International Trade and Transport - INCOTERMS 2020

Learning Outcomes for International Trade and Transport

• Explain the meaning of INCOTERMS $2020$.
• Describe the evolution of INCOTERMS.
• Explain the scope of INCOTERMS.
• Explain the purpose of INCOTERMS.
• Explain the importance of using appropriate INCOTERMS.
• Classify INCOTERMS $2020$.
• Identify the duties and responsibilities of parties under INCOTERMS $2020$.

Overview of INCOTERMS

• Definition: The INCOTERMS rules, or International Commercial terms, are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC).
• Usage: They are widely used in international commercial transactions and apply to both domestic and international trade.
• Function: They define the responsibilities of buyers and sellers for the delivery of goods under a sales contract.
• Authority: These are authoritative rules for determining how costs and risks are allocated to parties.
• Conflict Resolution: They significantly reduce misunderstandings among traders, thereby minimizing trade disputes and litigations.
• Facilitation: They promote a common understanding of specific tasks associated with trading parties.
• Structure: They consist of a series of three-letter ($3$) trade terms related to common sales practices.
• Primary Intent: Clearly communicate the tasks, costs, and risks associated with the transportation and delivery of goods.
• Global Acceptance: Accepted by governments, legal authorities, and practitioners worldwide for the interpretation of trade terms.
• Standardization: Intended to reduce or remove uncertainties arising from different interpretations of rules across various countries.

Purpose and Fundamental Questions Addressed by INCOTERMS

• Delivery Timing: Outline when and how the delivery of goods takes place depending on the specific term used.
• Scope of Questions Addressed:
  • How physical goods are delivered from sellers to buyers across international borders.
  • Who is responsible for the carriage of goods.
  • Who handles export and import clearance responsibilities.
  • Who pays for specific segments of the logistics chain ("Who pays what").
  • Who handles the logistical arrangements ("Who arranges what").
  • Who bears the risk for the loss or damage of goods at different locations throughout the total logistics chain.

Importance of INCOTERMS $2020$

• Defining Roles: Clearly state the roles of buyers/sellers or exporters/importers in transport arrangements.
• Risk Allocation: Establish exactly who bears the risk of loss or damage to goods at any specific point in an international journey.
• Documentary Obligations: Establish the parties' obligations regarding the procurement and preparation of documents necessary for the delivery of goods.
• Certainty: Provide solutions and certainty over total costs while reducing the risk of disputes and disagreements.
• Linguistic Consistency: Eliminate inconsistencies in language by providing all parties with the same definition for specific terms within a trade agreement.

Classification of INCOTERMS $2020$ Groups

• Group "E" (Departure): Seller makes the goods available to the buyer at the seller’s premises or another place named by the seller.
• Group "F" (Main Carriage Unpaid): Seller is responsible for delivering the goods to the export shipment point and the carrier designated by the buyer.
• Group "C" (Main Carriage Paid): Seller is responsible for contracting the carriage of goods to the place of destination but does not assume the risk of loss/damage or additional costs due to events occurring after shipment.
• Group "D" (Arrival): Seller is responsible for all costs and risks associated with delivering goods to the named place in the country of destination.

Key Changes in the INCOTERMS $2020$ Version

• Term Replacement: DAT (Delivered at Terminal) changed to DPU (Delivered at Place Unloaded).
• Insurance Variation: Insurance cover requirements now differ between CIF and CIP.
• Cost Listings: Enhanced listing and transparency of costs.
• Security: Updated security requirements for transport.
• Transport Logistics: Provisions for using "Own transport" rather than third-party carriers.
• FCA and Bills of Lading: Specific updates regarding FCA (Free Carrier) and the issuance of Bills of Lading.
• Presentation: Changes in the presentation and design of the rules for easier use.

