International Commercial Terms
The international commercial operations have their origin in a contract of purchase and sale made between the importer and the exporter, which stipulates the clauses by which the respective commercial operation will be regulated. INCOTERMS (International Commercial Terms) can be considered as a set of optional international rules that the International Chamber of Commerce has gathered and defined based on the practices more or less standardized by traders. The INCOTERMS basically define the place where the seller is responsible for the merchandise and what the expenses are for him and which, therefore, will be included in the price.
The aims of INCOTERMS are essentially as follows:
Define the transfer of expenses. The seller knows exactly when and how much to pay for his contract of sale and thus includes them in the price. This procedure allows the buyer to recognize exactly the expenses that must be added to the purchase price in order to compare with other national and international offers.
Define the transmission of risk. The buyer knows exactly the time and place from which the risks in which the goods incur during transportation are at his own expense. For this reason, the INCOTERMS define the time and place from which the responsibility of the seller ends and begins with that of the buyer. This data is extremely important to secure the merchandise.
Define the location from which the goods will exit. Indicating the exact place where the seller must deposit the merchandise and, thus, the place where the buyer will raise it.
There are, fundamentally, two main changes to Incoterms® 2020, compared to the 2010 edition:
- DAT (Delivered at Terminal) is now called DPU (Delivered at Place Unloaded).
- 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 standardized insurance contracts, but the level of insurance remains negotiable between the buyer and the seller.
- When referring, the cost allocation between the buyer and the seller is more accurately stated – an article refers to all costs for which the seller and the 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 transport, instead of using a third party .
- Security-related obligations are now more prominent. “Explanatory Notes for Users” for each Incoterm® have replaced the Guidance Notes for the 2010 edition and are designed to be simpler for users.
- CIP currently requires ICC A or equivalent insurance coverage as a standard. In Incoterms® 2010 it was ICC C. The insurance coverage required for CIF remains.
The seven rules defined by Incoterms 2020, for any mode of transport are:
EXW – Ex Works (named place of delivery)
Often used when making an initial quotation for the sale of goods without any costs included, EXW means that the seller makes the goods available at their premises or at another named place (works, factory, warehouse etc). The seller does not need to load the goods on any collecting vehicle, nor does it need to clear the goods for export.
FCA – Free Carrier (named place of delivery)
FCA can have two different meanings, each with varying levels of risk and cost for the buyer and seller. FCA (a) is used when the seller delivers the goods, cleared for export, at a named place which is their own premises. FCA (b) is used when the seller delivers the goods, cleared for export, at a named place which is not their premises. In both instances, the goods can be delivered to a carrier nominated by the buyer, or to another party nominated by the buyer.
CPT – Carriage Paid To (named place of destination)
Under CPT the seller pays for the carriage of goods up to the named place of destination.
CIP – Carriage and Insurance Paid to (named place of destination)
Similar to CPT with the exception that the seller is required to obtain minimum insurance for the goods while in transit.
DPU – Delivered at Place Unloaded (named place of destination)
This Incoterm requires that the seller delivers the goods, unloaded, at the named place. The seller covers all the costs of transport (export fees, carriage, unloading from main carrier at destination port and destination port charges) and assumes all risk until arrival at the destination place.
DAP – Delivered at Place (named place of destination)
The seller is deemed to have delivered when the goods are placed at the disposal of the buyer on the arriving means of transport and ready for unloading at the named place of destination. Under DAP terms, the seller needs to manage all risks involved in bringing the goods in.
DDP – Delivered Duty Paid (named place of destination)
The seller is responsible for delivering the goods to the named place in the country of the buyer, and pays all costs in bringing the goods to the destination including import duties and taxes. The seller is not responsible for unloading.
The four rules defined by Incoterms 2020 for international trade where transport is entirely carried out by water are:
FAS – Free Alongside Ship (named port of shipment)
The seller delivers when the goods are placed alongside the vessel (e.g., on a quay or a barge) nominated by the buyer at the named port of shipment. The risk of loss of or damage to the goods passes when the goods are alongside the ship, and the buyer takes on responsibility for all costs from that moment onwards.
FOB – Free on Board
The seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer takes on responsibility for all costs from that moment onwards.
CFR – Cost and Freight
The seller delivers the goods on board the vessel. The risk of loss of or damage to the goods passes when the goods are on board the vessel.The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.
CIF – Cost, Insurance and Freight
The same as CFR with the addition that the seller must also obtain minimum insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage.