Incoterms® 2020

What is an Incoterm®? | How to use Incoterms® 2020? | Getting to know Incoterms® 2020? | Who bears the various costs and risks? | What do the different Incoterms® mean? | Which law governs the contracts?

What is an Incoterm®?

The Incoterms® 2020

Before considering shipping merchandise internationally, an important question must be answered: At which point are the risks and charges transferred to the buyer?

In 1936, for the first time, the International Chamber of Commerce (ICC), published under the name of Incoterms® 1936 (INternational COmmercial TERMS), a series of international rules that answers this question.

In order to adapt these rules into the most recent international trade practices, many amendments have been added to the rules of 1936 accomplishing what today is called "Incoterms® 2020" which has replaced Incoterms® 2010.

The main changes made by Incoterms® 2020 to Incoterms® 2010 concern the following points:

• Evolution of the Incoterm® FCA (bills of lading with an on-board notation)
• Appearance of a new Incoterm®: DPU (Delivered at Place Unloaded) to replace the Incoterm® DAT
• Differentiated levels of insurance coverage between CIF and CIP
• Organisation of transport with the seller's or buyer's own means of transport in FCA, DAP, DPU and DDP

Managing Risk Control

By making references in their contracts, using one of the Incoterms® of the ICC, the buyer and the seller reduce the uncertain risks inherent in all international transactions: commercial practices and different interpretations from one country to the other. They specify their own respective responsibilities and obligations during the process of delivering the merchandise and the mandatory documentation that the vendor must supply. Also the Incoterms®, even if they are optional, they are recognized as standardized clauses which will prevent any litigation by clearly distributing between the buyer and the vendor: obligations, risks, costs. In addition, they dissociate the question of transferring risks from those of transferring ownership, this last issue remains under the control of the law that rules the contract. Concretely, Incoterms® will clarify the following points:

1. Place the critical point of transferring the risks from the vendor to the buyer during the process of shipping the goods (loss, damage or theft of the merchandise) allowing the one who is liable for these risks to make his own dispositions, notably in terms of insurance;
2. Indicate which one, either the seller or the buyer, must underwrite the shipping contract;
3. Distribute among the two parties the logistic and administrative charges during the different stages of the process;
4. Specify who takes care of the packaging, labeling, handling operations, loading and unloading of goods or stuffing and stripping containers as well as inspection procedures;
5. Set up the individual obligations of each party in the process of accomplishing export and/or import formalities, legal regulations and duty taxes as well as providing all the documents required. There are 11 Incoterms® being kept by the ICC, (original English acronym made up of three letters, ex: FOB) plus one specific location ex: "FOB Le Havre".

How to use the Incoterms® 2020?

Clarify this concept in the contract of sale

In order to use Incoterms®, this must be clearly stated in the contract of sale by indicating: the Incoterms® rule chosen, the port, designated place or location, followed by "Incoterms® 2020".
Example: CIF Hong Kong Incoterms® 2020

Choose the appropriate Incoterms® rule

The choice of the Incoterm® is an integral part of a commercial transaction. It has to be done in function with the organizational capacities of the enterprise, the type of transportation used, the level of service that the enterprise wishes to provide to the client or the resources of its supplier, or it could be in function to the common practices of the market, or the practices used by the competitors, etc.

The Incoterm® selected must also be well-adapted to the type of goods that will be shipped and the type of transportation that will be used.

Specify the place and port with precision

For an optimal application of Incoterms®, the contract's parties are required to assign a place or a port with maximum exactitude: ex FCA 25 rue Saint Charles, Bordeaux, France, Incoterms® 2020.

It must be stressed in this part that for certain Incoterms® such as CPT, CIP, CFR, CIF, the place designated is not the same as the place of delivery: it designates the place of destination paid for. In order to specify the final destination of the goods, it is advised to mention the specific address in order to avoid any ambiguity.

The same applies for the "out of the factory": Is it a factory in France or a factory established abroad by a French company?

Other precautions to be taken

Some precautions must be taken when using Incoterms®, such as:

• A good knowledge of the meaning of each Incoterm® and its acronym;
• The usage of the variants of Incoterms® with exactitude in order to prevent confusions that could result from a misinterpretation (ex: FOB USA).

The Incoterms® are standards accepted worldwide. In that capacity, like all standards (industry, quality, pollution), their names do not cause any divergence. Use only the standardized abbreviations. Any other code will be prohibited! As any standard, they are an explicit reference. As the horses DIN or the ISO 9002, the three letters of the Incoterm must be followed by the specific names of the designated places and the mention "Incoterm", see "Incoterm ICC".

Do not hesitate to consult an international law firm.

Today's tendency in international business is based on the fact that the buyer is released from all logistics concerns. This valorizes the position of the exporter. It is essential to negotiate the terms of the contract for the first shipment and, most of all, in the case of dealing with countries at risk, obtaining a document of credit as a form of payment will be advised.

