Everyone in the business of dealing with shipments and transactions cutting across international boundaries is sure to be aware of Incoterms® or atleast must have heard about it and how they are used to standardize all commercial transactions.
Until this year, we were accustomed to the 2010 version which is set to become defunct at the onset of 2020. If there is no year stated in the Incoterms®, then it is automatically assumed to be the 2020 version (from January 1st onwards).
International Commercial Terms aka INCOTERMS of 2020 refers to a set of 11 rules defined by the International Chamber of Commerce which define the responsibilities of the selling and buying parties in all international transactions.
INCOTERMS® 2020 – Decoded
If you are already aware of Incoterms® 2010, then there are some critical updates to the new version that you need to know and you can skip the rest of the blog.
| INCOTERMS® 2010 | INCOTERMS® 2020 |
|---|---|
| FCA: Seller is responsible for loading the goods to buyer's choice of transport; no bill-of-lading is available which makes it a predicament to get credit payments from Banks. | FCA: You now have an option to instruct the carrier to issue a Bill of Lading with on-board notation before boarding the goods on to the vessel, which ensures smoother payments from banks. |
| CIP: Minimum level of coverage as referred to by Clause (C) of Institute Cargo Clauses. | CIP: Seller should purchase higher level of insurance coverage, which is a cover of the Institute Cargo Clause (A) - atleast 110% of the value of goods. |
| DAT - Delivery at Terminal - this sometimes caused confusion as it could be perceived that the delivery is only at terminal. | DAT renamed to DPU (Delivery Place Unloaded) since destination point is not just a 'terminal', but could also be a place. |
| FCA, DAP, DAT, DDP: Compulsorily supposed to engage a 3rd part carrier. | FCA, DAP, DPU and DDP: May be transported using the seller's own transportation mode, instead of using a 3rd party carrier. |
| Security requirements were ambiguous. | All security-related obligations and allocation of costs are formalized clearly. |
EXW - Ex Works
Seller Responsibility: The seller packs and makes the shipment available at specified place for transporting - either their factory or depot.
Buyer Responsibility: The buyer takes the goods onto a vehicle, and oversees all export procedures for shipment and transport to desired destination including insurance.
Things to Note: Operational difficulties in cross-border transactions. The seller cannot wash their hands off and need to be involved in the export process to facilitate smooth logistics.
FCA - Free Carrier
Seller Responsibility: Export clearance is the sole risk attributed to the seller. Seller loads the goods on to truck or other transport vehicle if the seller's premise is the named place.
Buyer Responsibility: After goods have been delivered to destination, all risks and costs are to be borne by the seller.
Things to Note: Once the supplier has cleared goods to be "accepted" for shipment, the buyer assumes all risk henceforth from the pre-decided location where shipment changes hands.
Advantages: FCA can be applicable for multiple transport modes. The flexibility of the rules makes it suitable for various situations when the buyer arranges the main carriage. When buyer arranges for main carriage of container goods, FCA is the way to go. There is a temporary solution now when banks insist on seeing the bill of lading to clear the credit as you can now instruct the carrier to issue the bill.
FAS - Free Alongside Ship (Restricted to Sea or Waterway)
Seller Responsibility: Supplier is in charge of delivering all the goods, clears it for export and gets it alongside a vessel at an agreed upon port after which the risk transfers to the buyer.
Buyer Responsibility: Loading all components and bears all costs which follow.
Things to Note: This is best suited only for shipments which are transported by sea or inland waterways. Suppliers are usually restricted to use this rule when they have direct access to the vessel for loading.
Advantages: Bulk cargo or non-container based goods are best suited for FAS.
FOB - Free On Board
Seller Responsibility: Supplier is in charge of delivering all the goods, clears it for export and gets it loaded into the vessel at the port upon which the risk is transferred to the buyer.
Buyer Responsibility: All risks and costs after loading the shipment rests with the buyer.
Things to Note: Suited only when goods are transported by sea or inland waterways. Suppliers are usually restricted to use this rule when they have direct access to the vessel. Similar to FAS, bulk cargo or non-container based goods are ideally suited.
CFR - Cost and Freight
Seller Responsibility: Supplier is supposed to completely oversee the transport of goods from the warehouse to the destination port, "including the costs" along with delivering the goods, clearing it for export and loading it to the vessel.
Buyer Responsibility: Once on-board, the buyer assumes all the risk (and costs) - before the main carriage takes place.
Things to Note: Supplier would not be required to cover the shipment with marine insurance against loss or damage.
CIF - Cost, Insurance & Freight
Seller Responsibility: The seller responsibilities are the same as that of CFR except that here, the seller is also responsible for the cost of insuring the shipment.
Buyer Responsibility: Once on-board, the buyer assumes all the risk (and costs) - before the main carriage takes place.
Things to Note: Since this term requires minimal cover, many commercial roadblocks may arise. This would have to be addressed specifically in order to ensure clarity. The responsibility transfers to the customer once the shipment is loaded to the vessel.
CPT - Carriage Paid To...
Seller Responsibility: The seller takes complete responsibility of cost and risk involved in ensuring the components are shipped to the destination.
Buyer Responsibility: The customer should pay for insuring the goods. Upon shipment, the buyer needs to take responsibility and unload the goods as well as transport it back to the warehouse or factory as desired.
Things to Note: Terminal Handling Charges (THC) is payable to the terminal operator. To be on the safer side, the buyer should be aware of whether or not THC is included by the carrier as part of the freight charges. If not, then the buyer would have to shell out money to compensate for THC.
CIP - Carriage and Insurance Paid to...
Seller & Buyer Responsibility: The responsibilities and risks are the same as that of CPT except for the insurance being taken care of by the seller.
Things to Note: The seller is entitled to buy a Clause (A) level of cover to insure the shipment. Earlier, the buyer needed to be alert to address the level of cover in the agreement so as to avoid later confusions but this is resolved in the latest version.
DPU - Delivered at Place Unloaded (formerly DAT)
Seller Responsibility: Seller assumes full risk and cost for arranging transportation and delivery from the point where the components or parts have been shipped, until unloading safely at the agreed place.
Buyer Responsibility: The buyer takes over once the goods have been unloaded safely and then it's their personal responsibility to transport the goods back to the warehouse.
Things to Note: The delivery port needs to be specifically addressed or else there are chances of the goods being deported at a different destination. This rule is apt when it comes to containerised shipments as the seller would be in charge for most of the logistics and can be used for multiple modes of transport.
DAP - Delivery At Place
Seller Responsibility: The seller is in charge of ensuring the successful transport of goods from the supplier warehouse to the destination port.
Buyer Responsibility: A major difference from DAT is that the buyer has to unload the goods and take responsibility thereafter.
Things to Note: All import duties, clearances and taxes are to be borne by the buyer as unloading is the buyer's risk. This rule stands good involving all modes of transport.
DDP - Delivery Duty Paid
Seller Responsibility: The seller responsibilities are the similar to that of DAP but also include the local clearance, taxes and duties.
Buyer Responsibility: After the clearance of goods, the buyer can then take over and ensure the safe transfer of all the components back to the factory or warehouse.
Things to Note: As you can notice, this rule emphasizes on maximum risk for the seller. From a buyer's perspective, there is a risk of goods not getting cleared since a foreign supplier may not be well-versed with the complex local rules.
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