Definition

International commercial operations have their origin in a purchase and sale contract between the importer and the exporter, which stipulates the clauses by which the respective commercial operation will be regulated. The INCOTERMS (International Commercial Terms) can be considered as a set of international rules of an optional nature that the International Chamber of Commerce has gathered and defined on the basis of practices more or less standardized by traders. The INCOTERMS basically define the place where the seller is responsible for the goods and what are the expenses to be borne by him and which, therefore, will be included in the price.

Functions

The role of the INCOTERMS is essentially as follows:

They define the transfer of expenses.

The seller knows exactly when and where to pay for his sales contract and thus includes them in the price. This procedure allows the buyer to recognise exactly the expenses he must add to the purchase price in order to compare them with other national and international offers.

They define the transmission of risk.

The buyer knows exactly when and where the risks, which the goods incur during transport, are on his account. For this reason, the INCOTERMS define the time and place from which the responsibility of the seller ends and that of the buyer begins. This data is of extreme importance for securing the goods.

They define the place from which the goods will leave.

The INCOTERMS mark the exact place where the seller must deposit the goods and thus the place where the buyer will pick them up.

History

The Incoterms rules began to develop in 1921 with the formation of the idea by the International Chamber of Commerce. In 1936, the first set of Incoterms rules was published and remained in use for almost 20 years before the second publication in 1953. Other changes and expansions were followed in 1967, 1976, 1980, 1990 and 2000. The eighth version of the Incoterms 2010 rules was published on January 1, 2011.

Incoterm 2020

There are basically two main changes in Incoterms® 2020 compared to the 2010 edition:

  • DAT (Delivered at Terminal) is renamed DPU (Delivered at Place Unloaded).
  • The FCA (Free Carrier) now allows Bills of Lading to be issued after loading.

Other changes include:

  • CIF (Cost, Insurance and Freight) and CIP (Carriage and Insurance Paid to) establish new standard insurance contracts, but the level of insurance remains negotiable between buyer and seller.
  • When mentioned, the cost allocation between the buyer and seller is stated more precisely - an item refers to all costs for which the seller and buyer are responsible.
  • FCA (Free Carrier), DAP (Delivered at Place), DPU (Delivered at Place Unloaded) and DDP (Delivered Duty Paid) now take into account that the buyer and seller organize their own transportation instead of using a third party.
  • Safety related obligations are now more prominent.
  • "User Notes" for each Incoterm® have replaced the 2010 Edition Guidance Notes and are designed to be simpler for users.
  • CIP currently requires as standard ICC A or equivalent insurance coverage. At Incoterms® 2010 was ICC C. The insurance coverage required for ICC remains.

Rules for any mode of Transport

The seven rules defined by Incoterms 2010, for any mode(s) of transport are:

EXW - Ex Works (Factory... designated place)

The seller makes the goods available on his premises. This term places the buyer's maximum obligation and the seller's minimum obligation. The Ex Works term is often used when making an initial quotation for the sale of goods at no cost included. EXW means that a seller has the goods ready for collection at his premises (works, factory, warehouse) on the date agreed. The buyer pays all transport costs and also takes the risks to get the goods to their final destination. The seller does not load the goods for transport or release them for export. If the seller loads the goods, he does so at the buyer's full cost and risk. If the parties wish the seller to be responsible for loading the goods at the time of departure and assume the risk and all loading costs this should be made clear by adding explicit wording to this effect in the contract of sale.

FCA - Free Carrier (designated place)

The seller delivers the goods, free for export, at the disposal of the first carrier (appointed by the buyer), at the named place. The seller pays for the shipment to the point of departure and the risk is transferred when the goods are delivered to the first carrier.

CPT - Carriage Paid To (Shipping paid to... designated place of destination)

The seller pays the transport costs. The risk is transferred to the buyer after delivery of the goods to the first carrier.

CIP - Carriage Paid to (Transport and Insurance Paid to... designated place of destination)

Multimodal transport in containers equivalent to CIF. The seller pays for the transport and insurance up to the named point of destination, but the risk is transferred when the goods are delivered to the first carrier.

DAT - Delivered at Terminal (Delivered to the terminal... designated place of destination)

The seller pays for the transport to the terminal, except for import costs (customs clearance), and assumes all risks up to the point where the goods are unloaded at the terminal.

DPU – Delivered at Place Unloaded (Delivered on site unloaded)

The seller delivers the goods - and transfers the risk - to the buyer when the goods, after unloading from the arriving means of transport, are made available to the buyer at a designated place of destination or an agreed point within that place, if such point is agreed. The seller bears all the risks associated with bringing the goods to the place of destination and unloading them. Thus, in this Incoterms rule, delivery and arrival at destination are the same. DPU is the only Incoterms rule that requires the seller to unload the goods at destination. The seller must therefore ensure that he is in a position to arrange unloading at the designated point. If the parties understand that the seller should not bear the risk and cost of unloading, they should avoid the DPU rule and use DAP.

DDP - Delivered Duty Paid...(Delivered Duty Paid...designated place of destination)

The seller is responsible for delivering the goods to the named place in the buyer's country, and pays all costs for getting the goods to the destination, including import duties and taxes. This term places the maximum obligation on the seller and the minimum obligation on the buyer.

Rules for Maritime Transport

The four rules defined by Incoterms 2010 for international trade where transport is carried out entirely by water are:

FAS - Free Alongside Ship (Free Alongside Ship... designated port of shipment)

The seller must place the goods next to the ship at the port. The seller must deal with all burpatory aspects to release the goods for export. Suitable for sea transport only, but NOT for multimodal sea transport in containers (see Incoterms 2020). This term is normally used for heavy or cargoes of significant size.

FOB - Free on Board (Free on Board... designated port of shipment)

The seller must place the goods on board the ship designated by the buyer. Costs and risks are divided when the goods are on board the ship (this rule is new!). The seller must release the goods for export. The term is applicable for sea and inland waterway transport only, but NOT for multimodal sea container transport (see Incoterms 2020). The buyer must instruct the seller the details of the vessel and port where the goods are to be loaded, and there is no reference to, or provision for, the use of a carrier or freight forwarder. This term has been very poorly used over the past three decades since the 1980 Incoterms explained that the FCA should be used for container transport.

CFR - Cost and Freight (Cost and Freight... designated port of destination)

The vendor must pay the costs and freight to take the goods to the port of destination. However, the risk is transferred to the buyer as soon as the goods are loaded on board the ship (this rule is new!). Shipping and insurance for the goods are not included. This term is formally known as
CNF (C & F).

CIF – Cost, Insurance and Freight (Custo, Seguro e Frete… porto de destino designado)

CIF - Cost, Insurance and Freight (Cost, Insurance and Freight... designated port of destination)

GRAPHIC: Incoterms 2020