Author Name: Dion Suen – Marketing Analyst at FreightAmigo
The definition of Incoterms (International Commercial Terms) was first introduced in 1936 by the International Chamber of Commerce (ICC). It provides guidance to buyers and sellers when formulating and fulfilling a contract for the shipment of goods. From a trade finance point of view, it is necessary to know where the risk transfer occurs. It has an impact on how much of the invoice can be financed.
Incoterms 2020 marks the first version since 2010 to stay up with the continually changing international trading environment. Let’s learn more about how the rights and obligations of buyers and sellers have changed with FreightAmigo and make trade easier for everyone!
What are the most important changes on Incoterms 2020?
The most significant change relates to the term FCA (Free Carrier). The carrier can now be told by the buyer to issue the seller a Bill of Lading with an onboard notation. By doing so, it fulfils the requirements of a Letter of Credit. In the past, many exporters opted to use FOB (Free on Board) to arrange payment under a Letter of Credit. However, FCA was more suitable for the shipment of containerised goods. It was due to the extra delivery cost differential between FCA and FOB.
The most obvious change is DAT (Delivered at Terminal) will be replaced by DPU (Delivered at Place Unloaded). The reference to ‘Terminal’ has been removed to avoid confusion, and DPU broadly covers all delivery options and make it more general.
The term CIP (Carriage and Insurance Paid) changes the insurance coverage requirements. Instead of the lower level provided under Clause C, which was required for CIP in both version of Incoterms, the amount of insurance required under CIP has increased to at least 110% of the value of the goods as detailed in Clause of the Institute Cargo Clauses. It is more appropriate for manufactured goods.
Additionally, FCA (Free Carrier), DAP (Delivered at Place), DPU (Delivered at Place Unloaded) and DDP (Delivered Duty Paid) now take account of buyers and sellers arranging their own transport rather than relying on a third party.
To reduce confusion, expense allocation between buyer and seller are now listed more specifically. In the 2010 Incoterms, costs sometimes became a big problem. When carriers change their pricing structure by adding back-charges, sellers had to pay more for terminal handling.
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What are Incoterms 2020?
Incoterms identify the responsibilities of buyers and sellers at different points during shipment. The updated definitions separate the Incoterms into two groups based on the mode of transportation. Incoterms identify the responsibilities of each counterpart at different points during shipmentOne is applicable to all modes, while the other exclusively applies to sea and inland water transport. The eleven Incoterms includes:
Incoterms For Any Mode Of Transport
EXW – Ex Works
Under EXW, the seller has fulfilled its obligation when the goods are made available to the buyer. The parties can also agree on another named place such as factory, office or warehouse. At this point, ownership of the products passes to the buyer. Then, he handles all costs and risk after the products are collected. He also responsible for loading the goods on their transport.
EXW benefits the seller the most. Once the goods have left the premises, he is under no obligation to load the goods or to pay for the freight. If products are intended for export, EXW may present difficulties for the buyers.
FCA – Free Carrier
With FCA, the seller is responsible for delivering the goods to the buyer’s nominated premises and organising the shipping, including export clearance and meeting security requirements. He needs to load the goods on the buyer’s transport, at which point the risk is transferred to buyer.
The buyer pays the cost of freight, bill of lading fees and insurance. Also, he pays for unloading and transportation costs to the destination. Any damage to the goods when on board the vessel is responsible for the buyer.
Previously, the seller was unable to obtain a bill of lading with onboard notation when they used a transport middleman. Without the BL, the transacting bank would not authorise payment to the seller. Under the new Incoterms 2020, FCA resolves this problem.
CPT – Carriage Paid To
With CPT, the seller is responsible for clearing the goods for export and delivering them to the carrier or another person stipulated by the seller. The risk is transferred to the buyer once at the buyer’s place of destination. He is responsible for delivering cost, but not for procuring insurance.
If the buyer requires the seller to obtain insurance, the parties should consider the Incoterm CIP instead.
CIP – Carriage and Insurance Paid To
CIP is broadly similar to CPT. However, CIP requires the seller to pay the cost of shipping and insure the goods in transit.
With CIP, the seller clears the goods for export and delivers them to the carrier or another person stipulated by the seller. The seller is responsible for the transportation costs of the goods to the designated place of destination, at which point risk transfers to the buyer.
