are used within one shipment.
Delivered at Place Unloaded means that the seller fulfills their obligation once the goods have been unloaded from the arriving means of transport and are made available to the buyer at the named destination in the destination port or location. The seller is responsible for clearing the goods for export but is not obligated to clear them for import. The seller bears all costs and risks of transporting the goods to the named destination in the destination port or location, including unloading costs. If the location is something other than a "terminal," the seller must ensure that the goods can be unloaded at the delivery location.
This clause is applicable to all modes of transport and is also suitable when multiple modes of transport are used within one shipment.
DDP - Delivered Duty Paid
DDP represents the maximum obligation of the seller. The seller must clear the goods for export and import and deliver them, unloaded, on the arriving means of transport at the named destination. The seller bears all costs and risks until the goods arrive at the named destination.
DDP represents the maximum obligation of the seller. The seller must clear the goods for export and import and deliver them, unloaded, on the arriving means of transport at the named destination. The seller bears all costs and risks until the goods arrive at the named destination.
Key Changes in the 2020 Edition
The updated Incoterms® 2020 edition includes several adjustments and changes.
The Incoterms® clause DAT (Delivered at Terminal) has been changed to DPU (Delivered at Place Unloaded), allowing any named destination to be considered, and it does not have to be a "terminal."
Incoterms® 2020 addresses the market demand for bills of lading with "on-board" notations and the FCA Incoterms® clause.
Incoterms® 2020 addresses the market demand for bills of lading with "on-board" notations and the FCA Incoterms® clause.
Clearer presentation of costs within the framework.
Incoterms® 2020 adjusts the insurance coverage in the CIF and CIP clauses to reflect current business practices.
The FCA, DAP, DPU, and DDP clauses of Incoterms® 2020 consider the business practice of more sellers or buyers organizing the transportation of goods using their own means of transport.
The Incoterms® 2020 clauses take into account the increased global security requirements for the transportation of goods and provide clear rules for the allocation of security obligations and associated costs.
The Incoterms® 2020 clauses adapt the framework to new global trade practices.
The Incoterms® 2020 clauses take into account the increased global security requirements for the transportation of goods and provide clear rules for the allocation of security obligations and associated costs.
The Incoterms® 2020 clauses adapt the framework to new global trade practices.
References
The official ICC rules for the interpretation of national and international trade terms - Incoterms® 2020 - are available in a bilingual edition (German/English) and can be ordered through the following website.
For more information on Incoterms® and their development, please visit the website of the International Chamber of Commerce in Paris at http://www.iccwbo.org.
For more information on Incoterms® and their development, please visit the website of the International Chamber of Commerce in Paris at http://www.iccwbo.org.
Publication and distribution of Incoterms® 2020
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