An Overview of the Incoterms 2020
A big role is played by Maritime transport in international trade. Almost 85% of international trade is done through sea routes. For this, a sales contract is entered between the international buyer and seller. Both buyer and seller before entering into the sales contract agree on certain standard terms of duties and liabilities by adopting an Incoterm.
Though the importance of Incoterms is immense, most people are not aware of them, therefore the Article will throw light on its meaning, importance and the 11 terms defined by the Updated Incoterms 2020 published by the International Chamber of Commerce (hereafter referred to as ICC).
Table of Contents:
- Incoterms 2020
- Terms That Apply to Any Mode of Transport
- Terms That Apply to Waterway Transport
In international trade, there are different steps and procedures for the delivery of cargo such as the responsibility to deliver the goods at the place of delivery, payment of duty etc. If both the parties do not agree on the terms mutually, it will be difficult to have a good business deal. Therefore, to avoid troubles, sellers and buyers make deals relying upon incoterms, as they are internationally recognized.
International Commercial terms precisely called ‘Incoterms’ are the commercial terms that spell out the responsibilities of both buyer and seller in the import-export of goods. These internationally accepted terms are published by ICC. The terms were first developed by ICC in 1936 and since then periodically conforms it to the changing trade practices.
The incoterms are used so that both the parties understand the risk, cost, tasks and responsibilities. Pre-defining responsibilities and obligations are necessary for the smooth facilitation of the trade process.
To receive the legal effect, they must be explicitly incorporated by the parties into their contract.
Here are the main responsibilities and obligations:
- Point of delivery:here, the incoterms define the point of change of hands from seller to buyer.
- Transportation costs:here, the incoterms define who pays for whichever transportation is required.
- Export and import formalities:here, incoterms define which party arranges for import and export formalities.
- Documentation and formalities:Incoterms set out which parties take responsibility for dealing with all customs, export, and import documentation, formalities, and duty payments.
- Insurance cost:here, incoterms define who takes charge of the insurance cost.
- The Incoterms were evolved to facilitate tradearound the world.
- Incoterms prevent confusion in foreign trade contracts by clarifying the obligationsof buyer and seller.
- They are used as shorthand by both the sellers and buyers to know the exact terms of their contract.
- Incoterms act asGuide to the contract parties in every step of their contract
- The terms indicate that who will bear the transportation cost, who will bear the import and export duty
- Used as a common languageby the traders to set the terms of their trade.
The latest 2020 version of the Incoterms defines 11 terms. They could be divided into two categories:
I. Terms that Apply to Any Mode of Transport
i. EXW (Ex-Works)
They are used to describe the delivery of goods by the seller at the seller’s place of business, normally in their factory, office or warehouse. The only responsibility of the seller is to make the goods available to the buyer. Once the cargo is collected by the buyer from the seller’s place of business, all further responsibilities starting from the loading of cargo, transportation to the place of destination are of the buyer.
It is, therefore, more favourable for a seller. EXW means the buyer must arrange all transport, export documentation, cover all freight charges, and fulfill the importation and delivery process. Once the goods are collected from the seller’s property, the risk is transferred to the buyer.
ii. CPT (Carriage Paid To)
CPT Rules require the seller to arrange and pay for the carriage to the named place of destination. However, the seller is not responsible for insuring the goods to the named place.
A carrier is any person or company who undertakes the carriage of the goods, that can be a shipping line, airline, trucking company, railway or freight forwarder.
The buyer is responsible for import requirements and local delivery and unloading charges.
In CPT, the buyer’s risk begins, when the first carrier receives the goods from the seller.
iii. CIP (Carriage and Insurance Paid To)
The seller is responsible to arrange the carriage to the named place and is also responsible for insuring the goods. The seller here assumes all the risk and responsibility until the goods are delivered to the first carrier, after which the buyer assumes all the responsibility.
