By Michael Wilson ,
Shippers' Interest & Cargo Programs Leader
01/29/2020
What Are The Incoterms Rules?
The Incoterms Rules are standard trade definitions issued by the International Chamber of Commerce (ICC). They are a set of rules outlining the standard commercial terms used in contracts for the sale of goods, and are intended to divide transaction costs and responsibilities between buyer and seller.
There are a total of 11 different standard trading terms with the Incoterms® 2020 Rules being as follows:
Rules for any mode or modes of carriage
- EXW(“Ex Works”)
- FCA(“Free Carrier”)
- CPT(“Carriage Paid To”)
- CIP(“Carriage and Insurance Paid To”)
- DAP(“Delivered at Place”)
- DPU(“Delivered at Place Unloaded”)
- DDP(“Delivered Duty Paid”)
Rules for Sea and Inland Waterway Transport
- FAS(Free Alongside Ship)
- FOB(Free On Board)
- CFR(Cost and Freight)
- CIF(Cost Insurance and Freight)
What Is The Purpose Of The Incoterms Rules?
The Incoterms Rules have guided, facilitated, and assisted in standardizing sale purchase agreements by allowing parties to incorporate general responsibilities for each party, including the transfer of risk from seller to buyer, as well as specify the loading and unloading responsibilities of the buyer and seller.
These terms are recognized as the international standard and are accepted by governments, legal authorities, practitioners, and custom authorities worldwide for use in international trade.
The Incoterms Rules are not implied; they must be specifically stated in the contract. They are not binding and do not have the force of law or legislation in imposing upon the parties how a sales contract is conducted. The terms merely set out the obligations, but the specific manner of performance is left open to the parties.
When Do The Revisions Take Effect?
Effective January 1, 2020, the Incoterms® 2020 Rules came into effect. As per their predecessor, the Incoterms® 2020 Rules have no mandatory force, and apply only where they are expressly incorporated into sale contracts.
Why Were The Incoterms® 2010 Rules Revised?
The revisions to Incoterms® 2010 Rules are in part to encourage parties to consider more carefully the particular Incoterms Rules they choose to incorporate, by promoting a better understanding of the operation of the rules of incorporation.
Their main focus is the issue of the transfer of risk from seller to buyer defined in terms of “delivery.” They also highlight other responsibilities such as insurance, export and import clearance, and the division of other costs involved in the physical delivery of the goods from buyer to seller.
Key Points Of Change
The Incoterms® 2020 Rules are more intuitively structured relative to the 2010 Edition for increased clarity and to facilitate risk analysis. The general rule with the Incoterms Rules remains with the point of delivery of the goods being the important discerning point as to who is responsible for costs incurred in transit. The new 2020 Rules provide further details concerning the specific allocation of costs between a buyer and a seller and reflect an evolutionary improvement over the 2010 Rules in that regard.
The main substantive changes are as follows:
- Change DAT (Delivered at Terminal) to DPU (Delivered at Place Unloaded):Under the 2010 Incoterms Rules, under the DAT incoterm, the seller is responsible to deliver the goods and unload at the discharge “terminal”. Under the 2020 Incoterms Rules, the change from DAT to DPU (“Delivered at Place Unloaded”) is to highlight that the place of destination could be any place, not only the “terminal”.
- Changes to the Insurance Placement Obligations under CIP:The requirement concerning the placement of insurance on CIP term has changed. While the CIF term requires the seller to place insurance on the goods for the buyer, at a minimum, Institute Cargo “C” Clauses coverage. Under the 2020 Incoterms Rules, the CIP term will however now call for the placement by the seller of the Institute Cargo “A” Clauses coverage.
- Transport Security requirements:Under the 2020 Incoterms Rules, liability as to security has been addressed largely under two situations: Transportation from the country of origin to the destination country, and customs clearance formalities and procedures.
- Transit of goods may be performed by Buyer or Seller:Under the 2020 Incoterms Rules, FCA, DAP, DPU, and DDP terms address the possibility that a party to the sales contract, i.e. seller or buyer, may actually perform the carriage of goods. As such we now see the delivery requirement that a seller or a buyer will “contract or arrange at its own cost for the carriage of the goods from the named place of delivery”.
- FCA: Bills of Lading with an on-board notation:Under the 2020 Incoterms Rules, as it relates to maritime transport, under the FCA term a seller can agree to the buyer instructing the carrier to issue an on-board bill of lading to the seller after the loading of the goods onto the vessel. As such, the seller then can submit the bill of lading to the buyer / said bank, as the notation would largely be for a letter of credit transaction.
Incoterms Usage
It is very important to be clear and specific in your contract. If you want the Incoterms 2020 Rules to apply to your contract, the safest way to ensure that your intentions are clear is through the specific use of words, such as: “[the chosen Incoterms rule] [named port, place or point] Incoterms 2020.”
Examples:
- CIF Shanghai Port Incoterms 2020
- DAP 1166 Avenue of the Americas, New York, NY 10028 Incoterms 2020.
Additionally, as a point to remember, in all Incoterms except “C” terms, the named place indicates where the goods are “delivered,” which is where risk transfers from the buyer to the seller. Under “C” terms, the named place indicates the destination to which the seller must organize and pay for the carriage of the goods, which is not the place or port of delivery.
For More Information
Please contact your Marsh representative to arrange for a more detailed presentation on Incoterms and how they impact your cargo insurance program.
