INCOTERMS® 2020: WHAT IS IT ALL ABOUT?
By: Mark Anthony P. Tamayo on January 9,2020
The idea of the International Commercial Terms, or Incoterms®, was first conceived by the International Chamber of Commerce in 1921, with the first edition published in 1936. Since 1980, Incoterms® have been updated every decade in order to align the rules with changes in logistics and transport practices and, consequently, to keep pace with the evolution of international trade.
The updated version of the Incoterms® took effect on January 1. Dubbed Incoterms® 2020, it replaces Incoterms® 2010.
Relevance of Incoterms®
Incoterms® are a set of universal rules commonly used by exporters (sellers) and importers (buyers) in cross-border commercial transactions and also, where appropriate, for domestic sales. They define the tasks, costs, risks and responsibilities associated with the transport and delivery of goods from the seller to the buyer. As such, their usage, to a large extent, minimize uncertainties arising from different practices and conflicting interpretations of the rules between traders around the world.
Questions such as who bears the insurance cost, point of completion of delivery and transportation costs, as well as the specific conditions and modalities for transportation, are governed and captured under the Incoterms®.
However, Incoterms® have limitations. Incoterms® do not conclude a contract, determine the price payable, currency or credit terms. They do not apply to contractual rights and obligations beyond the task of delivery. Neither do they provide remedies nor solutions in case of a breach of contract.
Incoterms® 2020
Incoterms® feature abbreviated terms with precise meanings.
As in the 2010 version, there are 11 Incoterms®, but this time divided by mode of transport. Seven rules are applicable to any transport mode (multimodal terms), while four “waterway only” rules are applicable to sea and inland waterway transport.
The multimodal terms are EXW (Ex Works), FCA (Free Carrier), CPT (Carriage Paid To), CIP (Carriage and Insurance Paid To), DAP (Delivered at Place), DPU (Delivered at Place Unloaded) and DDP (Delivered Duty Paid). Among these, the DPU is the only new one, replacing DAT (Delivered at Terminal).
The “waterway only” terms are FAS (Free Alongside Ship), FOB (Free On Board), CFR (Cost and Freight) and CIF (Cost Insurance and Freight).
In understanding the Incoterms®, one has to envision the cycle of a cross-border commercial sale transaction. A sale invariably starts from a purchase order (PO) from the buyer. The goods (subject of the PO) are either stored by the seller at its warehouse or any other storage place. The goods are then transported from the premises of the seller to the port of exportation and cleared with the Customs authorities. From there, goods are transported to the port or point of destination, and accordingly cleared with the Customs authorities.
The broad principle is that the seller is responsible for costs incurred up to the point of delivery, and the buyer is responsible for costs beyond that.
Here are the rules:
EXW (named place of delivery). Under EXW, the seller fulfills his obligation to deliver to the buyer by making the suitable packaged goods available at the seller’s premises or other named location (e.g., depot, plant, factory, warehouse). The buyer then bears all costs and risks involved in taking the goods from the seller’s premises to their final destination. Thus, the obligation to provide carriage and to load the goods belongs to the buyer. If the seller does load the goods, it generally does so at the buyer’s risk and cost.
The buyer is also responsible for completing all export documents and clearing the goods through Customs. This, however, can be an issue in certain jurisdictions where the customs rules require the declarant to be either a resident individual or resident corporation. In such a case, the goods may be declared in the name of the seller by the buyer, even though the export formalities are the buyer’s responsibility. In the alternative, the FCA term could instead be considered.
Overall, an EXW arrangement places the least obligation on the seller and more on the buyer.
FOB (named port of shipment). In an FOB set up, the seller bears all costs and risks up to the point the goods are loaded “on board the vessel” at the named port of shipment. The seller is likewise required to clear the goods for export.
The risk of loss of or damage to the goods shifts to the buyer when the goods pass the ship’s rail, i.e., off the dock and placed on the ship.
The buyer pays the cost of marine freight transportation, bill of lading fees and insurance, as well as unloading and transportation cost.
CPT (named place of destination) and CFR (named port of destination). In a CPT, the seller is responsible for origin costs, including export clearance and freight costs for carriage to the named place of destination agreed to by the parties.
The goods are considered to be delivered when these have been handed over to the first or main carrier. The risk transfers then to the buyer upon handing the goods over to that carrier (not at the ship’s rail) at the place of shipment in the country of export.
If the buyer requires the seller to obtain insurance, the Incoterm CIP should be considered instead.
Similarly, in a CFR, the seller delivers when the goods are placed “on board the vessel” at the port of shipment. The seller pays the cost and freight to bring the goods to the named port of destination. The seller is also required to clear the goods for export.
The risk of loss, damage and any related costs are transferred to the buyer when the goods pass the ship’s rail in the port of shipment.
Insurance is the buyer’s responsibility. Otherwise, the Incoterm CIF should be considered.
CFR should only be used for non-containerized sea freight and inland waterway transport. For all other modes of transport, CPT should be used.
Next week, the salient features of the other Incoterms® shall be discussed.