The Incoterms ® rules are published by the International Chamber of Commerce for the interpretation of the most commonly used trade terms in international trade – International Commercial Terms.
The main purpose of the Incoterms ® rules is to clearly set out the obligations of the seller and the buyer and the division of costs, risks and obligations related to the delivery of goods as required by the sales / purchase contract.
Each rule clearly specifies the responsibilities of the seller and the buyer. The terms range from a situation in which everything is fundamentally the responsibility of the buyer to the other extreme where everything is fundamentally the responsibility of the seller.
The ICC has recently published its latest revision – Incoterms® 2020 (ICC Publication 723E).
Key changes in the Incoterms ® 2020 rules
Incoterms® 2020 was published and launched in the United Kingdom on 10th September 2019 and can be incorporated into contracts with immediate effect (although traders are advised to liaise with suppliers and buyers to mutually agree the most appropriate terms).
The changes incorporated into the new Incoterms® 2020 rules may appear at first glance to be cosmetic; there are still 11 rules with the groups and two classifications presented as under Incoterms® 2010. The ICC has however gone to great lengths to redesign the format in order to assist traders in selecting the most appropriate Incoterms® rule to reflect how goods will be handled / move under the terms of the contract.
The key changes are as follows:
- More detailed introduction explaining clearly what the Incoterms® rules are, what they do and do not do and how they are best incorporated into a contract. The differences between Incoterms® 2010 and Incoterms® 2020 are also laid out.
- Upgraded ‘Explanatory Notes’ (previously ‘Guidance Notes’) prefacing each Incoterms® rule.
- A re-ordering of seller and buyer obligations emphasising delivery, risk and costs.
- The FCA rule provides for the buyer to instruct their carrier to issue a transport document to the seller stating that the goods have been loaded. This is particularly relevant for sellers required to present “on-board” bills of lading to banks under letters of credit.
- Different levels of insurance cover for CIP and CIF.
- For CIP, the seller is obliged to arrange / pay for insurance on behalf of the buyer of at least Institute Cargo Clause ‘A’ (all risks) with the provision for the seller and buyer to agree a reduced level of cover if appropriate.
- For CIF (as under Incoterms® 2010), the seller is obliged to arrange / pay for insurance cover on behalf of the buyer of at least Institute Cargo Clause ‘C’ with the provision for the seller and buyer to agree a higher level of cover if appropriate.
- Provision for seller or buyer to arrange carriage using their own transport under FCA (buyer) and DAP, DPU and DDP Incoterms® rules.
- Greater emphasis on security requirements within carriage obligations and allocation of costs.
- Change from DAT (Delivered at Terminal) to DPU (Delivered at Place Unloaded) with more flexibility on place of unloading by seller (named place). DPU now appears between DAP and DDP within the Incoterms® 2020 rules.
ICC Registered Trainers
Given the global importance of the Incoterms® 2020 rules, the ICC has developed a robust and challenging programme for accrediting trainers registered to deliver Incoterms® 2020 training.
Mark is one of a team of registered trainers delivering Incoterms® 2020 training on behalf of one of only two ICC UK licensed providers, Strong and Herd LLP.
The ICC advise companies to be wary of organisations offering dedicated training programmes on the subject of “Incoterms ® 2020” unless officially approved by the ICC, having successfully completed its own accreditation programme.
Quick Guide to the Incoterms ® 2020 rules
There are two classifications of Incoterms® rules:
- Rules for any mode or modes of transport
- EXW (Ex Works)
- FCA (Free Carrier)
- CPT (Carriage Paid To)
- CIP (Carriage and Insurance Paid)
- 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)
There are four categories into which the rules for any mode or modes of transport are grouped:
- The “E” rule (EXW) – Often referred to as the ‘Lazy Exporter’s Term’ where the seller makes the goods available not loaded at its own premises to the buyer, who then takes responsibility for all subsequent costs, risk and other obligations relating to the transit. As the buyer is responsible for export clearance and documentation in the country of shipment, the ICC recommends that EXW is appropriate for domestic trade only and should not be used for international shipments.
- The “F” rule (FCA) – The seller is responsible to deliver the goods to a carrier nominated by the buyer free of export formalities. The place of delivery can typically either be at the seller’s premises or another place of export (eg: freight forwarder’s facility at a port or airport).
- The “C” rules (CPT, CIP) – Rules where the seller is responsible for contracting and paying for carriage of the goods, but not responsible for risk of loss or damage to the goods once they have been delivered to the carrier in the country of export.
- The “D” rules (DAP, DPU and DDP) – Rules where the seller/exporter/manufacturer is responsible for all costs and risks associated with delivering the goods to the place of destination.
There are two categories into which the rules for sea and inland waterway transport are grouped:
- The “F” rule (FAS, FOB) – Rules where the seller is responsible to deliver the goods to a vessel nominated by the buyer free of export formalities. The place of delivery will be alongside a sea vessel (FAS) or on board a sea vessel (FOB) at a port in the country of export. The ICC recommends that FAS and FOB should not be used where goods are handed to a carrier for loading into a container prior to reaching the sea vessel. FCA (named place) is intended to replace FAS and FOB in such instances.
- The “C” rules (CFR, CIF) – Rules where the seller is responsible for contracting and paying for carriage of the goods, but not responsible for risk of loss or damage to the goods once they have been delivered on board a sea vessel at a port in the country of export. The ICC recommends that CFR and CIF (applicable for sea and inland waterway transport only) should not be used where goods are handed to a carrier for loading into a container prior to reaching the sea vessel. CPT and CIP are intended to replace CFR and CIF in such instances.
Incoterms ® 2020 and Letters of Credit
Sellers should be wary of selecting EXW, FCA or FOB when being paid under a Letter of Credit. The buyer’s agent will be controlling the production of certain documents required to be presented to the bank. What if these documents fail to arrive in time or contain discrepancies?
It may be more beneficial to consider rules such as CPT / CIP, CFR / CIF whereby the seller will be engaging the services of a carrier or freight forwarder acting on its behalf. This will provide the seller with greater control over timing and production of L/C documents to the bank.
A buyer will generally be reluctant to select DAP, DPU or DDP when the seller is able to present documents / claim payment following shipment. Assuming documents comply with the L/C terms, it is possible that the seller will be paid by the bank whilst goods are still in transit and delivery obligations have not been completed. That said, it must be remembered that under UCP 600, banks concern themselves with documents only and not the underlying contract (Article 4) or the goods to which the documents relate (Article 5).
This brief introductory guide has been produced by MJ Hayward Associates Ltd and is not intended as a substitute for Incoterms ® 2020 itself. It is strongly recommended that traders familiarise themselves with the full legal text of Incoterms ® 2020 available from https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-2020/