INCOTERMS - 2020 Changes & Amendments

What does "Incoterms" stand for? It is an acronym standing for international commercial terms. Incoterms is a trademark of the International Chamber of Commerce, registered in several countries.

The Incoterms rules feature abbreviations for terms, like FOB (“Free on Board”), DAP (“Delivered at Place”) EXW (“Ex Works”), CIP (“Carriage and Insurance Paid To”), which all have very precise meanings for the sale of goods around the world. These terms hold universal meaning for buyers and sellers around the world.

The main Incoterms changes that are being considered are as follows:

The removal of FAS (Free Alongside Ship) as it is being used infrequently, separating FCA (Free Carrier) into two separate Incoterms, one for land delivery and one for maritime delivery and the committee is also considering bringing back the terms FOB (Free on Board) and CIF (Cost, Insurance, Freight), instead of the FCA and CIP (Cost and Insurance Paid to) used for non-container shipments. There is also a debate about the creation of a new Incoterms called CNI (Cost and Insurance) to bridge the gap between FCA and CFR/CIF (Cost and Freight/Cost, Insurance, Freight). Currently, FCA includes the cost of international insurance on account of the seller-exporter, while CFR/CIF does not include the cost of freight. And lastly, to alleviate questions surrounding the party responsible for paying Customs fees, the ICC will evaluate the creation of 2 Incoterms to replace DDP (Delivered Duty Paid).

Incoterms are a set of rules defining the terms of sale. Furthermore, people use it all over the world. In addition, these rules share the costs and responsibility between the buyer and the seller. They are used while transporting goods from the seller to the buyer. Incoterms refer primarily to the UN Convention on Contracts for the International Sale of Goods. The latest released version – Incoterms 2010 – has been operating since January 1, 2010. The rules change every 10 years, so soon we can expect new rules – Incoterms 2020.

Changes in 2020

Proposals for changes regarding Incoterms 2020 have already been presented. The official announcement of the modification will be released at the end of 2019, and what is more, the new rules will start operating on January 1, 2020.

The International Chamber of Commerce (ICC) establish the Incoterms rules. This year, the representatives of China and Australia also participated in the exporters’ committee to prepare the new Incoterms rules for the first time.

Division of Incoterms

Incoterms 2020 are divided into four groups (C, D, E, F). The rules are classified according to the fees, risk, responsibility for formalities, as well as issues related to import and export.

C Group

In group C (Main Carriage Paid), the seller concludes a transport contract with the forwarder and takes the costs. In this case, the seller is responsible for conducting export clearance. The risk is transferred at the time of posting the goods to the buyer. All matters arising after loading costs related to transporting, and other events, are the buyer’s responsibility. Group C includes the following Incoterms rules: CFR, CIF, CPT, and CIP.

D Group

Group D (Arrival) assumes that the seller is obliged to deliver the goods to a specific place or the port of destination. This group includes such Incoterms as DAP, DPU, and DDP.

E Group

In group E (Departure), the seller makes the goods available to the buyer at the delivery point indicated by the seller. The seller is not obliged either to customs or export clearance and does not bear the risk and costs of loading. In group E, there is only Incoterms EXW.

F Group

Group F (Main Carriage Unpaid) obliges the seller to perform export customs clearance. The seller does not pay transport and insurance costs. FCA, FAS, and FOB belong to this group.

FCA rules

FCA is the most common Incoterms rule (approx. 40% of international commercial operations). It is a very versatile rule that allows the delivery of goods to various places (eg address, terminal, port, airport, etc.), which are mostly located in the buyer’s country. The Committee decided that the FCA rule will provide for two possible places of delivery.

A first variant is a place belonging to the seller (e.g., his warehouse, factory, yard). Delivery is considered complete when the goods are physically transferred (after loading) to the care of a courier or other person designated by the buyer.

However, the second option applies to the place indicated in the contract, which does not belong to the seller (e.g., seaport, terminal). In this situation, the delivery is considered to have been made after the goods have been handed over to the carrier, on the means of transport sent by the seller. It should be noted that unloading goods from the means of transport is not the responsibility of the seller.

