What are Incoterms ® ?
Incoterms ® , also known as world’s essential terms of trade, are a set of rules that establish commonly accepted definitions and rules related to the delivery of goods between trading partners worldwide. Incoterms ® rules sets out the the basic roles and responsibilities of seller and buyer regarding costs, risk and insurance of the goods.
The ICC has launched the Incoterms ® 2020, which is effective from the 1st of January 2020. More accessible and easier to use than Incoterms ® 2010 , Incoterms ® 2020 includes more detailed explanatory notes with enhanced graphics to illustrate the responsibilities of importers and exporters for each Incoterms ® rule.. The introduction to Incoterms ® 2020 also includes a more detailed explanation on how to choose the most appropriate Incoterms ® rule for a given transaction.
The most important changes made by ICC to the Incoterms ® 2010 rules in the Incoterms ® 2020 are the following:
- There is a change in the three-letter name for Delivered at Terminal (DAT) to DPU (Delivered at Place Unloaded) – Previously, the word “Terminal” was confusing, but now DPU term covers all delivery options.
- Bills of lading with an on-board notation and the FCA Incoterms ® rule.
Other relevant changes made by Incoterms ® 2020:
- Different levels of insurance cover in CIF and CIP – the level of insurance continues to be negotiable between the buyer and the seller.
- Arranging for carriage with seller’s or buyer’s own means of transport in FCA, DAP, DPU and DDP.
- Inclusion of security-related requirements within carriage obligations and costs.
Rules for any mode or modes of transport
It is an international trade term that describes when a seller makes a product available at a designated location. At this point, the buyer gains ownership of the goods. Then, he handles all costs and risk after the products are collected.
Ex Works is most favourable to the seller. He has no obligation to load the goods or to cover freight costs once the goods have left the premises. This term can cause complications for the buyer if products are for export.
With FCA, the seller is responsible for delivering the goods to the buyer’s nominated premises. He needs to load the stocks onto the buyer’s transportation. Then, the seller organises the transport, including export clearance and meeting security requirements.
The risk is transferred once the goods are loaded onto the buyer’s transportation. Thus, any damage to the products when on board the vessel is the responsibility of the buyer.
The buyer pays the cost of freight, bill of lading fees and insurance. Also, he pays for unloading and transportation costs to the final destination.
The Seller delivers and transfers risk of loss or damage by handing over goods to the carrier chosen by the seller, cleared for export, who pays for moving the goods to the named place of destination. From the time the goods are transfered to the first carrier, the Buyer bears the risks of loss or damage.
The Seller delivers and transfers risk of loss or damage by handing over goods to the carrier chosen by the seller, cleared for export, who pays for moving the goods to the named place of destination. From the time the goods are transferred to the first carrier, the Buyer bears the risks of loss or damage. The Seller, however, purchases cargo insurance thru to the named place of destination.
The seller delivers the goods to a named place of destination but is not responsible for unloading. His responsibilities include packing, export clearance, carriage expenses and any terminal costs up to the agreed destination port.
DAP means the buyer is responsible for all costs, duties and taxes associated with unloading the goods. He is also responsible for clearing customs to import the products into the named country of destination.
The risk is transferred to the buyer at the final designated place of destination
This term is often used for consolidated containers with multiple consignees. It is the only term that tasks the seller with unloading the goods.
The seller covers all the costs of transportation (export fees and carriage). Also, at the destination port, the seller pays the unloading from the carrier and the port charges. He assumes all risks until arrival at the destination port or terminal.
The buyer is responsible for all costs and risks after unloading. It includes import duties, taxes and customs clearance. Also, the buyer pays local transportation to the final named place of destination.
If the seller is not able to organise unloading, he should consider transport under DAP terms instead.
DDP means the seller bears all risks and costs associated with clearing and delivering the goods to the designated place.
The seller is liable for clearing the goods through customs in the buyer’s country. It includes payment of both duties and taxes. Furthermore, he needs to obtain the necessary authorisations and registrations from the authorities. However, the seller is not responsible for unloading.
This term places the maximum obligations on the seller and minimum obligations on the buyer. The buyer bears no risk or responsibility until the goods are at the final agreed place
Rules for sea and inland waterway transport
The seller delivers the goods alongside the buyer’s vessel at the named port of shipment. It means that the buyer bears all costs and risks of loss or damage from that moment.
The FAS term requires the seller to clear the goods for export (under previous Incoterms ®, the buyer arranged export clearance).
Under FOB terms, the seller bears costs and risks until the goods are loaded on board of the designated vessel.
The seller’s responsibility includes arranging export clearance. At the same time, the buyer pays the cost of marine freight, bill of lading fees and insurance. He is also responsible for unloading and local transportation costs from the port of arrival to the final destination.
Any damage to the goods when on board the vessel is the responsibility of the buyer.
CFR incurs more significant risk and responsibility for the seller who pays for the carriage of the goods up to the named port of destination.
The risk is transferred to the buyer at the country of export. Specifically, when the goods have been loaded on board the ship.
The shipper pays for export clearance and freight costs to the selected port. Furthermore, he is responsible for any damage to the goods on board the ship until the port of final destination.
The buyer pays for local delivery from the port to the final destination and is responsible for purchasing insurance. If the buyer requires the seller to obtain insurance, the parties should consider the Incoterm ® CIF instead.
The seller clears the goods for export and delivers them when they are on board at the port of shipment. The seller bears the cost of freight and insurance to the designated port of destination. Also, he is responsible for any damage to the goods on board the ship.
The seller needs to purchase the minimum level of insurance under Clause C of the Institute Cargo Clauses. (This requirement is unchanged from Incoterms ® 2010.)
At the port of arrival, the seller must turn over three key documents – invoice, insurance policy and bill of lading. Those documents represent the cost, insurance and freight of CIF.
If you want to find out more about Incoterms rules, you can access them on the official website of the International Chamber of Commerce (ICC)