Getting to Know Incoterms® 2020

Incoterms® 2020 applicable to all modes of transport

* New for Incoterms® 2020

Incoterms® 2020 applicable to maritime and inland waterway transport

* New for Incoterms® 2020

Sale on Departure, Sale on Arrival: a fundamental difference

Sale on Departure

A sale on departure means that the merchandise will be shipped at the risk and hazard of the buyer, which means:

• from the moment that the goods are placed at disposal at the vendor's premises (EXW) ;
• from the moment that the goods are handed to the carrier in order to be shipped (FCA, FAS, FOB, CFR, CIF, CPT et CIP) ;

The Incoterms® for a sale on departure assign to the buyer (in a more or less large amount) the costs and the risks linked to the shipping of the merchandise.

Sale on Arrival

A sale on arrival means that the merchandise will be shipped at the risk and hazard of the seller until it reaches the designated destination point or port. Three Incoterms® are provided:

• until the end of its maritime transportation and its disembarkation (DAP);
• until its destination point (DPU, DDP).

Who bears the various costs and risks?

Distribution of costs between seller and buyer according to the Incoterm® negotiated in the contract

* "All-risk" insurance for the benefit of the buyer
** "Minimum" insurance for the benefit of the buyer
*** According to agreed location. Optional bill of lading.

S : Costs to be borne by the seller
B : Costs to be borne by the buyer

Distribution of risks between seller and buyer according to the Incoterm® negotiated in the contract

* According to agreed location

S : Risks to be borne by the seller
B : Risks to be borne by the buyer

What do the different Incoterms® mean?

EXW (Ex Works)

Seller

The only responsibility of the seller is to prepare the merchandise for the buyer, at his own premises, suitably packed for export shipping purposes (in general, the price includes loading the merchandise in the pallet).

Buyer

The buyer is responsible for all the charges and risks involved in the shipment of the merchandise from the moment it leaves the seller's warehouse until it reaches its destination place.

The term EXW represents a minimum obligation for the seller. However, if the parties agree that the vendor insures the loading of the merchandise at the point of departure "EXW Loaded", and make the vendor responsible of these risks and charges, they have to precise this issue very clearly on an explicit clause included in the sales contract (ex: EXW Paris loaded, ICC 2020).

The seller is expected to provide for the buyer, at his request and at his charge and risks, all the assistance required to obtain an export license, insurance and provide the buyer with all the useful information in his possession which will allow the buyer to insure the export of his merchandise in full security.

Variant

« EXW Loaded ».

The revised version of Incoterms® 2000 introduced this concept of "EXW Loaded" which recognizes a frequently used practice: the seller takes care and responsibility of loading the merchandise into the buyer's vehicle.

FCA (Free Carrier)

Seller

If the delivery takes place at the seller’s premises, it is the seller, who handles the loading of the suitably packaged goods into the vehicle provided by the buyer, (specify “FCA seller’s premises”). Export customs clearance is the responsibility of the seller.

Buyer

The buyer has chosen the type of transportation and the carrier with whom he has signed a transportation contract and pays for the main transportation (if applicable). The transfer of charges and risks takes place at the moment when the carrier picks up the merchandise. The parties must agree upon naming a place where to hand over the merchandise (the carrier’s terminal or the vendor’s premises).

The seller must, should the case arise, provide for the buyer, at the right time, all the assistance needed to obtain all the documents and information regarding the security requirements for the export and/or import of the merchandise and/or for its transportation to its final destination. The cost of the documents furnished and/or the assistance given are costs and risks paid by the buyer.
The Incoterms® 2020 rules explicitly allow for the necessary transport to be performed under a contract of carriage or to be arranged by own means (without the involvement of a carrier acting as a third party).

Variant

"FCA seller's premises".
This Incoterm® was officially added to the revised version of Incoterms® 2000: it is the responsibility of the seller to load the merchandise.

Geographical precision

More than in any of the other Incoterms®, in FCA, the "named place" agreed upon must be precise and indicated with care. FCA (Le Havre) is not enough if the buyer is located in Le Havre. Is it FCA (warehouse Le Havre) or FCA (in-transit bulking warehouse X Le Havre) or even FCA (dock No. X at the port of Le Havre)?

If the delivery is going to be done at a place other than the vendor's premises, for example: handing it over at a transportation terminal -truck, rail, air, maritime - the vendor will be in charge of transporting the merchandise up to this named terminal but he will not be responsible for unloading the vehicle. The unloading will be handled by the one in charge of receiving the merchandise at the transportation terminal. Prefer FCA instead of FOB if the transportation is done in containers or by roll-on roll-off ship.

Bill of lading with an on-board notation in FCA sales

When the goods are sold FCA, sellers or buyers (or their bank if a letter of credit is involved) may wish to obtain a bill of lading with an on-board notation.
However, delivery under the Incoterm® FCA is effective prior to the loading of the goods on board a vessel. It is by no means certain that the seller can obtain an on-board bill of lading from the carrier. According to the transport contract, this carrier is only required and entitled to produce a bill of lading when the goods are properly loaded.
To remedy this situation, the Incoterms® 2020 have provided an additional option. The buyer and seller can agree that the buyer should instruct its carrier to provide the seller with the bill of lading with the on-board notation after the goods have been loaded, and the seller is then obliged to deposit this bill of lading with the buyer, typically via banks. The seller The seller will not be liable to the buyer in respect of the terms of the contract of carriage.

FAS (Free Alongside Ship)

Seller

The obligations of the seller are henceforth fulfilled when the merchandise is placed, after customs clearance, alongside t