Incoterms 2020
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What are Incoterms?
Put simply, Incoterms® are the selling terms that the buyer and seller of goods both agree to during international transactions. These rules are accepted by governments and legal authorities around the world. Understanding Incoterms® is a vital part of International Trade because they clearly state which tasks, costs and risks are associated with the buyer and the seller.
The Incoterm® states when the seller’s costs and risks are transferred onto the buyer. It’s also important to understand that not all rules apply in all cases. Some encompass any mode or modes of transport. Transport by all modes of transport (road, rail, air and sea) covers FCA, CPT, CIP, DAP, DPU and DDP. Sea/Inland waterway transport (Sea) covers FAS, FOB, CFR and CIF.
Description of the common Incoterms rules
EXW – Ex-Works or Ex-Warehouse
The seller makes the goods available at their premises, and the buyer assumes all responsibilities and costs for transportation, export, and import formalities.
FCA – Free Carrier
The seller delivers the goods to the carrier or another party specified by the buyer at the seller's premises or another named location. The buyer assumes responsibility for transportation and associated costs from that point.
FAS – Free Alongside Ship
The seller delivers the goods alongside the ship at a named port of shipment, and the buyer assumes responsibility for all transportation, export, and import formalities from that point.
FOB – Free On Board
The seller delivers the goods on board the ship at a named port of shipment and clears the goods for export. The buyer assumes responsibility for all transportation, import formalities, and associated costs from that point.
CFR – Cost and Freight
The seller arranges and pays for the carriage of goods to a named port of destination and clears the goods for export. The buyer assumes responsibility for import formalities, insurance, and associated costs from that point.
CIF – Cost, Insurance and Freight
Similar to CFR, but the seller also procures insurance paid coverage for the buyer's risk of loss or damage during transit to the named port of destination.
CPT – Carriage Paid To
The seller arranges and pays for the carriage of goods to a named destination, but the risk transfers to the buyer once the goods have been handed over to the carrier.
DPU – Delivered At Place Unloaded
The seller delivers when the goods, once unloaded are placed at the place of destination. The seller bears all risks involved in bringing the goods to, and unloading them at the named place of destination.
DAP – Delivered At Place
The seller delivers the goods to a named destination, ready for unloading, and bears all risks and costs until that point. The buyer is responsible for import formalities and associated costs.
DDP – Delivered Duty Paid
The seller delivers the goods to a named destination, cleared for import, and bears all costs and risks, including duties and taxes.
Why are Incoterms® vital in International Trade?
Incoterms® are referred to as International Commercial Terms. They are a set of rules published by the International Chamber of Commerce (ICC), which relate to International Commercial Law. According to the ICC, Incoterms® rules provide internationally accepted definitions and rules of interpretation for most common commercial terms used in contracts for the sale of goods’.
What are the different levels of insurance coverage in CIF and CIP?
The Incoterms® 2020 rules provide for different levels of insurance coverage in the Cost Insurance and Freight (CIF) rule and Carriage and Insurance Paid To (CIP) rule. CIF Incoterms® rule, which is reserved for use in maritime trade and often used in commodity trading, the Institute Cargo Clauses (C) remains the default level of coverage, giving parties the option to agree to a higher level of insurance cover. The CIP Incoterms® rule now requires a higher level of cover, compliant with the Institute Cargo Clauses (A) or similar clauses.
How does Incoterms® 2020 account for arranging carriage?
It recognises that not all commercial trade transactions from the seller to the buyer are conducted by a third-party carrier.
Is the Incoterms® rule DPU new?
No, simply renamed and moved to more accurately reflect the content of the rule. The former Delivered at Terminal (DAT) has been changed to Delivered at Place Unloaded (DPU) to emphasise that the place of destination can be any place and not just a “terminal,” and to underscore the sole difference from Delivered at Place Unloaded (DPU). And since delivery under DAP happens before unloading, Incoterms® 2020 presents the newly named DPU after DAP.