Incoterms 2020

Basics of Incoterms

Since 1936, the International Chamber of Commerce (ICC) has published a set of three-letter trading terms for use in sale and purchase contracts. Known as ‘Incoterms’, these deal with the obligations between buyer and seller.

Incoterms consist of 11 three-letter trading terms grouped as follows:

• C rules: where the seller arranges and pays for carriage to a named place, which indicates the destination of the goods (e.g. “CIF Shanghai Incoterms 2020”)
• D rules: where the seller arranges and pays for carriage to a named place, which indicates the destination of the goods and the place of delivery (e.g. “DAP 1 China Road, Shanghai Incoterms 2020”)
• F rules: where the buyer pays for and usually arranges carriage
• EXW (ex works): where the seller delivers to the buyer from the seller’s premises.

In the D, E and F rules, risk passes from seller to buyer at a named place, which is where the goods are legally ‘delivered’ under the sale contract.

Each Incoterm carries with it a series of obligations on both the seller and the buyer. These may address the obligations of each party, such as:

• delivery of goods
• transfer of risks
• arranging and paying for carriage
• insurance obligations
• procuring of transport documents
• providing proof of delivery
• arranging export/ import clearance
• goods checking operations
• the giving of notices.

These definitions of the obligations on the seller and buyer apply only where Incoterms are explicitly referenced in the sale contract. Many three-letter trading terms – for example, ‘FOB’ and ‘CIF’ – have a legal meaning which is independent from and varied by the Incoterms definitions.

Incoterms 2020

In September 2019, the ICC published the latest version: Incoterms 2020.

The changes made to Incoterms 2020 since the 2010 edition are largely presentational and clarificatory. The substantive changes include:

• A change to the FCA (free carrier) term. Popular in the container trade, under which the seller legally delivers the goods to the buyer before they are loaded onto a ship and so may not receive a bill of lading from the carrier, which it requires to obtain payment under a letter of credit. The 2020 FCA Incoterm now contains an option under which the buyer agrees to instruct the carrier to issue the bill of lading to the seller.
• Under the CIP (carriage and insurance paid to) term, the seller must now obtain an increased level of cargo insurance. Under Incoterms 2010, a CIP seller had to purchase cargo insurance on Institute Cargo Clauses (C) terms, which provides cover for a limited number of risks. Under Incoterms 2020, a CIP seller must purchase insurance on Institute Cargo Clauses (A), which is an “all risks” policy with some exclusions.

A number of terms have been modified to allow the seller or the buyer, as the case may be, to perform the carriage itself.

All Incoterms now contain an express allocation of the responsibility for security-related obligations.

Incoterms are not often included in contracts of carriage, but instead apply under many underlying sale contracts which underpin international trade.

It is sensible for buyers and sellers to specify which edition of Incoterms are being adopted (e.g. “Incoterms 2020”).

By

David Richards
Deputy Director (Cargo)