Trading organizations must ensure that their phrasing is in accordance with the new Incoterms 2020
rules and make the necessary adjustments to their contracts.
What is Incoterms 2020?
Incoterms 2020 consists of 11 international rules used in international trade, which determine the rights and obligations of the parties to a sales contract in terms of delivering goods from the seller to the buyer (delivery terms of goods).
Incoterms represent trade terms abbreviated by the first three letters, reflecting business practices in international goods supply. Incoterms® (International commerce terms) is a trademark of the International Chamber of Commerce (ICC). The ICC's Incoterms rules are designed for the use of trade terms in national and international trade.
Incoterms 2020 Rules
To provide merchants with international rules for interpreting trade terms most frequently used in foreign trade, the International Chamber of Commerce (ICC) published the first edition of Incoterms rules in 1936. Since then, with changes in trade parameters and an increase in various modes of goods delivery, the international Incoterms rules also evolved. Revisions and amendments were made in 1953, 1967, 1976, and from 1980 onwards, Incoterms began to be periodically reviewed every 10 years, updating in 1990, 2000, and 2010.
On September 10, 2019, the latest ninth edition of Incoterms 2020 rules was published, which took effect on January 1, 2020 (ICC publication No. 723). The new Incoterms 2020 rules represent an updated version of Incoterms 2010, which were developed at the International Chamber of Commerce (ICC) by a committee of experts - the Editorial Group. This committee included lawyers from the United States, the UK, France, Turkey, Germany, and for the first time, representatives from China and Australia. The goal of the Editorial Group and the review of the current Incoterms rules was to simplify them to the greatest extent, and moreover, to eliminate redundant delivery bases that could cause confusion and misunderstanding in the use of trade terms, and to more clearly explain all delivery terms for exporters and importers worldwide.
Application of Incoterms 2020 Rules
The international Incoterms 2020 rules can be applied from January 1, 2020. However, one can also continue to use the Incoterms 2010 rules, the Incoterms 2000 rules, or even earlier versions of Incoterms. Therefore, in international sales contracts, when indicating the delivery terms, it is necessary to specify the exact version of Incoterms.
It's important to note that Incoterms rules do not replace the sales contract but merely allow for its condensation. Incoterms delivery conditions do not define the transfer of ownership rights to the goods, do not indicate the price for the goods and the method of payment, or the consequences of breaching the contract. Incoterms only reflect the distribution between the seller and the buyer of duties and financial costs, such as: transporting the goods, loading and unloading them from the vehicle, customs clearance, payment of taxes, duties and fees, insurance, and the transfer of risks of loss and damage to the goods.
The ICC suggests the following template for applying the Incoterms rule in your contract:
"[Selected Incoterms delivery term] [name of the port, point or place] Incoterms [year of publication]"
For example: "FCA Moscow Russia Incoterms 2020"
The chosen Incoterms delivery term should correspond to the product, the method of its transportation, insurance, and customs clearance.
Differences between Incoterms 2020 and Incoterms 2010
It was expected that in the new Incoterms 2020 rules, terms EXW, FAS, and DDP would be removed, and new delivery terms CNI, DTP, and DPP would be introduced. However, at first glance, Incoterms 2020 did not undergo significant changes. No term was removed, and no term was added, but one of the delivery terms was renamed!
Incoterms 2020
The delivery term DAT replaces the outdated term DPU
The DAT delivery basis (Delivered at Terminal) has been renamed to DPU Incoterms 2020 (Delivered Named Place Unloaded).
This change was driven by two reasons:
Firstly, there was confusion regarding the differences between the DAT Incoterms 2010 term (Delivery at Terminal) and the DAP Incoterms 2010 term (Delivery At Place). The key difference between these terms is that under the DAT rule, delivery is made after the goods have been unloaded from the transport vehicle and made available to the buyer at the designated terminal. Whereas under the DAP term, delivery is made prior to unloading the goods - when they are made available to the buyer on the arriving transport vehicle ready for unloading.
