WHAT ARE THE MOST IMPORTANT CHANGES IN INCOTERMS 2020?

Incoterms 2020 formally defines the delivery point in the transac on where ‘the risk of loss or
damage to the goods passes from the seller to the buyer’. In contrast, previously, the term had a
more informal explana on.

Knowing the point of risk transfer eases the transac on for different trade finance par es.

Incoterms 2020 rules make security more prevalent by lis ng import and export requirements. Also,
they help in dis nguishing whether the buyer or seller is responsible for mee ng each of those
requirements.

The updated defini ons split the incoterms into 2 groups, each relevant to a specific mode of
transport.

The most significant change relates to the term FCA (Free Carrier). It now allows the buyer to instruct
the carrier to issue a Bill of Lading with an onboard nota on to the seller. By doing so, it sa sfies the
terms and condi ons of a Le er of Credit.

Previously, many exporters preferred to use FOB (Free on Board) to arrange payment under a Le er
of Credit. Nonetheless, FCA was more suitable for the shipment of containerised goods. It was due to
the extra delivery cost differen al between FCA and FOB.

Another major change is the replacement of DAT (Delivered at Terminal) with DPU (Delivered at
Place Unloaded). Previously, the word ‘Terminal’ was confusing, and DPU broadly covers all delivery
op ons.

The term CIP (Carriage and Insurance Paid) changes the insurance coverage requirements. The seller,
under Ins tute Cargo Clause A, must purchase a higher level of insurance. The insurance could
amount to 110 per cent of the invoice value, which is more appropriate for manufactured goods.

The CIF (Cost Insurance & Freight) is for commodity shipments. The Ins tute Cargo Clause C specifies
the insurance requirements (unchanged).

Addi onally, FCA (Free Carrier), DAP (Delivered at Place), DPU (Delivered at Place Unloaded) and DDP
(Delivered Duty Paid) now take account of buyers and sellers arranging their own transport rather
than using a third party.

Expense alloca on between buyer and seller are now listed more precisely to help avoid confusion.
In the 2010 Incoterms, costs some mes became a big issue. Carriers could change their pricing
structure by adding back charges. As a consequence, sellers faced addi onal terminal handling
expenses.

Unravel the different InCoTerms costs involved when selec ng trade terms for your shipment.

Key Takeaways

• What are InCoTerms?

Incoterms are rules for buyers and sellers to follow when formula ng a contract for the shipment of
goods.

• What are InCoTerms 2020?

• The most obvious changes?

The most significant changes relates to the term FCA (Free Carrier) and the replacement of DAT
(Delivered at Terminal) with DPU (Delivered at Place).

InCoTerms for Any Mode of Transport

Some Incoterms are be er suited to specific modes of transport than others. However, below are the
ones applicable for any transport mode.

EXW – Ex Works

Under the EXW term, the seller is responsible for making the goods available at its premises. The
par es can also agree on another named place such as factory, office or warehouse. At this point, the
buyer gains ownership of the goods. Then, he handles all costs and risk a er the products are
collected.

EXW is most favourable to the seller. He has no obliga on to load the goods or to cover freight costs
once the goods have le the premises. This term can cause complica ons for the buyer if products
are for export.

FCA – Free Carrier

With FCA, the seller is responsible for delivering the goods to the buyer’s nominated premises. He
needs to load the stocks onto the buyer’s transporta on. Then, the seller organises the shipping,
including export clearance and mee ng security requirements.

The risk is transferred once the goods are loaded onto the buyer’s transporta on. Thus, any damage
to the products when on board the vessel is the responsibility of the buyer.

The buyer pays the cost of freight, bill of lading fees and insurance. Also, he pays for unloading and
transporta on costs to the final des na on.

FCA is the term that has been most significantly changed under the Incoterms 2020 rules. Previously,
the use of a transport intermediary meant the seller was unable to obtain a bill of lading with
onboard nota on. The reason was that he did not present the goods directly to the interna onal
shipper. Without the BL, the transac ng bank would not authorise payment to the seller.

Under the new Incoterms 2020, FCA resolves this problem. The buyer should instruct the carrier to
issue a bill of lading with the onboard nota on to the seller. The par es specify this nota on on the
sale contract.

CPT – Carriage Paid To

CPT goes beyond FCA by specifying that the seller bears the costs of transporta on to the buyer’s
place of des na on. The seller clears the goods for export and delivers them to the carrier or place
of des na on as instructed by the buyer.

At the defined place of shipment is where the risk is transferred to the buyer. The seller is
responsible for the transporta on costs associated with delivering goods. However, he is not
responsible for procuring insurance.
If the buyer requires the seller to obtain insurance, the par es should consider the Incoterm CIP
instead.

CIP – Carriage and Insurance Paid To

CIP is broadly similar to CPT. However, the seller is required to insure the goods in transit and to pay
the transporta on itself.

The seller clears the goods for export and delivers them to the carrier or place of des na on as
instructed by the buyer. The seller is responsible for the transporta on costs of the items to the
designated place of des na on.

The risk is transferred to the buyer at the defined place of shipment.

