Incoterms Rules 2020

Incoterms Rules 2020

Incoterms (English Incoterms, International commercial terms) - international rules, a set of terms most widely used when concluding contracts for external supplies, and comprehensive definitions to them, providing an unambiguous interpretation of trade concepts used in the field of foreign economic activity. They determine when risks, responsibilities and obligations for a product are transferred from the seller to the buyer. Incoterms 2020 came into force on January 1, 2020, however, the use of old editions is also possible at this time. That is why, when mentioning the terms of delivery, it is necessary to indicate the edition of the Rules with an indication of a specific year.

The main task of Incoterms is to optimize the terms of international supply contracts in order to bring them into compliance with the laws of all countries participating in the contract.

Incoterms is an international normative act issued in the form of a dictionary.

The definition of common rules was one of the first initiatives of the International Chamber of Commerce (International Chamber of Commerce, ICC) after its foundation in 1919.

In the early 1920s, the ICC tried to understand the trade terms used by international merchants in their transactions. The studies were carried out in 13 different countries. The findings were published in 1923 in the form of the first six rules, which became the predecessors of the future Incoterms rules. These are the terms FAS, FOB, FOT, FOR, CIF and C&F (CNF).

In 1928, a second study was conducted to investigate divergences, expanding the scope to interpret trade terms used in more than 30 countries.

Based on the results of these studies, the first version of the Incoterms rules was published in 1936, which included the trade terms: FAS, FOB, C&F (CNF), CIF, EXS and EXQ. Subsequently, a new edition of Incoterms appeared once a decade, starting in the 50s of the last century.

The new rules were expected to be big changes compared to previous versions, but these expectations were not met. So, let's look at the changes in Incoterms 2020.

Each rule contains two sections of ten articles:

Section “A” stipulates the Seller's obligations, and section “B” - the Buyer's obligations. The rules provide for the carriage of goods by the Buyer or Seller by their own transport, without the involvement of outside carriers. Situations on the conclusion of a separate contract of carriage between them are also considered.

Articles A9 / B9 now specify the costs of the Buyer and Seller for each Incoterms 2020 rule. For the first time, an explanation of the customs clearance of goods in transit has been included. It is tied to the place where the risk of transportation is transferred

Expanded explanations are attached to each item - “Explanatory notes for users”, regulate:

EXW or “Ex Works” rests all responsibility for the delivery of the goods with the Buyer. The Seller has minimal responsibilities - to prepare the goods for shipment at their warehouse or elsewhere.

The recipient organizes the entire transportation chain:

The buyer bears all risks of transportation of the goods.

With FCA or Free Carrier, the Seller loads the goods and prepares customs clearance, pays duties. The place of transfer of the cargo and transport are indicated in the contract. Changes to Incoterms 2020 allow the Buyer, after accepting the goods on the sea vessel, to transfer the bill of lading to the Seller through the carrier.

This speeds up the receipt of payment for the delivered products. CPT or “Carriage Paid To” establishes that the Seller goes through export customs clearance and hands over the goods to the carrier. From this moment, responsibility for road transport, sea and air delivery passes to the recipient. The Buyer at the port accepts and unloads the goods, clears customs, delivers to the point of destination.

CIP or “Carriage and Insurance Paid To” are identical to the CPT terms, but the Seller is obliged to insure the shipment prior to its transfer to the Buyer. The new Incoterms rules have increased the amount of insurance coverage. It should now equal or exceed 110% of the delivery amount. The increase is due to the fact that, according to CIP standards, industrial equipment and mechanisms are usually transported using multimodal schemes. Insurance should cover the risks of damage and loss of production machines. DAP or “Delivery at point” means that the Seller pays in full for the carriage of the goods to the point specified in the contract. The customs release in export mode is also processed by the Supplier. Responsibility for the goods passes to the Buyer at the time of transfer to their own warehouse or elsewhere. The unloading and customs clearance procedure is also assigned to him.

DPU, or Delivery At Point of Unloading, is a fully organized and seller-paid delivery. The risk passes to the Buyer after the goods have been unloaded at the specified location. The recipient only formalizes the import transaction at the customs office and accepts the cargo. The DPU basis in Incoterms 2020 replaced DAT (“Delivery to the terminal”), which appeared in the 2010 rules. The difference in terms is purely technical - the word "terminal" is replaced by "place".

DDP or “Delivery Duty Paid” expands the seller's responsibilities over the previous condition:

The Buyer only accepts the goods. Prior to the adoption of the 2020 Incoterms, it was expected that DDP would be split into DTP and DPP - delivery with payment of duties to the terminal or to address. But the International Chamber of Commerce has skipped this point so far. The regulation for sea and inland water transportations CIF or "Cost, insurance and freight" completely repeats the conditions of the CIP, but is valid for sea transport. When concluding a contract on the basis of CIF, the minimum insurance amount is usually applied. The adopted Incoterms 2020 did not change the norms. The International Chamber of Commerce leaves the amount of insurance at the discretion of partners.

CFR or “Cost and Freight” means that the Seller goes through export customs clearance, pays duties, and loads the goods on board. The responsibility then passes to the Buyer. The freight cost is paid by the supplier. But he is not obliged to insure the cargo. At the port of arrival, the Buyer is responsible for unloading, customs clearance, and delivery to the final destination.

FOB or “Free on Board” limits the Seller's obligations to deliver the goods on board and go through the customs import procedure. But the cargo should not only be on the ship, but also be properly placed on the deck or in the hold. That is, the supplier pays for the loading. In this way, freight transportation of pick-up cargo is usually organized.

FAS or “Free Alongside Ship” assumes that the Seller clears the goods and delivers them to the ship. This is where the supplier's responsibility ends. Loading is paid by the buyer.

Conclusion - Incoterms 2020 is the latest version of the rules, which will be valid for a decade, until 2030. The changes, although not large-scale, as expected, are a positive moment for organizations actively using the Incoterms 2010 rules.