The seller is responsible here for the cost of carriage as well as all-risk insurance coverage until the freight reaches the named place of destination. Thus, if the carrier breaks or loses the goods on the way, all the damages and losses will be covered by the insurance.
iv. DAP (Delivered at Place)
First, both the parties have to agree on a place. Here, the seller is responsible for arranging the carriage and for delivering the goods to the named place of destination. Thus, the seller bears the responsibility up to unloading of the goods. As the goods become available for unloading, the risk transfers from the buyer to the seller.
Unloading is done at the buyer’s risk and cost. The buyer is also responsible for import clearance and any applicable local taxes or import duty.
v. DPU (Delivered at Place Unloaded)
DPU requires that after unloading the goods from the arriving means of transport, the seller should deliver the goods at the disposal of the buyer. Export clearance is the responsibility of the seller.
DPU is the only rule that requires the seller to unload goods at the destination place. As soon as the goods are unloaded, the risk transfers from the seller to the buyer.
Import clearance and any applicable local taxes or import duty are the responsibility of the buyer.
vi. DDP (Delivered Duty Paid)
First, both the seller and the buyer agree on a place. Arranging the carriage and delivering the goods is the responsibility of the seller. All risks and responsibilities till the delivery of the goods are borne by the seller.
DDP is the only rule that makes the seller responsible for import clearance and import duty. The Rule can be considered to be more favourable for buyers as most of the responsibilities are borne by the seller.
vii. FCA (Free Carrier)
In free carrier rule, the seller is under an obligation to deliver the goods at a named place specified by the buyer.
When the place of delivery is the seller’s premise, for example, seller’s factory, the buyer arranges and pays for the carriage. Here the risk passes from the seller to the buyer and the goods are considered to be delivered.
If the place of delivery is somewhere else in the seller’s country, the seller has to arrange and pay for the carriage from the seller’s depot to the named place. As soon as the goods get loaded on the seller’s transportation vehicle and reach the named place and get unloaded from the seller’s transportation vehicle to the carrier nominated by the buyer, all risks get transferred to the buyer and the goods are considered to be delivered.
In both circumstances, export clearance will be the responsibility of the seller.
II. Terms That Apply to Waterway Transport
The use of the following Rules is restricted to goods transported by sea or inland waterway.
viii. FAS (Free Alongside Ship)
When the seller places the goods alongside the vessel nominated by the buyer, it is considered that the goods are delivered. When the goods are alongside the ship, the risk gets transferred to the buyer from the seller.
Loading of goods and all costs thereafter are the responsibility of the buyer.
ix. FOB (Free on Board)
The delivery of the goods is said to be concluded when the seller puts the goods on the vessel. The vessel is nominated and its payment is made by the buyer. The loading fee is paid by the seller.
The seller does not pay for any damage or loss if the goods were damaged or lost on the ship to the buyer. From the named port of shipment, all further expenses are borne by the buyer.
The responsibility of export clearance in FOB is of the seller.
x. CFR (Cost and Freight)
As soon as the seller puts the goods on the ship, delivery by the seller to the buyer is considered to be completed. If on their way to the buyer, if the goods are lost or damaged, the seller does not have to pay for the damage or loss.
Regardless of the transfer of the responsibility to the buyer, the seller has to bear the unloading cost at the port of destination. Clearance of the goods for export is also the responsibility of the seller.
xi. CIF (Cost, Insurance and Freight)
In CIF, the seller has to arrange and pay for the ship as well as the fee to unload the goods at the destination port. Arrangement of the ship and its payment is made by the seller. The seller is also responsible for the payment of the unloading of the goods at the destination port.
Insurance from the delivery point to the destination point is to be purchased by the seller. Thus, insurance would cover the loss of the goods on the way to the buyer gets damaged or lost.
Arising of disputes between the contracting parties can become usual if the parties want different terms for entering into the contract. Therefore, acceptance of widely and internationally recognized Incoterms become essential for the parties. The Incoterms are widely used by the parties in their international contracts of trade to avoid any confusion regarding the contract terms. This helps the parties to lessen the chances of any dispute arising between them with reference to the trade contract.