Incoterms is short for international commercial terms that are reference all over the world when doing cross border trade. These terms define the liabilities, responsibilities and cost allocation between buyers and sellers in shipping transactions. Not all terms are created equal and some can only be used for ocean transport. They are usually used with a sales contract or any other sale agreement document. The International Chamber of Commerce (ICC) published the latest version of Incoterms, which is the 2020 update that replaces Incoterms 2010. Incoterms 2020 is expected to be in effect at least for the next 10 years.
The changes made to the latest version of the Incoterms:
Here are the most important changes from the Incoterms 2010 version to the Incoterms 2020 version.
DAT has been changed to DPU
Delivered at Place Unloaded (DPU) is introduced to replace Deliver At the Terminal (DAT). These changes were made because some goods cannot be unloaded at the entry point. Rather, they can or need to be unloaded at another agreed point such as a third-party warehouse in the final destination. DPU Incoterm is intended to be used when containers are consolidated with multiple consignees. It is the only term where sellers become responsible for the unloading of the goods.
Free carrier (FCA) requires presentation of on-board bill of lading to the seller
This one of the more essential change in the new Incoterms 2020. In earlier versions of FCA, problems used to occur when the seller was accountable for loading the goods on the hired truck and not directly into the vessel of the international carrier. When both seller and buyer use the letter of credit as a means of payment, the seller will be required to present to the bank the bill of lading with an on-board notation before the payment could be made.
A point to note is that an international carrier cannot provide a seller who doesn’t present the goods directly to them with a bill of lading. The FCA term in the new Incoterms 2020 allows parties to agree in their contract that the carrier will provide the seller with a bill of lading with an on-board notation.
Insurance responsibilities better defined under CIP and CIF terms
These two terms are the only terms that identify the selling party must purchase insurance for the export journey to the buyer’s benefit.
As per the Incoterms 2010, under both these terms, the seller was accountable for acquiring minimum levels of coverage. Under the new Incoterms 2020, the seller is now accountable to purchase higher level of insurance coverage under CIP terms. It must be noted that the responsibilities of purchasing insurance are still negotiable under new Incoterms 2020 and the buyer may wish to purchase additional insurance on their own.
Customs clearance responsibility is clearly defined
Under the new Incoterms 2020, responsibility for Customs clearance and related charges are well defined.
Import and export security obligations have increased spontaneously during the past decade. The new Incoterms 2020 specifically spell out those obligations in the discussion of seller and buyer’s responsibilities under each trade terms.
The Incoterms text specify which of the terms can only be used for ocean transport. The rest of the terms can be used for any mode of transport. Keeping this in mind, the Incoterms that can be used for air shipments are:
EXW, FCA, CPT, CIP, DPU, DDP & DAP
Let’s very briefly look at some of these terms below:
Title transfer to the buyer occurs at the seller’s warehouse. The buyer takes care of everything else including transportation payments and insurance charges from the seller’s door.
CIP (Carriage and insurance)
Just like CIF, this term states that the seller must procure insurance against damages/loss during carriage.
CPT (Carriage Paid To)
According to this term, the seller delivers the goods to the carrier of his/her choice but the seller has to pay the carriage fees needed to deliver the goods to the named destination. After the delivery, the buyer bears all the charges. The seller is obligated to clear the goods for export, but not for import.
DDP (Delivered Duty Paid)
This is the term that represents the maximum obligations for the seller. It should not be used if the seller is unable to secure the import license. According to the term, the seller bears all the charges and risk of carrying out Customs formalities including undertaking liabilities for Customs fees. This is the only term that requires the seller to act as the importer of record at the destination.
DAP-Delivered At Place
Here, the seller pays the carriage fees but does not incur the charges associated with import clearance. The seller also will not act as the importer of record.