Under Incoterms 2020, CIP requires the amount of insurance increased to at least 110% of the contract value under Institute Cargo Clauses (A) of the Institute of London Underwriters. Previously the minimum insurance was applicable under Institute Cargo Clauses (C).
DPU – Delivered at Place Unloaded
It was previously known as Delivered at Terminal (DAT). The reason for the name change is that the buyer (or seller) may want to specify the delivery location rather than the terminal, such as a construction site. This term is often used for consolidated containers with multiple consignees. It is the only term that requires the seller to unload the goods.
With DPU, the seller pays all the costs of transportation, for instance, export fees and carriage. Also, the seller pays the unloading from the carrier and the port charges at the destination port. He assumes all risks until arrival at the destination port or terminal.
The buyer is responsible for all costs and risks after unloading, includes import duties, taxes and clearing the goods for export. Also, the buyer pays local transportation to the final named place of destination.
If the seller cannot arrange for unloading, he should consider shipping under DAP terms instead.
DAP – Delivered At Place
With DAP, the seller delivers the goods to a named place of destination but is not responsible for unloading, at which point the risk is transferred to the buyer. While the buyer is responsible for all costs and risks associated with unloading the goods and clearing customs to import the products into the designated destination country.
DDP – Delivered Duty Paid
With DDP, the seller is liable for clearing the goods with both duties and taxes through customs in the buyer’s country. Also, he needs to obtain the necessary authorisations and registrations from the authorities. However, unloading is not the seller’s responsibility.
DDP puts the maximum risk and responsibility on the seller and minimum obligations on the buyer. The buyer bears no risk or responsibility until the goods are at the final agreed place.
DDP is an extremely risky term for the seller if he does not understand the clearance procedures very well, it should be used with caution.
Incoterms For Sea And Inland Waterway Transport
Usually, the risk and responsibility are transferred when the goods are on board (apart from FAS). As the condition of the items must be verified at this point, these terms are only suitable for non-containerised goods, such as commodities.
FAS – Free Alongside Ship
With FAS, the seller has fulfilled its obligation after delivering the goods alongside the buyer’s vessel, for example, a quay or barge, at the named port of shipment. At that moment, the risk for the goods transfers from the seller to the buyer.
Under Incoterms 2020, FAS term requires the seller to clear the goods for export instead of buyer.
FOB – Free On Board
With FOB, the seller bears costs and risks until the goods are loaded on board of the designated vessel.
The seller is responsible for arranging export clearance, while buyer pays the cost of marine freight, bill of lading fees and insurance.
The risk for the goods transfers to the buyer when on board the vessel.
Since Incoterm FCA was introduced in 1980, FOB should be used only for non-containerised sea freight and inland waterway transport.
However, FOB continues to be the most commonly term used for all modes of transportation, including containerised goods.
CFR – Cost and Freight
CFR incurs more significant risk and responsibility for the seller who pays for the carriage of the goods up to the named port of destination.
With CFR, the seller has fulfilled its obligation when the goods are delivered and loaded on the vessel. The risk is transferred to the buyer at the country of export.
The shipper pays for export clearance and freight costs to the selected port, and any damage to the goods on board the ship until the port of destination. CFR puts the maximum risk and responsibility on the seller.
Under CFR, the seller is not responsible for purchasing insurance. If the buyer requires the seller to obtain insurance, the parties should consider the Incoterm CIF instead.
Under Incoterms 2020, CFR should only be used for non-containerised sea freight and inland waterway transport. For all other modes of transportation, it should be replaced with CPT.
CIF – Cost, Insurance & Freight
With CIF, the seller is responsible for clearing the goods for export and delivers them when they are on board the vessel, cost of freight and insurance to the designated port of destination. Also, he is responsible for any damage to the goods on board the ship.
The seller only obtains the minimum level of insurance under Clause C of the Institute Cargo Clauses under both Incoterms version.
At the port of arrival, the seller must turn over three key documents which are invoice, insurance policy and bill of lading. The difference between CIF and CFR is that CIF requires sellers to insurance while the goods are in transit.
For the most precise explanations and guidelines, please refer to the International Chamber of Commerce (ICC).
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