INCOTERMS

There are 11 INCOTERMS® 2020 which are represented by a 3-letter term as an abbreviation for their meaning.

The below chart summarizes the seller’s and buyer’s responsibilities for each term in INCOTERMS 2020.

• INCOTERMS 2020 are not law. They are a voluntary set of rules that traders need to agree to and explicitly incorporate into a contract of sale.
• Once the INCOTERMS 2020 have been incorporated into a contract, they become part of the legal agreement and are, therefore, enforceable under the law applicable to the contract of sale.
• The revision year (i.e. 2020) must be specified to avoid any misunderstandings as this is the 9^th time INCOTERMS have been updated and previous iterations contain varying information.
• Ownership of the goods, the transfer of title and retention of title cannot be determined by examining only the Incoterms 2020 portion of a contract alone. Traders should include an appropriate ownership clause in their contract to cover these points.
• INCOTERMS 2020 do not include rules for payment terms.
• As INCOTERMS 2020 rules are voluntary, it is possible to make customized changes to these rules when incorporating these into a contract, however utmost care should be taken to ensure any changes are clearly outlined in the contract.

Ex Works 2020 term, the seller makes the goods available at a named place (which is often their premises). It is the responsibility of the buyer to collect and load cargo and arrange all customs and shipping formalities from that point onwards.
Under EXW terms the seller isn’t required to provide any means for the cargo to be loaded, including by special equipment, nor are they required to physically assist with the loading in any way. The seller does however have responsibility to provide any information that may be needed to enable the export customs clearance for the goods. This may include appropriate permissions to export or other requirements such as security, quarantine, health or defense arrangements, or a pre-inspection of cargo.

The term FCA (Free Carrier “named place of delivery”) means the seller completes its goods delivery obligation to the buyer in one of two methods:

• • Option 1: Where the named place is identified as the seller’s premises: Once the goods have been loaded on the collecting transport vehicle the buyer has arranged. The loading operation is at the seller’s risk and cost.

Or

• • Option 2: Where the named place is identified as the buyer’s carrier: Once the seller places the goods, ready to be unloaded from the delivery vehicle at the buyer’s named place. The unloading of the goods at the named place is at the buyer’s cost and risk.

Eg: FCA Shenzhen Port, INCOTERMS 2020

Under FCA, the seller has the responsibility of carrying out export customs clearance and other official formalities. Essentially, the seller makes the goods available ‘ready for export’. The rest of the responsibilities fall on the buyer, such as, contracting for carriage, insuring the cargo, import customs clearance, and local delivery. The bulk of the risk and the control is held by the buyer as the responsibility transfers before the commencement of the carriage journey.

CPT (Carriage Paid To “Named Place of Destination”) means the seller supplies goods to the buyer, the price for which includes pre-paid carriage to a named place of destination. The seller completes their goods delivery obligation and transfers risks to the buyer when the goods are handed over to the carrier.
Under CPT term the seller has an obligation to deliver the cargo to the agreed named place or point of destination and pay the transport charges. Noting that the named place does not have to be in the country of the buyer. The seller does not guarantee the goods will arrive in sound condition, or that the total consignment will arrive, or that the goods will arrive at all. Costs for handling cargo on arrival are generally at the buyer’s expense unless they form part of the contract of carriage. It is important for the buyer to know at the contract formation stage which costs are included in the CPT price and which costs are excluded.

CIP (Carriage and Insurance Paid To “Named place of Destination”) is similar to CPT except it includes insurance being arranged by the seller. In Incoterms 2020, CIP means the default level of cover is now Institute Cargo Clauses A or similar clauses appropriate to the means of transport used. This means that the seller must arrange the highest level or insurance unless agreed otherwise. Insurance cover must be at least 110% of the value of the goods and be in the same currency as the contract. The buyer has an obligation to provide information they hold to assist the seller with obtaining insurance but this is done at the seller’s risk and cost.

Under DAP terms (Delivered at Place) the seller completes delivery and transfers risk to the buyer when the goods are placed at the buyer’s disposal at the agreed place of destination, but not unloaded from the vehicle. The seller is not responsible for unloading the cargo at the destination nor are they required to arrange the import clearance and/or payment of duties and taxes as these responsibilities fall on the buyer.
The named destination may include a terminal or any other place beyond the customs entry point in the destination country. It is important to specify in the contract where the named destination is so that it is clear to the seller and buyer where their responsibility begins and ends.  There are no restrictions on the named place so it can be a terminal, a buyer’s warehouse, a transport hub, or a third-party warehouse.

DPU is a new term within the Incoterms 2020 rules and has replaced the term DAT or Delivered at Terminal, which had become confusing due to the many definitions of a Terminal. DPU (Delivered at Place Unloaded) is similar to DAP however the responsibility is on the seller to unload the goods at destination. The seller completes delivery and transfers risks to the buyer when the goods, unloaded from the arriving delivery vehicle, are placed at the buyer’s disposal at the agreed place of destination.