Incoterms – CIF, and CIP

Incoterms 2020 aligns different levels of insurance coverage in Cost Insurance and Freight (CIF rules) and Carriage and Insurance Paid To (CIP).

Carriage with own means of transport – FCA, DAP, DPU, DDP

Incoterms 2020 includes arrangements for carriage with own means of transportation in FCA, Delivery at Place (DAP), Delivery at Place Unloaded (DPU), and Delivered Duty Paid (DDP).

Incoterms 2020 – discussions

Most members of the Commission dealing with changes in Incoterms 2020 are representatives of European countries. This year, representatives of China and Australia will also join to France, Great Britain, Germany, Turkey, and the United States.

It may seem that changes to existing Incoterms are not much, but Incoterms 2020 may be easier to understand than Incoterms 2010. The commission wanted to avoid situations where Incoterms are misinterpreted and misused, which is often associated with costly consequences. 

Incoterms 2020 FOB

Incoterms describe the rules of trade. It primarily defines the allocation of all factors, risk, and costs related to the transaction between the seller and the buyer. There will be changes in Incoterms from 2020. FOB Incoterms is one of the most frequently used rules in maritime transport. We describe Incoterms 2020 FOB. Let’s see what changes have taken place.

Incoterms 2020 FOB – Cost-sharing

The seller takes the cost:	The buyer takes the cost:
cost of export clearance;	costs connected with the conclusion of a transport contract;
cost of delivering the goods to the ship;	costs related to import issues;
any costs associated with damage to the goods before loading them to the vessel.	cost of import clearance;
	possible costs related to damage or theft of the goods after loading the products onboard.

What are the obligations of the seller?

• The seller has to deliver the goods to the vessel at the place designated by the buyer. He also has to bear the costs involved.
• Obtains permission to export products.
• The seller shall be fully liable for any damage to the goods before loading to the vessel.
• Informs the buyer of all undesirable events that occur during the delivery of products to the ship.
• Informs the buyer that the goods have been delivered to the ship.
• He delivers sales notes.
• The seller is responsible for the export clearance and related costs.

What are the obligations of the buyer?

• The buyer is responsible for any damage to the goods and theft after the goods have been loaded into the ship.
• He bears the costs related to the conclusion of the transport contract and import issues.
• It shall inform the seller about designated port, the name of the vessel and the delivery date.
• Organizes import clearance and bears the associated costs.

Delivery of goods

The time of delivery shall be deemed to be the time when the goods are loaded to the vessel designated by the buyer, on the designed date, and in the form prescribed by the port authorities.

Insurance of the goods on Incoterms

Applying FOB rule the buyer and the seller have no obligation to conclude insurance contract.

Incoterms 2020 FOB in transport

FOB rules are used only and exclusively in maritime transport or inland waterway transport. The use of FOB is not recommended for containers transport. That’s the difference from Incoterms 2000, where FOB was also used for container transport.

FOB rules are often used in maritime transport.

In this case, the delivery documents are generally defined. It can be a sea waybill, helmsman’s receipt or a certificate of receipt, received from the forwarder. The FOB rule applies only to maritime transport. The rule is very often misapplied because it cannot be used to container transport (in this case, the FCA rule is recommended). 

Incoterms 2020 CIF

Incoterms are known as International Trade Rules. They determine the conditions for the worldwide exchange of goods. It regulates the allocation of responsibility and costs between the buyer and the seller. CIF Incoterms is one of the longest-established formulas. However, Incoterms are updated every ten years, which means that some changes are expected in 2020.