In one of the most significant changes under Incoterms 2020, CIP requires the seller to purchase a
higher level of insurance. This level of coverage is appropriate for containerised goods: 110% of the
contract value under Ins tute Cargo Clauses (A) of the Ins tute of London Underwriters. Previously
the minimum insurance was applicable under Ins tute Cargo Clauses (C).

DPU – Delivered at Place Unloaded

It was previously known as Delivered at Terminal (DAT). It has been renamed because the buyer (or
seller) may want to specify the delivery loca on rather than the terminal. This term is o en used for
consolidated containers with mul ple consignees. It is the only term that tasks the seller with
unloading the goods.

The seller covers all the costs of transporta on (export fees and carriage). Also, at the des na on
port, the seller pays the unloading from the carrier and the port charges. He assumes all risks un l
arrival at the des na on port or terminal.

The buyer is responsible for all costs and risks a er unloading. It includes import du es, taxes and
customs clearance. Also, the buyer pays local transporta on to the final named place of des na on.

If the seller is not able to organise unloading, he should consider shipping under DAP terms instead.

DAP – Delivered At Place

The seller delivers the goods to a named place of des na on but is not responsible for unloading. His
responsibili es include packing, export clearance, carriage expenses and any terminal costs up to the
agreed des na on port.

DAP means the buyer is responsible for all costs, du es and taxes associated with unloading the
goods. He is also responsible for clearing customs to import the products into the named country of
des na on.

The risk is transferred to the buyer at the final designated place of des na on.

DDP – Delivered Duty Paid

DDP means the seller bears all risks and costs associated with clearing and delivering the goods to
the designated place.

The seller is liable for clearing the goods through customs in the buyer’s country. It includes payment
of both du es and taxes. Furthermore, he needs to obtain the necessary authorisa ons and
registra ons from the authori es. However, the seller is not responsible for unloading.
This term places the maximum obliga ons on the seller and minimum obliga ons on the buyer. The
buyer bears no risk or responsibility un l the goods are at the final agreed place.

Hence, the term is favourable for online businesses seeking eCommerce financing for cross-border
trading.

Unless the seller has a profound understanding of the rules and regula ons in the buyer’s country,
DDP terms can be a considerable risk both in terms of delays and in unforeseen extra costs. Hence,
DDP should be used with cau on.

What Rules Apply for Sea and Inland Waterway Transport?

The following four rules apply to goods shipped by sea or inland waterways.

Usually, the risk and responsibility are transferred when the goods are on board (apart from FAS). As
the condi on of the items must be verified at this point, these terms are only suitable for non-
containerised goods, such as commodi es.

Note: in previous edi ons of Incoterms, the risk passed between the seller and the buyer at the point
where the goods crossed the ship’s rail.

FAS – Free Alongside Ship

The seller delivers the goods alongside the buyer’s vessel at the named port of shipment. It means
that the buyer bears all costs and risks of loss or damage from that moment.

The FAS term requires the seller to clear the goods for export (under previous Incoterms, the buyer
arranged export clearance).

FOB – Free On Board

Under FOB terms, the seller bears costs and risks un l the goods are loaded on board of the
designated vessel.

The seller’s responsibility includes arranging export clearance. At the same me, the buyer pays the
cost of marine freight, bill of lading fees and insurance. He is also responsible for unloading and local
transporta on costs from the port of arrival to the final des na on.

Any damage to the goods when on board the vessel is the responsibility of the buyer.

For this reason, FOB is ideal for invoice financing solu ons. This is because the risk of goods is
transferred to the buyer once the goods are shipped.

Since Incoterm FCA was introduced in 1980, FOB should be used only for non-containerised sea
freight and inland waterway transport.

However, FOB con nues to be the most commonly – and incorrectly – term used for all modes of
transporta on. Despite the contractual risk that can result (which include the difficulty of checking
goods if they are enclosed in a container).

CFR – Cost and Freight

CFR incurs more significant risk and responsibility for the seller who pays for the carriage of the
goods up to the named port of des na on.
The risk is transferred to the buyer at the country of export. Specifically, when the goods have been
loaded on board the ship.

The shipper pays for export clearance and freight costs to the selected port. Furthermore, he is
responsible for any damage to the goods on board the ship un l the port of final des na on.

The buyer pays for local delivery from the port to the final des na on and is responsible for
purchasing insurance. If the buyer requires the seller to obtain insurance, the par es should consider
the Incoterm CIF instead.

CFR should only be used for non-containerised sea freight and inland waterway transport. For all
other modes of transporta on – and for containerised goods – it should be replaced with CPT, as
specified in a cri cal change in Incoterms 2020.

CIF – Cost, Insurance & Freight

The seller clears the goods for export and delivers them when they are on board at the port of
shipment. The seller bears the cost of freight and insurance to the designated port of des na on.
Also, he is responsible for any damage to the goods on board the ship.

The seller needs to purchase the minimum level of insurance under Clause C of the Ins tute Cargo
Clauses. (This requirement is unchanged from Incoterms 2010.)

At the port of arrival, the seller must turn over three key documents – invoice, insurance policy and
bill of lading. Those documents represent the cost, insurance and freight of CIF.

This Incoterm is similar to CFR. However, the seller needs to obtain insurance while the goods are in
transit.