The second reason for this change was to provide greater flexibility in defining the place of goods delivery. Now, the seller and buyer can agree on any place for the delivery of goods, not just at a specific terminal. The delivery terms of DPU Incoterms 2020 and DAT Incoterms 2010 are otherwise identical in content. The DPU Incoterms 2020 rule is the only term that requires the seller to unload the goods.
Updates to the FCA delivery term
The FCA Incoterms 2020 delivery term (Free Carrier) is the most commonly used Incoterms rule (about 40% of international commercial transactions are conducted under this trade term). It's a very versatile rule, allowing for the shipment of goods from various places (e.g., at an address, terminal, port, airport, etc.) located in the buyer's country.
The FCA Incoterms 2020 delivery basis provides for two possible places of shipment by the seller:
The first option is a location owned by the seller (e.g., warehouse, factory, store). For the seller, delivery is considered complete when the goods are physically loaded onto the transport vehicle specified by the buyer.
However, the second option applies to a location specified in the contract that is not owned by the seller (e.g., seaport, terminal). In this case, shipment is considered to have been made after the goods are loaded onto the carrier's transport vehicle paid for by the seller. It should be noted that unloading the goods from the transport vehicle is not the responsibility of the seller.
Issues arose with this term when the goods were shipped by sea transport (sea container), and if the seller and buyer agreed to use a letter of credit as the method of payment for the goods. To receive payment, the seller must confirm shipment to the buyer, i.e., after loading the goods on board the vessel, present a bill of lading marked "on board" to the bank for payment. However, the sea carrier typically did not provide the seller with a bill of lading with such a notation. Hence, exporters often used the FOB delivery term for sea container shipments, which required the seller to load the goods onto the ship and the sea carrier to provide a bill of lading to the seller.
According to the new Incoterms 2020 rules, the FCA delivery term allows the parties to agree in the sales contract that the buyer must instruct their carrier to issue an on-board bill of lading to the seller.
Insurance coverage level for CIF delivery terms
The CIF Incoterms 2020 delivery term (Cost Insurance and Freight) and the CIP Incoterms 2020 delivery term (Carriage and Insurance Paid to) are the two Incoterms rules that require the seller to purchase insurance on behalf of the buyer for exporting goods.
In the new Incoterms 2020 edition for CIF delivery terms, as in the Incoterms 2010 rules, minimum insurance coverage is required. The parties can agree in the contract to higher levels of coverage if they so wish.
However, there seems to be a slight inconsistency in your text. To clarify:
For the CIF Incoterms 2020, the seller is typically required to provide insurance with a minimum coverage. This reflects the historical use of this term primarily for commodities, where full 'all risk' insurance was not typically required or was often procured by the buyer in their own right.
On the other hand, for the CIP Incoterms 2020, the seller is now obligated to provide insurance with an expanded coverage, i.e., against all risks, and for an insured amount of at least 110% of the value of the goods. Given that CIP is a multimodal term often used for manufactured goods, it is recognized that a higher level of protection may be needed.
The rationale for the change is that the CIP term is often used for more valuable manufactured goods, whereas CIF is typically used for bulk commodity trades. The inclusion of a requirement for 'all risk' insurance for CIP shipments recognizes the nature of goods typically shipped under this term, while the continuation of the minimum coverage requirement for CIF reflects the nature of commodities and the fact that buyers often procure their own bespoke coverage for such shipments.
In either case, it's always essential for buyers and sellers to understand their respective obligations and to discuss and specify any specific insurance needs within their sales contract.
Incoterms 2020
Each Incoterms 2020 rule consists of two sections with ten articles each:
A1 / B1 General obligations
A2 / B2: Delivery
A3 / B3: Transfer of risks
A4 / B4: Transportation
A5 / B5: Insurance
A6 / B6: Transport and transport documents
A7 / B7: Export / Import customs clearance
A8 / B8: Inspection / packing / marking
A9 / B9: Allocation of costs
A10 / B10: Notices
In the "A" section, the seller's obligations are specified, while in the "B" section, the buyer's obligations are detailed.
