Incoterms® 2020 went into effect on January 1, 2020. Here are answers to many common questions, including what changes have been made in the newest version of Incoterms®.
What are Incoterms®?
Incoterms® are 11 predefined rules, or terms, published by the International Chamber of Commerce (ICC) to reduce uncertainties and ambiguities in contracts for international trade. Use of an Incoterm® three-digit code in a contract removes the need to write out the full text of that rule.
As described on the ICC website, “The Incoterms® rules are the world’s essential terms of trade for the sale of goods. Whether you are filing a purchase order, packaging and labelling a shipment for freight transport, or preparing a certificate of origin at a port, the Incoterms® rules are there to guide you. The Incoterms® rules provide specific guidance to individuals participating in the import and export of global trade on a daily basis.”
What Do Incoterms® Cover?
In a sales contract, Incoterms® delineate the primary obligations and responsibilities of the buyer and the seller, including:
- When delivery takes place
- When risk is transferred from seller to buyer
- Export and import clearance and insurance
- How any other costs that pertain to the delivery of the goods are divided
What Do Incoterms® Not Cover?
A complete contract cannot be written with the use of Incoterms® alone. Important elements of a contract that Incoterms® do not cover include:
- Price of the goods
- Title transfer
- Payment obligations and terms in detail
- Vessel requirements
- Unforeseeable circumstances that prevent either party from completing the contract (force majeure)
- Trade restrictions
- Compliance issues
- Jurisdiction-specific laws and regulations
How Are Incoterms® Created?
Incoterms® have been a project of the ICC since 1936. For each revision the ICC assembles an international panel to work out the specific terms. Incoterms® 2020 is the fourth revision in the last 30 years. Each of those revisions have been published in the first year of a new decade: 1990, 2000, 2010 and 2020. Incoterms® 2020 marks the first time that authors from China and Australia were included on the panel. Other Incoterms® 2020 authors are from the United States and the European Union.
Are Incoterms® Laws?
No, Incoterms® rules are not laws. Parties to a contract may agree to use Incoterms® as a convenient way to make sure they understand the specific details of a contract without having to write out those details. However, the parties may decide to not use Incoterms® and fully customize their contract instead.
What Are the 11 Terms of Incoterms® 2020?
Here’s a general overview of the 11 rules of Incoterms® 2020. Each rule includes sections and subsections. For detailed versions of the rules, see the answer to “How Do We Get a Complete Copy of Incoterms® 2020?” below.
These seven terms are for any mode of transport:
- CIP/Carriage & Insurance Paid To | The seller delivers the goods to the carrier or the buyer’s appointed agent and pays for international carriage and insurance.
- CPT/Carriage Paid To | The seller delivers the goods to the carrier or buyer-appointed agent and pays for international carriage.
- DAP/Delivery At Place | The seller delivers the goods by making them available to the buy at a named place.
- DDP/Delivered Duty Paid | The seller delivers the goods by placing them at the buyer’s disposal, already cleared for import with duties paid and ready to be unloaded at a named place.
- DPU/Delivered at Place Unloaded | The seller delivers the goods by unloading them at a named place.
- EXW/ExWorks | The seller makes the goods available to the buyer at the seller’s premises. At that point the buyer is fully responsible for the cost and risk.
- FCA/Free Carrier | The seller delivers the goods (or pays to have them delivered) to the carrier or agent named by the buyer. The seller accepts the risk and cost of loading the goods on the means of conveyance provided by the carrier. Once the carrier is in possession of the shipment, responsibility is transferred to the buyer.
These four terms are for ocean and inland waterway transport only:
- CFR/Cost & Freight | The seller pays for the costs and freight of the goods to a named destination and delivers when the goods are on board a vessel nominated by the buyer.
- CIF/Cost, Insurance & Freight | The seller pays for the costs, freight and insurance to a named destination and delivers when the goods are on board a vessel nominated by the buyer.
- FAS/Free Alongside Ship | The seller delivers the goods by placing them alongside a vessel nominated by the buyer.
- FOB/Free on Board | Once the goods are on board a vessel nominated by the buyer, they are considered delivered by the seller. At that point they become the responsibility of the buyer. Until then, the seller is responsible for delivering the goods, loading them onto the ship and all costs of duties including the terminal handling charge.
What Significant Changes Have Been Made in Incoterms® 2020?
Several significant changes from Incoterms® 2010 have been made in Incoterms® 2020, including:
- DAT (Delivery at Terminal) has been renamed DPU (Delivered at Place Unloaded) for 2020. The reason for the change is that goods frequently need to be delivered directly to a factory or warehouse rather than to a terminal.
- FCA (Free Carrier) has been updated to fix what was a common problem with transactions involving letters of credit. Banks often require the seller to present a Bill of Lading with an On-Board notation so the bank could recognize that the transaction was complete before making payment on the letter of credit. Incoterms 2010 did not provide for the option of an On-Board notation; Incoterms 2020 does.
- The level of insurance required for CIP (Carriage & Insurance Paid To) has been raised, while the requirement for CiF (Cost, Insurance & Freight) remains the same. The difference in requirements is because CIF is far less likely to cover goods with a high value per unit. In both cases, the seller is responsible for the cost of insurance.
- Unlike Incoterms 2010, Incoterms 2020 recognizes that sellers might deliver goods using their own vehicles (DIY seller) without the involvement of a third party to make the delivery for them.
- Security has become a greater concern since 2010, and Incoterms 2020 recognizes the heightened security requirements now in effect. Incoterms 2020 rules detail those requirements when discussing buyer/seller responsibilities for each trade item.
Is Incoterms® 2020 Now the Only Version that Can Be Used?
No, Incoterms® 2020 is not the only version of the rules that can be used. In fact, any previous edition can be cited in a contract simply by stating the year of that version. For example, the rule for Cost, Insurance & Freight (CIF) has changed for 2020. If the parties to the agreement wanted to use the rules from 2010, that rule would be cited in the contract as CIF 2010. If the contract were to state CIF with no year following it, then CIF 2020 would apply, as it is now the default rule. To avoid confusion, it is best to always state the version year for each Incoterms® rule in the contract.
How Do We Get a Complete Copy of Incoterms® 2020?
Any business that engages in international trade on a regular basis would be well-advised to become familiar with the details of the Incoterms® 2020 rules and to keep a copy of the complete rules on hand for reference. Here are two ways to get the complete rules. Please note that Jaguar Freight does NOT receive a commission for sales of Incoterms® 2020.
If you’re paying in euros, you can purchase a copy of Incoterms® 2020 as a book or eBook directly from the International Chamber of Commerce.
If you’re paying in US dollars, Incoterms® 2020 is available in paperback on Amazon.com.
What Should We Do If We Aren’t Sure We Understand Certain Rules?
Jaguar Freight is always here to help. If there are Incoterms® 2020 rules or rule changes that you find confusing. don’t hesitate to contact your Jaguar Freight agent at (516) 600-0170 or send us a message.