Rules for Any Mode(s) of Transport

• EXW – Ex-Works (Named Place of Delivery):
  • The seller makes the goods available at its premises (works, factory, warehouse, plant) on the agreed date.
  • Obligations: Places maximum obligation on the buyer and minimum on the seller.
  • Loading: The seller does not load the goods on collecting vehicles or clear them for export. If the seller does load them, it is at the buyer's risk and cost. Any alternative arrangement for loading must be explicitly worded in the sales contract.
  • Transport/Risk: Buyer pays all transportation costs and bears risks from the collection point to the final destination.
• FCA – Free Carrier (Named Place of Delivery):
  • Seller delivers goods, cleared for export, to the carrier or person nominated by the buyer at the seller's premises or another named place.
  • Risk: Passes to the buyer at the point of delivery. Parties are advised to specify this point as clearly as possible.
  • Costs: Seller pays for carriage to the named point of delivery.
• CPT – Carriage Paid To (Named Place of Destination):
  • Seller delivers goods to the carrier or person nominated by the seller at an agreed place.
  • Contracting: Seller must contract for and pay the costs of carriage to the named destination.
  • Risk Transfer: Risk transfers to the buyer upon handing the goods over to the first ($1^{st}$) carrier.
• CIP – Carriage and Insurance Paid To (Named Place of Destination):
  • The containerized or multimodal equivalent of CIF.
  • Obligations: Seller pays for both carriage and insurance to the named destination point.
  • Risk Transfer: Risk passes when goods are handed to the first ($1^{st}$) carrier.
• DPU – Delivered at Place Unloaded (Named Place of Destination):
  • Replaces the previous DAT term.
  • Delivery: Seller delivers and transfers risk when goods are unloaded from the arriving means of transport and placed at the buyer's disposal at the named destination.
  • Responsibility: Seller bears all risks and costs involved in bringing the goods to and unloading them at the destination.
• DAP – Delivered at Place (Named Place of Destination):
  • Seller delivers when goods are placed at the buyer's disposal on the arriving means of transport, ready for unloading at the named place.
  • Risk/Costs: Seller bears all risks of bringing goods to the place and pays carriage, excluding import clearance costs.
• DDP – Delivered Duty Paid (Named Place of Destination):
  • Seller delivers when goods are placed at the buyer's disposal, cleared for import, and ready for unloading.
  • Obligations: Maximum obligation on the seller and minimum on the buyer.
  • Clearance: Seller must clear products for both export and import, pay all duties, and carry out all customs formalities.

Rules for Sea and Inland Waterway Transport

• FAS – Free Alongside Ship (Named Port of Shipment):
  • Delivery occurs when goods are placed alongside the vessel (e.g., on a quay or barge) nominated by the buyer at the named port.
  • Restriction: Suitable only for maritime transport; NOT for multimodal sea transport in containers.
  • Risk/Costs: Seller clears goods for export. Risk and costs transfer to the buyer once the goods are alongside the ship.
• FOB – Free On Board (Named Port of Shipment):
  • Seller must load goods on board the vessel nominated by the buyer.
  • Risk/Cost Division: Divided when the goods are actually on board the vessel. Risk transfers once goods pass the ship's rail.
  • Documentation: The Bill of Lading must carry the wording "Shipped on Board," the signature of the transporter/carrier, and the date of boarding.
  • Buyer Role: Chooses the ship and pays the freight. Instruction on vessel details and the loading port must be provided to the seller.
• CFR – Cost and Freight (Named Port of Destination):
  • Seller contracts for and pays costs and freight to the named port of destination.
  • No Insurance: Insurance is NOT included.
  • Risk Transfer: Risk transfers to the buyer once goods are on board the vessel in the port of shipment.
• CIF – Cost, Insurance and Freight (Named Port of Destination):
  • Seller delivers when goods pass the ship's rail at the port of shipment.
  • Insurance: Seller must obtain marine insurance against the risk of loss or damage during carriage at their own cost. Buyer is also advised to take insurance cover.
  • Components: Price involves the FOB price plus ocean freight and insurance.
  • Risk Transfer: Risk passes to the buyer upon delivery on board; however, the buyer takes delivery from the carrier at the appointed destination port.

Responsibility Quick Reference Guide (Obligations & Charges)

Specific Insurance Notes

• CIF Insurance: Requires at least insurance with the minimum cover of the Institute Cargo Clause (C). This covers a number of listed risks, subject to itemized exclusions.
• CIP Insurance: Now requires at least insurance with the minimum cover of the Institute Cargo Clause (A). This is "All risk" cover, subject to itemized exclusions.