Own transport in the transportation of goods
The international Incoterms 2010 rules were drafted under the assumption that when transporting goods from the seller to the buyer, they would be carried by a third-party carrier hired by either the seller or the buyer. This did not account for situations where an external carrier was not actually required because the seller or buyer used their own transport for the delivery of the goods. The new Incoterms 2020 rules now account for such situations where one can use their own transport for goods delivery or enter into a transport contract.
Allocation of costs
All costs associated with various aspects of buying and selling are now listed in the articles A9 / B9 "Allocation of costs" for each Incoterms rule, as well as in the relevant Incoterms articles to which they pertain.
The aim of this change is to provide users with a comprehensive list of costs in one place so that the seller and buyer are better informed about the expenses each will bear according to the definitions of Incoterms 2020.
Transit. Export and import customs clearance.
The international Incoterms 2020 rules explain more precisely which party, seller or buyer, bears the responsibility for carrying out customs clearance and customs formalities at the border, taking on the costs and risks. And the release of goods in transit is included for the first time. As for the latter, a rule is applied whereby the responsibility is placed on the one assuming the risk of transportation to the delivery place. Therefore, if the transportation risk is transferred in the country of origin (seller's country), the buyer assumes responsibility for transit customs clearance; conversely, if the risk transfers at the destination point (buyer's country), the seller bears responsibility.
Safety requirements
Transport safety has become the new standard (e.g.: mandatory container checks). Now, Article A4 / B4 ("Transportation") of each Incoterms rule requires the seller, where applicable, to comply with any safety requirements related to transport up to the delivery point and/or provide the buyer with any information regarding safety requirements related to transport necessary for the buyer to organize the transportation.
Article A7 / B7 ("Export/Import Customs Clearance") of each Incoterms rule, where applicable, also now explicitly requires the seller to carry out any security-related formalities when handling export and assists the buyer in obtaining any documents or information necessary for compliance with customs formalities related to import or transit. The expenses for ensuring transport security have also become more noticeable in a separate list of obligations on costs according to articles A9 / B9 of each Incoterms rule. It should be noted that references to "security" in Incoterms 2020 are generic; there's no specific reference to cybersecurity or other forms of security.
Each Incoterms 2020 rule now has "Explanatory Notes for Users" in which explanatory notes are much more extensively set out with illustrations of the respective Incoterms delivery term, in particular:
• When the given rule should be used
• When the risk transfers
• How the costs are allocated
The explanatory notes aim to help users choose the most appropriate Incoterms and provide guidance in case of disputes.
Incoterms 2020 Rule Table
Structurally, Incoterms 2020 look the same as in the previous version: eleven three-letter abbreviations ranging from "EXW" (Ex-Works) to "DDP" (Delivered Duty Paid), which continue to be divided into 2 categories depending on the mode of transport:
Incoterms 2020 Rules for All Modes of Transport:
EXW - "Ex Works"
FCA - "Free Carrier"
CPT - "Carriage Paid to"
CIP - "Carriage and Insurance Paid to"
DPU - "Delivered Named Place Unloaded"
DAP - "Delivered at Place"
DDP - "Delivered Duty Paid"
Incoterms 2020 Rules for Sea and Inland Waterway Transport:
FAS - "Free Alongside Ship"
FOB - "Free on Board"
CFR - "Cost and Freight"
CIF - "Cost Insurance and Freight"
4 groups of basic delivery terms under Incoterms 2020 (E, F, C, and D):
Classification principles: definition of parties' obligations concerning the transportation of the delivered goods and increasing seller's obligations from minimum to maximum.
Group "E" - delivery term EXW, under which the seller merely makes the goods available to the buyer at its premises;
Group "F" - delivery terms FCA, FAS, and FOB, under which the seller is obliged to hand over the goods to a carrier appointed by the buyer;
Group "C" - delivery terms CFR, CIF, CPT, and CIP, where the seller has the obligation to contract for carriage but without assuming the risk of loss or damage to the goods or additional costs due to events occurring after shipment and dispatch;
Group "D" - delivery terms DAP, DPU, and DDP, under which the seller bears all costs and risks required to bring the goods to the place of destination.
