At the turn of the 20th century, as international trade grew exponentially, there were numerous differences in trading and legal practices between countries. It was determined a common set of rules were needed. These shipping rules are known as Incoterms.
The first international trade terms were issued in 1923 by the ICC, with the first edition of “Incoterms” being published in 1936. The rules have been updated when needed, with amendments and additions in 1953, 1967, 1976, 1980, 2000, 2010, and recently 2020.
Why Incoterms Are Important
Incoterms provide sellers and buyers clear rules to help understand their responsibilities through each stage of the shipping process and ultimately reduce the risk of legal impediment.
Recent Changes with Incoterms 2020
Incoterms 2020 went into effect January 1, 2020. Similar to the previous version, Incoterms 2010, there are 11 pre-defined terms. The previous version divided these into four categories while the latest version has the terms listed in two categories.
The first category contains seven of the terms and are used regardless of the method of transport.
The second category, Incoterms for Sea and Inland Waterway Transport, contains the remaining four terms and are applicable only to sales that involve shipment by water where the goods can be verified at the point of loading on board the ship. These terms are not to be used for containers or combined transport methods.
Other changes for the Incoterms 2020 include:
- Renaming Delivered at Terminal (DAT) to Delivered at Place Unloaded (DPU)
- CIP requires the seller to purchase insurance to at least 110% of the value of the goods
- With Free Carrier (FCA), the buyer can now instruct the carrier to issue a bill of lading with an on-board notation to the seller to satisfy the terms of a letter of credit.
Incoterms 2020 Definitions
Each of the 11 Incoterms are listed and explained below. They are organized by the mode of transport.
Incoterms for Any Mode of Transport
EXW (Ex Works)
EXW Incoterms is defined by putting responsibility on the buyer for collecting the goods from the seller. The buyer accepts all onward arrangements, including associated costs, risks and liabilities.
FCA (Free Carrier)
FCA Incoterms states that the seller is responsible for the goods, including costs, up to delivery to the buyer’s chosen carrier at a named location – often a terminal or transport hub or forwarder’s warehouse. The seller is responsible for export clearance, after which the responsibility transfers to the buyer. If the named location is the seller’s place of business, then they are responsible for the loading of the goods. At all other named locations, the buyer is responsible for loading.
CPT (Carriage Paid To)
CPT Incoterms is when the seller bears all costs of transporting goods to the port of discharge but is not responsible for insuring the goods. The seller’s responsibility for the goods ends on delivery to the carrier at a named place.
CIP (Carriage and Insurance Paid)
CIP Incoterms have the same seller responsibilities as CPT (cost to the port of discharge, responsibility to delivery to carrier) but with the additional inclusion of insurance which is at least 110% of the value of the goods.
DAP (Delivered at Place)
DAP Incoterms means the seller clears the goods and bears all risks and costs with delivering the goods to the named place of destination, not unloaded. The buyer is responsible for unloading the goods at the named place of delivery. Buyer assumes responsibility from the point of unloading the goods, including import customs clearance, duties and taxes.
DPU (Delivered at Place Unloaded)
Previously known as DAT (Delivery at Terminal), it is now titled DPU because the buyer and/or seller may want the delivery of goods to occur someplace other than a terminal.
DPU Incoterms are used for consolidated containers with multiple consignees and the only term in which the seller must unload the goods. Seller clears the goods and assumes all risks and costs associated with delivering and unloading the goods at the port terminal or place of destination. Buyer is responsible for all costs and risks from this point.
DDP (Delivered Duty Paid)
DDP Incoterms make the seller responsible for all costs and risk associated with delivering the goods to the named place of destination. The seller must unload the goods.
Incoterms for Sea and Inland Waterway Transport
CFR (Cost and Freight)
CFR Incoterms state that the seller’s invoice will include the cost of the goods plus the cost of transporting the goods to the port of discharge (not including local charges). Buyer assumes all risks for the goods from the time they have been delivered on board the vessel at the port of shipment.
CIF (Cost, Insurance and Freight)
CIF Incoterms have the same seller responsibilities as CFR, plus a marine insurance policy also paid by the seller.
FAS (Free Alongside Ship)
FAS Incoterms means the seller places the goods alongside the carrier vessel at the port of export, with seller responsibility for export customs clearance and risk and cost up to that point. The buyer takes responsibility for the goods from loading onto the vessel onwards.
FOB (Free On Board)
FOB Incoterms allows the seller to clear the goods for export and is considered delivered when they are on board the vessel at the named port of shipment. The buyer takes responsibility for the goods onwards.
Incoterms create standardization among international trade. Each Incoterms option provides buyers and sellers clear rules to help them understand who is responsible at any point during the shipping process.
It is important to be familiar with the various Incoterms in order to know which term you should use. It’s especially important to understand each Incoterms definition and purpose if you will be entering into a global trade contract and are shipping internationally. Using the right term for your scenario helps reduce risk and avoid potential legal conflicts.