Under DDP (Delivered Duty Paid to “Named Place of Destination”) the responsibility is on the seller to not only deliver the goods to the named place of destination, but also to complete all customs formalities and pay the import duties applicable in the country of destination. The seller completes delivery and transfers risk to the buyer when the goods, not unloaded from the arriving delivery vehicle, are placed at the buyer’s disposal at the agreed place of destination.
DDP is not a very popular term to use as it requires the seller to complete import customs formalities in a foreign jurisdiction. This means they’ll be less familiar with these processes and in some cases the import declarations may need to be completed in a foreign language and/or have restrictions on who can clear goods for import with border control authorities.

Note: Although done at the seller’s risk and cost, if requested, the buyer must assist the seller  to provide any necessary information or documentation required in order to arrange the export border clearance, transit clearance, and/or import clearance.
There is no obligation for the buyer to insure the cargo, as it is the seller who bears the risk of loss of, or damage to, the goods in transit. The seller is also under no obligation to arrange insurance however prudent risk management practices suggest the seller should mitigate risks by insuring the cargo, at their risk and cost.

FAS is a term that should only be used for sea or inland waterway (lakes and rivers) transport, as this term is not recommended for container traffic. The term FAS means that the seller completes their obligation to the buyer when the goods are placed alongside the ship, nominated by the buyer at the named port of shipment.
The contract should specify as clearly as possible the loading point at the named port of shipment where the goods are to be transferred from the quay or barge to the ship. The costs and risks to that point are for the account of the seller and these costs and associated handling charges may vary according to the practice of the port

FOB is a term that should only be used for sea or inland waterway (lakes and rivers) transport, as this term is not recommended for container traffic. FOB stands for Free On Board and means the seller completes their delivery obligation to the buyer once the goods have been placed on board the vessel, nominated by the buyer, at named port of shipment. The risk of loss or damage to the goods transfers to the buyer once the goods are on board the vessel. It is important to note delivery applies to the whole consignment. So, for example, if part of the cargo is lost or damaged prior to the complete consignment having been loaded on board the vessel at the named port of departure, then the seller has failed to deliver. The goods have to be successfully loaded on board but do not necessarily have to be stowed or lashed, just placed on board. Once on board the risk has transfers from the seller to the buyer.

The term CFR or Cost and Freight to “Named Port of Destination” means the seller completes its goods delivery obligation to the buyer once the goods have been placed on board the vessel at the port of shipment with a carrier arranged by the seller. The seller is responsible for any loading costs at origin, as well as any costs during transit that are captured under the contract of carriage up to the named port of destination. It is the buyer’s responsibility to receive the cargo from the carrier and arrange all customs and documentation formalities from the port of destination.

CIF (Cost, Insurance and Freight to “Named Port of Destination”) is similar to CFR however it is the responsibility of the seller to arrange insurance. In Incoterms 2020 for CIF Terms the default level of cover is at Institute Cargo Clauses C or any other similar clauses (Incoterms® 2020 CIF Article 5).

This means that under CIF terms the default insurance is at the lowest level of cover – unless it is agreed otherwise.

• Insurance has to be for at least 110% of the value of the contract goods in the same currency of the contract
• Insurance must cover the journey from place of delivery at origin to at least the named place of destination
• Insurance must allow the buyer to have an insurable interest and be able to claim directly from the insurer

The terms FOB, CIF and CFR are extremely popular in today’s international trade market. However, in many cases these terms are actually being used incorrectly when it comes to full container sea freight, less than container load sea freight and air freight shipments. Misuse of these terms on a contract of sale can cause conflicts if anything goes wrong with the shipment because the point where the risk and responsibility transfers from seller to buyer is not clearly defined by these terms for multimodal use.

Following the specific guidelines of Incoterms 2020, FOB, CIF and CFR terms should only be used for non-containerized sea or inland water way freight, otherwise known as bulk shipments. The reason these terms should not be used for containerized sea and air freight movements is simply because these are multimodal operations that can involve several intermediary locations before reaching the ship or air freight. When transporting the goods by container or aircraft, the seller loses physical control over the consignment at a point prior to the goods reaching the vessel. In fact, it is not unusual for ten lift-on and lift-offs to occur, through various third parties, from the time the consignment leaves the seller’s premises until it is placed on board the vessel. While these terms aren’t suitable for container traffic, they should be used for cargo such as bulk shipments, where the product is often placed alongside a ship for loading, or it is loaded onto a ship using specified equipment according to the nature of the goods.

The popularity of FOB could be due to its prominent use in customs valuations. Customs in much of the developed world use the FOB and CIF value to attribute shipping costs to calculate specific duties and taxes for goods. By using FOB and CIF values, customs create a standard of which costs are to be included and excluded in calculating the amount of tax payable, no matter what the Incoterms on the contract of sale actually are. However, these border control activities are not concerned with contractual matters or risk transfer in transit which the Incoterms on the contract of sale deal with. As a result, these terms have consistently been used for all modes of transport, sometimes contradicting, and confusing the risks and responsibilities of the buyer and seller in a contract leading to disagreements between the parties.