Cost-sharing – Incoterms 2020 CIF

The seller takes the costs:	The buyer takes the costs:
cost of export clearance;	costs of informing the seller of the date of dispatch of the goods and the port of destination;
cost of delivering the goods to the ship;	costs of import license and others authorizations;
costs of issuing and sending the commercial invoice;	cost of import clearance;
costs of obtaining an export license or other authorizations;	the costs of obtaining documents (or equivalent electronic documents) which are necessary for the buyer to import or transit the goods;
the cost of concluding the contract of carriage;	costs of pre-shipment checks on the products (except where the authorities require such checks of the exporting country);
the cost of insurance;	all costs not covered by the contract or not being freight but relating to the goods during transport from the port of loading;
cost of packaging and marking the products;	additional charges are resulting from the failure to notify the seller of the time of dispatch or destination.
the cost of giving information to the buyer (e.g., the goods have been delivered to the ship);
costs of quality control (measurement, weighing, counting).

What are the obligations of the seller?

• The seller is obliged to conclude a contract of carriage to a designated port of shipment at his own expense.
• Conclude and pay the freight contract costs.
• The seller is responsible for the loading the goods on the vessel.
• The seller is obliged to conclude an insurance agreement (with minimum coverage) and deliver it to the buyer.
• Is responsible for the export clearance and related costs.

What are the obligations of the buyer?

• The buyer is responsible for any damage or theft of the goods after the goods have been loaded to the vessel.
• Is obliged to bear all the costs required to obtain the certificate of origin, consular documents and import rates of duty.
• He has to inform the seller of the designated port, the name of the vessel and the delivery date.
• He organizes the import clearance and bears all related costs.
• The buyer has to obtain all documents necessary for import or transit.

Incoterms 2020 CIF

The seller bears all costs until the goods are delivered to the port of loading. Besides, the seller takes the risk until the goods have been loaded. He has to bear the insurance costs until the products have passed the side of the vessel at the port of loading.

Delivery of goods

According to this rule, the products are delivered by the seller at the moment when the goods pass the ship’s side at the port of loading. From now on, the seller is no longer liable for damage or loss of goods. These responsibilities are transferred to the buyer.

Insurance of the goods on Incoterms 2020 CIF

The seller has to conclude the insurance contract. The buyer has to note that the seller is obliged only to insurance with a minimum of coverage.

Incoterms 2020 CIF in transport

CIF rules are used only in maritime or inland waterway transport. Apart from the FOB rule, the most frequently used in bulk cargo transport by sea is the CIF rule. However, it is not allowed to use CIF Incoterms using more than one mode of transportation. The CIP formula is used for this purpose. CIF is not recommended for the transport of containers. In this case, the FCA and CIP formulas are recommended.

Transport may be carried out by several carriers in maritime transport. For example, first by a carrier operating a feeder ship from Hong Kong to Shanghai and then to an ocean-going ship from Shanghai to Southampton. In this case, the seller is no longer responsible for the goods in Hong Kong. The rule is very often misapplied because it cannot be applied to container transport. In this case, FCA or CIP are recommended. It is also worth to notice that Incoterms CIF transfers the obligation to pay sea freight to the seller. (The opposite is FOB rule.)

The CIF formula is very similar to the CFR. But using CIF Incoterms, the seller additionally pays basic insurance of the goods during transport. When applying the CFR rule, the exporter is obliged to find the carrier, negotiate appropriate terms of the contract, and bear the transport costs.

Incoterms 2020 FCA

Regulations of sharing cost and risk between the seller and the buyer regulate Incoterms rules. It turns out that the most commonly used is FCA Incoterms. Almost 40% of contracts all over the world are concluded based on this rule. FCA is comprehensive because it applies to all modes of transport.

