Incoterms 2020

ICC INCOTERMS 2020 DELIVERY METHODS

The Incoterms determined by the ICC are designed to share the costs and risks arising from the transportation and delivery of commercial goods correctly and fairly between the parties. The legal resolution of agreements in international trade is quite costly and long processes. Therefore, the elimination of disputes, the method of transportation between the seller and the buyer, who is responsible for the responsibilities and expenses are determined by Incoterms.

Incoterms were first used in 1936. New revisions were later published in 1953, 1967, 1976, 1980, 2000 and 2010. Incoterms 2020 is the eighth Incoterms to date.

However, the publication of a new Incoterms does not invalidate the old versions. If the buyer and seller reach an agreement and write “Delivery Term: CIP New York Incoterms 1980” in the delivery method field in their contract, it is accepted that the CIP delivery method rules in the Incoterms 1980 version are valid.

Incoterms 2020 is basically regulated by the responsibilities and risks of buyers and sellers and the stages of shipment, and consists of 11 Incoterms as EXW, FAS, FCA, FOB, CFR, CIF, CPT, CIP, DAP, DPU, DDP:

EXW – Ex Works (named place of delivery)

The seller makes the goods available at their premises, or at another named place. This term places the maximum obligation on the buyer and minimum obligations on the seller. The Ex Works term is often used while making an initial quotation for the sale of goods without any costs included.

EXW means that a buyer incurs the risks of bringing the goods to their final destination. Either the seller does not load the goods on collecting vehicles and does not clear them for export, or if the seller does load the goods, they do so at buyer's risk and cost. If the parties agree that the seller should be responsible for the loading of the goods on departure and to bear the risk and all costs of such loading, this must be made clear by adding explicit wording to this effect in the contract of sale.

There is no obligation for the seller to make a contract of carriage, but there is also no obligation for the buyer to arrange one either - the buyer may sell the goods on to their own customer for collection from the original seller's warehouse. However, in common practice the buyer arranges the collection of the freight from the designated location, and is responsible for clearing the goods through Customs. The buyer is also responsible for completing all the export documentation, although the seller does have an obligation to obtain information and documents at the buyer's request and cost.

These documentary requirements may result in two principal issues. Firstly, the stipulation for the buyer to complete the export declaration can be an issue in certain jurisdictions (not least the European Union) where the customs regulations require the declarant to be either an individual or corporation resident within the jurisdiction. If the buyer is based outside of the customs jurisdiction, they will be unable to clear the goods for export, meaning that the goods may be declared in the name of the seller by the buyer, even though the export formalities are the buyer's responsibility under the EXW term.

Secondly, most jurisdictions require companies to provide proof of export for tax purposes. In an EXW shipment, the buyer is under no obligation to provide such proof to the seller, or indeed to even export the goods. In a customs jurisdiction such as the European Union, this would leave the seller liable to a sales tax bill as if the goods were sold to a domestic customer. It is therefore of utmost importance that these matters are discussed with the buyer before the contract is agreed. It may well be that another Incoterm, such as FCA seller's premises, may be more suitable, since this puts the onus for declaring the goods for export onto the seller, which provides for more control over the export process.

FAS – Free Alongside Ship - Free Delivery Alongside the Ship (named place of delivery port)

The seller is deemed to have delivered the goods when the seller places them alongside the ship specified by the buyer at the port of shipment (for example, on a pier or barge). The seller is responsible for the preliminary transportation costs incurred for the goods to be loaded alongside the ship to be loaded, as well as export customs procedures and taxes. (If loading is to be done on a ship anchored offshore and both parties agree to this, the seller delivers the cargo by barging it alongside the ship.) The risk of loss or damage to the goods passes to the buyer when the goods are placed alongside the ship, and the buyer assumes responsibility for all costs from that moment on.

However, other operations such as loading onto the ship, transportation, unloading and import are the buyer's responsibility.

FCA – Free Carrier (named place of delivery)

The seller delivers the goods, cleared for export, at a named place (possibly including the seller's own premises). The goods can be delivered to a carrier nominated by the buyer, or to another party nominated by the buyer.

In many respects this Incoterm has replaced FOB in modern usage, although the critical point at which the risk passes moves from loading aboard the vessel to the named place. The chosen place of delivery affects the obligations of loading and unloading the goods at that place.

If delivery occurs at the seller's premises, or at any other location that is under the seller's control, the seller is responsible for loading the goods on to the buyer's carrier. However, if delivery occurs at any other place, the seller is deemed to have delivered the goods once their transport has arrived at the named place; the buyer is responsible for both unloading the goods and loading them onto their own carrier.

When FCA is used in sea shipments, the responsibility for the transportation of the goods ends at the port on behalf of the seller. On the other hand, the printing and sending of the bill of lading, which is a valuable document, was carried out under the responsibility of the carrier. With Incoterms 2020, the buyer company will be able to add the delivery of transport documents such as the bill of lading by the carrier to the seller according to the contracts they make with the buyer, although the transportation risk is on the buyer.

In Incoterms 2010 and earlier versions, the main problem with FCA was that in multiple shipments and especially in sea shipments, the seller's delivery obligation was completed before the export cargo was loaded onto the ship, for example at the port entrance. If a sale was made with a letter of credit, for example, the bank requested the bill of lading document from the seller and held him responsible for the details that should be written on the bill of lading.

However, since the seller (the exporter), ended his relationship with the carrier when the goods were delivered, seller was responsible for the missing or errors of a document for which he was not responsible. With the revision made in Incoterms 2020, the buyer will be able to instruct its carrier to deliver the bill of lading to the seller, with the seller's approval, although the carriage risk is on the buyer's own company. In this way, the responsibility for the bill of lading instruction and delivery to the bank stages will be shared with the seller.

FOB – Free On Board – Free Delivery on Board

It includes the seller's responsibility until the goods are carried to the deck/board of the ship where the loading organization is made by the buyer. In addition to the FAS delivery method, it is the delivery method in which the costs of loading the goods onto the ship are also paid. The transportation costs from the factory to the port customs office, as well as the port customs and port expenses, are the responsibility of the seller. All costs and risks after the goods are carried to the deck/board of the ship organised by the buyer.

As is known, FOB is written as an incorrect application for many shipments delivered as FCA in areas such as warehouses and terminals. The FOB delivery method is used only in maritime transportation.

CFR – Cost and Freight

CFR, (cost and freight) is an international commercial term meaning the cost of goods and freight. It indicates that all transportation costs of the product carried in import and export will be covered entirely by the exporter company until the previously determined port. However, any increase in costs or damages during transportation are the responsibility of the other party (buyer).

The difference between CIF "Cost Insurance & Freight" (sea transportation) and CIP "Cost Insurance Paid To" (land, air and combined transportation) is that it does not include insurance liability details.

CIF – Cost, Freight and Insurance

CIF (cost, insurance & freight) is an international trade term meaning cost, insurance and freight. In this type of trade, the seller assumes the same obligations as in the CFR term, but in addition to these, the seller also assumes the obligation to provide marine insurance against the risk of loss and damage to the goods during transportation. Here, the seller is responsible for concluding the insurance contract and paying the insurance premium.

The point that the buyer should take into account is that in the CIF term, only a minimum level of insurance coverage is expected from the seller. The CIF term also requires the seller to carry out the export procedures of the goods.

This term can only be used in sea or river transport. If the term "shipboard" no longer has any practical meaning in the transport process, such as in roll-on/roll-off or container delivery, then the term CIP would be more appropriate.

CPT – Carriage Paid To (named place of destination)

CPT replaces the C&F (cost and freight) and CFR terms for all shipping modes outside of non-containerized sea freight.

The seller pays for the carriage of the goods up to the named place of destination. However, the goods are considered to be delivered when the goods have been handed over to the first or main carrier, so that the risk transfers to buyer upon handing goods over to that carrier at the place of shipment in the country of Export.

The seller is responsible for origin costs including export clearance and freight costs for carriage to the named place of destination (either the final destination such as the buyer's facilities or a port of destination. This has to be agreed to by seller and buyer, however).

If the buyer requires the seller to obtain insurance, the Incoterm CIP should be considered instead.

CIP – Carriage and Insurance Paid to (named place of destination)

This term is broadly similar to the above CPT term, with the exception that the seller is required to obtain insurance for the goods while in transit. CIP requires the seller to insure the goods for 110% of the contract value under Institute Cargo Clauses (A) of the Institute of London Underwriters (which is a change from Incoterms 2010 where the minimum was Institute Cargo Clauses (C)), or any similar set of clauses, unless specifically agreed by both parties. The policy should be in the same currency as the contract, and should allow the buyer, the seller, and anyone else with an insurable interest in the goods to be able to make a claim.

CIP can be used for all modes of transport, whereas the Incoterm CIF should only be used for non-containerized sea-freight.

DAP – Delivered At Place (named place of destination)

Incoterms 2010 defines DAP as 'Delivered at Place' – the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. Under DAP terms, the risk passes from seller to buyer from the point of destination mentioned in the contract of delivery.

Once goods are ready for shipment, the necessary packing is carried out by the seller at their own cost, so that the goods reach their final destination safely. All necessary legal formalities in the exporting country are completed by the seller at their own cost and risk to clear the goods for export.

After arrival of the goods in the country of destination, the customs clearance in the importing country needs to be completed by the buyer, e.g. import permit, documents required by customs, etc., including all customs duties and taxes.

Under DAP terms, all carriage expenses with any terminal expenses are paid by seller up to the agreed destination point. The necessary unloading cost at final destination has to be borne by buyer under DAP terms.

DPU – Delivered At Place Unloaded (named place of destination)

This Incoterm requires that the seller delivers the goods, unloaded, at the named place of destination. The seller covers all the costs of transport (export fees, carriage, unloading from main carrier at destination port and destination port charges) and assumes all risk until arrival at the destination port or terminal.

The terminal can be a port, airport, or inland freight interchange, but must be a facility with the capability to receive the shipment. If the seller is not able to organize unloading, they should consider shipping under DAP terms instead. All charges after unloading (for example, import duty, taxes, customs and on-carriage) are to be borne by buyer. However, any delay or demurrage charges at the terminal will generally be for the seller's account.

Some uncertainty has emerged since Incoterms 2020 were adopted as to the meaning of "unloaded" when goods are delivered in a container, usually by sea, as the removal of the container from the incoming vessel may suggest that it has been "unloaded", but the goods themselves are not yet "unloaded" while they remain in the container.

DDP – Delivered Duty Paid (named place of destination)

Seller is responsible for delivering the goods to the named place in the country of the buyer, and pays all costs in bringing the goods to the destination including import duties and taxes. The seller is not responsible for unloading. This term is often used in place of the non-Incoterm "Free In Store (FIS)". This term places the maximum obligations on the seller and minimum obligations on the buyer. No risk or responsibility is transferred to the buyer until delivery of the goods at the named place of destination.

The most important consideration for DDP terms is that the seller is responsible for clearing the goods through customs in the buyer's country, including both paying the duties and taxes, and obtaining the necessary authorizations and registrations from the authorities in that country. Unless the rules and regulations in the buyer's country are very well understood, DDP terms can be a very big risk both in terms of delays and in unforeseen extra costs, and should be used with caution.