Detailed Explanation of Incoterms 2020 Rules
Group E (Departure)
Delivery terms EXW Incoterms 2020 stands for "Ex Works" named place.
Seller's obligation: Provide the goods ready for shipment.
Buyer's obligation: Handle export and import customs clearance and deliver the goods.
Risk transfers when the goods are placed at the seller's warehouse.
The main distinction is that EXW places minimal responsibilities on the seller.
Group F (Main Carriage Paid by Buyer)
Delivery terms FCA Incoterms 2020 stands for "Free Carrier" named place.
Seller's obligation: Complete export customs clearance and deliver the goods to the carrier designated by the buyer.
Buyer's obligation: Transport the goods and complete import customs clearance.
Risk transfers at the moment the seller hands over the goods to the carrier.
Delivery terms FAS Incoterms 2020 stands for "Free Alongside Ship" named port of shipment.
Seller's obligation: Complete export customs clearance and place the goods alongside the ship at the buyer's designated port of shipment.
Buyer's obligation: Load the goods onto the ship, deliver to the destination port, and complete import customs clearance.
Risk transfers at the port when the goods are placed alongside the ship.
Delivery terms FOB Incoterms 2020 stands for "Free On Board" named port of shipment.
Seller's obligation: Complete export customs clearance, deliver the goods to the port of shipment, and load them on board the ship specified by the buyer.
Buyer's obligation: Transport the goods to the destination port and complete import customs clearance.
Risk transfers on board the ship at the moment of full loading.
Group C (Main carriage paid by seller)
Delivery terms CFR Incoterms 2020 - CFR stands for "Cost and Freight" named port of destination.
Seller must: complete export customs clearance, load the goods onto the vessel, and deliver them to the port of discharge.
Buyer must: unload and take delivery of the goods at the port of discharge, as well as complete import customs clearance.
Risks transfer to the buyer once the goods are fully loaded onto the vessel.
Delivery terms CIF Incoterms 2020 - CIF stands for "Cost, Insurance and Freight" named port of destination.
Seller must: complete export customs clearance, insure the goods, load them onto the vessel, and deliver them to the port of discharge.
Buyer must: unload and take delivery of the goods at the port of discharge, as well as complete import customs clearance.
Risks transfer to the buyer once the goods are fully loaded onto the vessel.
Delivery terms CIP Incoterms 2020 - CIP stands for "Carriage and Insurance Paid to" named place of destination.
Seller must: complete export customs clearance, insure, and deliver the goods to the agreed-upon place of destination.
Buyer must: unload the goods and complete import customs clearance.
Risks transfer at the moment when the seller hands over the goods to the carrier.
Delivery terms CPT Incoterms 2020 - CPT stands for "Carriage Paid To" named place of destination.
Seller must: complete export customs clearance and deliver the goods to the agreed-upon place of destination.
Buyer must: unload the goods and complete import customs clearance.
Risks transfer at the moment when the seller hands over the goods to the carrier.
Group D (Delivery)
Delivery terms DAP Incoterms 2020 - DAP stands for "Delivered At Point" named point of destination.
Seller must: complete export customs clearance and deliver the goods to the agreed-upon point of destination.
Buyer must: unload the goods and complete import customs clearance.
Risks transfer at the point of destination.
Delivery terms DPU Incoterms 2020 - DPU stands for "Delivered Named Place Unloaded" named place of destination.
Seller must: complete export customs clearance, deliver the goods to the place of destination, and unload them.
Buyer must: accept the goods and complete import customs clearance.
Risks transfer at the place of destination after full unloading.
Delivery terms DDP Incoterms 2020 - DDP stands for "Delivered Duty Paid" named place of destination.
Seller must: complete export customs clearance, deliver the goods to the agreed-upon place of destination, and complete import customs clearance with duty payment.
Buyer must: unload and accept the goods.
Risks transfer at the place of destination.
The main difference is that DDP places maximum responsibilities on the seller.
"Incoterms 2020 is the latest version of the rules and will be in effect until 2030. The next review of the Incoterms rules is planned for 2029."