Cost-sharing – Incoterms 2020 FCA

The seller takes the costs:	The buyer takes the costs:
The costs of export clearance,	The costs related to import issues and transport of goods from the moment of delivery to the courier by the seller,
The costs of delivering and entrusting the goods to a carrier,	Additional costs related to non-compliance with the obligation to take delivery of the goods at the place and time agreed in the contract,
The costs of obtaining an export license or other authorization, taxes, duties and additional official export charges,	The costs of obtaining documents or equivalent in electronic form (other than usual delivery notes) issued in the country of consignment and/or origin which are necessary for the buyer to import or transit the goods,
Costs in case of a ban on the export of the products or costs if there are special taxes on its export,	Costs of informing the seller about the date and place where the goods will be delivered to the carrier,
The costs of providing the document proving the delivery of the goods or equivalent electronic version,	Costs related to the transport of the products,
Costs of preparing and sending the commercial invoice or equivalent electronic version,	Costs of unloading the delivered goods from the means of transportation in the terminal of the carrier designated by the buyer,
Costs of informing the buyer that the goods have been delivered and entrusted to the carrier or have not been accepted by the carrier at the agreed time,	All costs relating to the products from the time they are put at the disposal of the carrier designated by the buyer (including customs duties and taxes and other official charges),
The costs of packaging and marking required for transport, unless the goods are generally transported without packaging,	All additional costs resulting from not designating a carrier or notifying the seller of the name of the carrier and the designated date when the goods are to be delivered to the carrier,
The costs of quality control, measurement, weighing, and counting.	The costs of pre-shipment inspection of the goods, unless the authorities compulsorily require this of the exporting country.

What are the obligations of the seller?

• The seller has to provide the goods, the commercial invoice and other evidence of conformity as may be required and specified in the contract,
• Upon request and at the buyer’s expense, the seller enables and assists in obtaining a shipping document,
• Appoints a person responsible for loading the goods to the vehicle of the purchaser of the products,
• The seller is responsible for preparing the goods for loading (measurement and packing of the goods),
• He adjusts the goods for export and bears the risks and costs involved,
• At the request of the buyer, he may conclude a contract of carriage on normal terms and conditions at the cost and risk of the buyer.

What are the obligations of the buyer?

• The buyer completes the formalities related to the import of goods and their transport from the moment of delivery by the seller to the courier,
• He bears the risk of losing or damaging the products from the moment of delivery to the courier,
• It concludes transport contracts, although the seller may (as an additional service) arrange transport at the expense and risk of the buyer,
• He takes care of all necessary transit formalities and preparing the goods to import,
• The buyer orders transport,
• He takes delivery of the goods at the place agreed upon in the contract in advance.

Delivery of goods

The Incoterms 2020 FCA has two possible delivery locations. A first variant is a place belonging to the seller (e. g. his warehouse, factory). The delivery is deemed have been completed when the goods are physically handed over (after the loading has been completed) to a courier or other person designated by the buyer.

The second option concerns the place, which does not belong to the seller (e. g. seaport, terminal). In such a case, the delivery is deemed to have taken place after the goods have been handed over to the carrier in the mode of transport sent by the seller. It should be noted that the unloading of products from the mode of transportation is not the responsibility of the seller. 

Regardless of the chosen option, information about the place, and time of delivery should be included in the contract.

Insurance of the goods on Incoterms 2020 FCA

In the case of FCA Incoterms, insurance is the responsibility of the buyer. The seller is not responsible for the products from the moment of delivery at the place specified in the contract. The further transport, as well as the insurance of the goods, depends on the buyer.

Incoterms 2020 FCA

The FCA formula can be applied to all modes of transport, including combined transport (where different modes of transport are used).

The seller must deliver the goods and commercial invoice in accordance with the sales contract and any other evidence of conformity that may be required in the contract. Besides, he assists in obtaining the transport document at his own expense and risk, 

However, this is optional and unnecessary if the seller and the buyer agree that the seller will provide a waybill stating that the goods have been delivered for dispatch and that they have not been sent on board.

FCA and other Incoterms rules

In the case of the FCA rule, as with all other Incoterms 2010 rules (except EXW), the seller is charged with all procedures related to the export of goods.

At both EXW and FCA, the importer has a transport authority for the entire delivery route. In EXW rule the seller is not obliged to load the goods or clear the goods for export. In the FCA Incoterms, the obligation of export clearance is on the seller. The obligation of loading depends on the mode of transport. For this reason, it is recommended to use the FCA instead of EXW.