Incoterms 2020
What are Incoterms?
Incoterms (International Commercial Terms) can be taken as a set of optional international rules that the International Chamber of Commerce has compiled and defined on the basis of more or less standardized practices by merchants.
Incoterms are rules that determine:
Distribution of expenses.
So that both the seller and the buyer know what expenses are included in the sale price, thus facilitating comparison with other offers, whether domestic or international.
Risk transfer.
Because they define the time and place where the seller's responsibility ends and the buyer's begins.
Delivery of the merchandise.
They indicate the specific place where the seller must deposit the merchandise and, therefore, the point where the buyer must collect it.
At Banco Sabadell we want to help your company in its international business operations.
What's new in Incoterms 2020
See the major changes.
Incoterm classification and rules
The International Chamber of Commerce classifies Incoterms according to the mode of transport used.
Recommendations when using Incoterms
- Always include the expression "Incoterms 2020" after the Incoterms term. For example: "CIF Istanbul (Incoterms 2020)".
- Use only the 11 Incoterms in force in their three letter form, followed by the agreed delivery point or port.
- Give precise instructions to the carrier regarding the Incoterms term used to ensure that the transport contract agrees with the sale contract.
- FAS, FOB, CFR and CIF Incoterms must be used exclusively for traditional maritime transport (goods loaded on board a ship).
- For containers, multimodal and general cargo, use the Incoterms EXW, FCA, CPT, CIP, DAP, DPU and DDP.
- Incoterms C (CIF, CFR, CIP and CPT) are not arrival or delivery contracts at destination but lading contracts. Delivery occurs at origin, as in group F.
- Remember that additional specifications may be required regarding:
- When will delivery take place and who should carry out the loading and unloading.
- Insurance coverage and its geographical and temporal scope.
- The limitations regarding transportation (refrigerated containers, prohibition of merchandise on deck ...).
- Force majeure, exonerative or temporary extension clauses, especially if you are responsible for customs clearance or delivery to a point located in the interior of the country.
- See the Incoterms® 2020 publication of the International Chamber of Commerce.
EXW (Ex Works)
The seller fulfils his delivery obligation once the merchandise has been placed in his own premises (factory, warehouse, etc.) at the buyer's disposal.
The seller is not responsible for loading the merchandise on the transport provided by the buyer nor for the export customs clearance, unless otherwise agreed. The buyer bears all the costs and risks inherent in transporting the merchandise from the seller's premises to the desired destination. This term represents the minimum obligation on the part of the seller.
This term should not be used when the buyer is unable to carry out, directly or indirectly, the export formalities. In such circumstances, the term FCA should be used.
It is suitable for domestic trade. In the case of international trade, FCA is more advisable.
Nor is it suitable when payment is made by documentary credit. If documentary credit is used, no shipping document should be required, as delivery to the carrier is not one of the seller’s obligations.
FCA (Free Carrier)
The seller has complied with his delivery obligation once the merchandise has been delivered, after the export procedures have been performed, to the carrier designated by the buyer at the agreed place.
If the buyer does not indicate a specific delivery point, the seller can choose, within the stipulated place or area, where he will deliver to the carrier. When, in accordance with commercial practice, the assistance of the seller is required to carry out the contract with the carrier (in cases such as transport by train or plane), the seller may do so at the buyer’s expense and risk. The term FCA can be used for all means of transport, including multimodal.
The term FCA should be used for maritime transport in all those cases where the delivery is not carried out in the traditional way on board the ship (in a cargo, train, container or similar terminal). If the term FOB were used for these cases, the seller would bear the risks and costs until the merchandise is put on board for a period over which he would have no possibility to control.
CPT (Carriage Paid To)
The seller pays the freight costs to transport the goods to the agreed destination.
The risk of loss or damage to the merchandise, together with any additional costs due to events that may occur after the date of delivery to the carrier, are transferred from the seller to the buyer at the time the merchandise has been delivered into the carrier’s custody. If the transport involves several carriers to the agreed destination point, the risk is transferred at the moment the merchandise has been delivered to the first carrier.
CPT requires the seller to clear the merchandise for export. The term can be used for all means of transport, including multimodal.
CIP (Carriage and Insurance Paid To)
The seller has the same obligations as under the CPT term and, moreover, must obtain transport insurance against the risk of loss or damage to the goods incurred by the buyer during transport.
The seller contracts the insurance and pays the corresponding premium. The seller is obliged to obtain insurance that complies with the coverage provided by clauses (A) of the Institute's Loading Clauses (LMA / IUA) or other similar clauses. The insured amount must be, at least, for the price established in the contract plus 10% (that is, 110%).
