If you ship goods domestically, you may wonder why you need to know Incoterms too. FOB is FOB, isn't it?
Well, actually, no—they’re not!
While the vast majority of companies in the United States use the shipping terms identified under the U.S. Uniform Commercial Code (UCC) when shipping domestically, these shipping terms aren't appropriate to use when exporting.
The codes you use for domestic shipping mean something different when shipping internationally. Domestic shippers often use a variation of the term FOB, for instance, which isn’t appropriate internationally because of its very different meaning in that regard. Not only are the Incoterms different for both scenarios, but they also happen to be acronyms, which can make them even more confusing and difficult to remember.
In this article, we’ll look in-depth at Incoterms—what they are and how they originated, how to apply them, how exporters and importers benefit from them, and why they matter.
What Are Incoterms 2020 Rules?
Incoterms 2020 rules are the official terms published by the International Chamber of Commerce (ICC). They are a voluntary, authoritative, globally-accepted, and adhered-to text for determining the responsibilities of buyers and sellers for the delivery of goods under sales contracts for international trade. Incoterms closely correspond to the U.N. Convention on Contracts for the International Sales of Goods. Incoterms are known and implemented by all major trading nations.
Incoterms are only part of the whole export contract. They don’t say anything about the price to be paid or the method of payment that is used in the transaction. Furthermore, Incoterms don’t deal with the transfer of ownership of the goods, breach of contract, or product liability; all of these issues need to be considered in the contract of sale. Also, Incoterms can’t override any mandatory laws.
The Origin of Incoterms
Differences in trading practices and legal interpretations between traders of different countries necessitated a need for a common set of rules. These rules needed to be easy to understand by all of the participants in order to prevent misunderstandings, disputes and litigation.
Incoterms were first created in 1936 and were designated Incoterms 1936. Since then, Incoterms have evolved into a codified worldwide contractual standard. They are periodically updated as events in international trade occur and require attention. Amendments and additions were made in 1953, 1967, 1976, 1980, 2000 and 2010.
Incoterms 2020 Rules
The most current revision of the terms, Incoterms 2020, go into effect on January 1, 2020, and consists of 11 Incoterms.
The latest revision’s changes include the following:
- The most obvious change is renaming the term Delivered at Terminal (DAT) to Delivered at Place Unloaded (DPU).
- The most significant change relates to the term Free Carrier (FCA). Under this term, the buyer can now instruct its carrier to issue a bill of lading with an on-board notation to the seller so that they may satisfy the terms of a letter of credit.
- Under the revised term CIP, the seller is now responsible for purchasing a higher level of insurance coverage—at least 110% of the value of the goods as detailed in Clause A of the Institute Cargo Clauses. The insurance requirement hasn't changed for CIF.
- Incoterms 2020 rules recognizes sellers who may use their own transport to deliver the goods. The terms now expressly state that sellers can make a contract for carriage or simply arrange for the necessary transportation.
- Incoterms 2020 rules now specifically call out the import and export security requirements and identifies whether the buyer or seller is responsible for meeting those requirements.
You'll find a detailed discussion of what’s new with Incoterms 2020 and how to use them in my blog post, Incoterms 2020: Here's What's New.
While you can still use previous versions of Incoterms, like Incoterms 2010, it’s not preferred; if you’re not using Incoterms 2020 rules, you must clearly state which version you’re using and make sure your documentation is correct throughout the transaction. If you’re looking to streamline the export documentation process, Shipping Solutions export documentation and compliance software can help.
Incoterm 2020 Definitions
Because each of the different Incoterms identify the responsibilities of the seller and the buyer in the transaction at different points in the shipping journey, certain Incoterms work better for certain modes of transportation.
Each of the 11 Incoterms is summarized below based on the mode of transport. For a more complete list of the responsibilities for each of the terms, you should get a copy of ICC's Incoterms® 2020 book.
Incoterms for Any Mode of Transport
The seller fulfills its obligations by having the goods available for the buyer to pick up at its premises or another named place (i.e. factory, warehouse, etc.). Buyer bears all risk and costs starting when it picks up the products at the seller’s location or other named place until the products are delivered to its location. Seller has no obligation to load the goods or clear them for export.
The seller is responsible for either making the goods available at its own premises or at a named place. In either case, the seller is responsible for loading the goods on the buyer's transport and is responsible for delivery to the port and export clearance including security requirements. Risk transfers once the goods are loaded on the buyer’s transport.
This term has changed the most in the Incoterms 2020 rules. Previously, problems occurred with this term when the seller was responsible for loading the goods on a truck or some other transport hired by the buyer and not directly on the international carrier. If the seller and buyer had agreed on using a letter of credit as the payment method for this transaction, banks often require the seller to present a bill of lading with an on-board notation before they can get paid.