CIP requires the seller to clear the merchandise for export. The term can be used for all means of transport, including multimodal.
DAP (Delivered at Place)
The seller has fulfilled his obligation to deliver the merchandise once it has been made available to the buyer at the agreed destination.
The seller must bear the risks and costs of placing the merchandise at the agreed point (excluding fees, taxes and any other official expense derived from importing it into the country of destination). The buyer must bear any additional costs and assume the risks derived from the lack of clearance of the merchandise in the country of import. If the parties want the seller to complete the customs formalities and bear the resulting costs and risks, the precise instructions must be added to the DAP term. If the parties wish to add some of the costs derived from the importation to the obligations of the seller (such as VAT), this must be clearly stated (for example, “DAP, VAT paid”).
Generally, this term is not appropriate in a documentary credit, since a document certifying delivery at destination would be required, which would distort the documentary credit.
DPU (Delivered at Place Unloaded)
The seller has fulfilled his obligation to deliver the merchandise once it has been made available to the buyer at the agreed destination unloaded but not cleared for import.
The seller must bear all the risks and costs until the merchandise is placed at the agreed point (excluding fees, taxes and any other official expense derived from importing it into the country of destination).
Generally, this term is not appropriate in a documentary credit, since a document certifying delivery at destination would be required, which would distort the documentary credit.
DDP (Delivered Duty Paid)
The seller has fulfilled his obligation to deliver the merchandise once it has been made available to the buyer at the agreed destination. The seller must bear the risks and costs of placing the merchandise at the agreed point (including customs duties, taxes and delivery costs of the goods cleared for import. While the term EXW represents the minimum obligation for the seller, the term DDP represents the maximum obligation.
This term should not be used if the seller cannot, directly or indirectly, obtain the import license.
If the parties want the pay to satisfy the import duties, the term DAP should be used.
If the parties wish to exclude some of the costs derived from the importation to the obligations of the seller (such as VAT), this must be clearly stated (for example, “DDP, VAT unpaid”).
Generally, this term is not appropriate in a documentary credit, since a document certifying delivery at destination would be required, which would distort the documentary
FAS (Free Alongside Ship)
The seller complies with his delivery obligation once the merchandise has been placed next to the ship at the dock or the barges at the designated point of shipment.
In this case, the buyer must bear all the costs and risks of loss or damage to the merchandise from that moment. The term FAS can only be used for maritime or inland water transport. FAS requires the seller to clear the merchandise for export.
When the goods are in containers the term FAS would be inappropriate and the term FCA should be used.
FOB (Free On Board)
The seller complies with his delivery obligation once the merchandise has been placed on board at the designated point of shipment.
The buyer must bear all the costs and risks of loss or damage to the merchandise from that moment. FOB requires the seller to clear the merchandise for export. The term FOB can only be used for maritime or inland water transport. When passing the ship's rail is of no practical use for the purposes herein discussed, such as roll-on / roll-off (the load goes onto the ship inside the truck or wagon) or container traffic, the term FCA is more suitable.
CFR (Cost and Freight)
The seller must pay the costs and freight necessary to place the merchandise in the port of destination, but it is the buyer who runs the risk of loss or damage to the merchandise, along with any additional costs due to events that may occur later to the merchandise on board the ship at the port of shipment.
CFR requires the seller to clear the merchandise for export. The term CFR can only be used for maritime or inland water transport. When passing the ship's rail is of no practical use for the purposes herein discussed, such as roll-on / roll-off (the load goes onto the ship inside the truck or wagon) or container traffic, the term CPT is more suitable.
CIF (Insurance and Freight)
The seller has the same obligations as under the CFR term and, moreover, must obtain maritime transport insurance against the risk of loss or damage to the goods incurred by the buyer during transport.
The seller contracts the insurance and pays the corresponding premium. The buyer must bear in mind that under term CIF, the seller is obliged to obtain insurance that complies with the coverage provided by clauses (C) of the Institute's Loading Clauses (LMA / IUA) or other similar clauses. The insured amount must be, at least, for the price established in the contract plus 10% (that is, 110%).
CIF requires the seller to clear the merchandise for export. The term CIF can only be used for maritime or inland water transport. When passing the ship's rail is (as in FOB) of no practical use for the purposes herein discussed, such as roll-on / roll-off (the load goes onto the ship inside the truck or wagon) or container traffic, the term CIP is more suitable.