An international carrier won't typically provide a seller who did not present the goods directly to them with such a bill of lading. Under the new Incoterms 2020 rules, FCA allows the parties to agree in the sales contract that the buyer should instruct its carrier to issue a bill of lading with the on-board notation to the seller.
CPT (Carriage Paid To)
Seller clears the goods for export and delivers them to the carrier or another person stipulated by the seller at a named place of shipment, at which point risk transfers to the buyer. Seller is responsible for the transportation costs associated with delivering goods to the named place of destination but is not responsible for procuring insurance.
CIP (Carriage and Insurance Paid To)
Seller clears the goods for export and delivers them to the carrier or another person stipulated by the seller at a named place of shipment, at which point risk transfers to the buyer. Seller is responsible for the transportation costs associated with delivering goods and procuring insurance coverage to the named place of destination.
In Incoterms 2020 rules for CIP, the seller is now responsible for purchasing a higher level of insurance coverage—at least 110% of the value of the goods as detailed in Clause A of the Institute Cargo Clauses.
DAP (Delivered at Place)
Seller clears the goods for export and bears all risks and costs associated with delivering the goods to the named place of destination not unloaded. DAP means the buyer is responsible for all costs and risks associated with unloading the goods and clearing customs to import the goods into the named country of destination.
DPU (Delivered at Place Unloaded)
Previously named Delivered at Terminal (DAT), this Incoterm has been renamed Delivered at Place Unloaded (DPU) because the buyer and/or seller may want the delivery of goods to occur somewhere other than a terminal.
This term is often used for consolidated containers with multiple consignees, and it is the only term that tasks the seller with unloading the goods. Seller clears the goods for export and bears all risks and costs associated with delivering the goods and unloading them at the terminal at the named port or place of destination. Buyer is responsible for all costs and risks from this point forward including clearing the goods for import at the named country of destination.
DDP (Delivered Duty Paid)
DDP Incoterms means the seller bears all risks and costs associated with delivering the goods to the named place of destination ready for unloading and cleared for import.
Incoterms for Sea and Inland Waterway Transport
Seller clears the goods for export and delivers them when they are placed alongside the vessel at the named port of shipment. Buyer assumes all risks/costs for goods from this point forward.
FOB (Free on Board)
Seller clears the goods for export and delivers them when they are on board the vessel at the named port of shipment. Buyer assumes all risks and cost for goods from this moment forward.
CFR (Cost and Freight)
Seller clears the goods for export and delivers them when they are on board the vessel at the port of shipment. Seller bears the cost of freight to the named port of destination. Buyer assumes all risks for the goods from the time the goods have been delivered on board the vessel at the port of shipment.
CIF (Cost, Insurance, and Freight)
Seller clears the goods for export and delivers them when they are on board the vessel at the port of shipment. Seller bears the cost of freight and insurance to the named port of destination. The seller is required to purchase the minimum level of insurance under Clause C of the Institute Cargo Clauses. This requirement is unchanged from Incoterms 2010.
Buyer is responsible for all costs associated with unloading the goods at the named port of destination and clearing goods for import. Risk passes from seller to buyer once the goods are on board the vessel at the port of shipment.
Indicating Incoterms 2020 Rule Usage
If parties want Incoterms 2020 Rules to apply, the best way to make that clear in their sales contracts and on their export paperwork as follows:
“[the chosen incoterms rule], [named port, place, or point] Incoterms 2020”.
- CIF, Shanghai, Incoterms 2020, or
- DAP, No. 123, ABC Street, Importland, Incoterms 2020
Using Incoterms for Domestic Sales
Because they use Incoterms for international sales, some companies have started using Inocterms for their domestic sales as well instead of using the Uniform Commercial Code (UCC) terms. This is perfectly acceptable as long as their contracts identify what set of terms they’re using.
The Importance of Incoterms 2020
Each Incoterm provides exporters and importers clear, succinct rules that help them understand their responsibilities, clarify any gray areas in contracts, and can save a lot of headaches when used correctly. Incoterms reduce the risk of legal complications by giving buyers and sellers a single home base from which to reference trade practices.
With the changes in Incoterms 2020 rules, you may be looking for more resources. We can help!
For a more detailed understanding of which term or terms your company should be using in your international transactions, register for an Incoterms® 2020 Rules seminar or webinar offered by International Business Training. If you don't want to attend a half-day class, you can get the book provided at these seminars and webinars: Incoterms® 2020 for Importers and Exporters.
For a basic understanding of the Incoterms 2020 rules, download the free Chart of Responsibilities and Transfer of Risk.
By correctly using Incoterms, you’ll be able to partner more harmoniously, transport and deliver your goods more easily, and get paid more quickly. And who doesn’t want that?
This article was first published in two parts in October and November 2014 and has been updated to include current information including the Incoterms 2020 rules, new links, and subtle formatting changes.