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Incoterms 2020: A Comprehensive Guide to International Trade Rules

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Introduction to Incoterms 2020

Incoterms, or International Commercial Terms, are a set of predefined rules published by the International Chamber of Commerce (ICC) that define the responsibilities of buyers and sellers in international trade. Introduced in 1936, these terms have become essential in facilitating global trade, ensuring that both parties clearly understand their obligations concerning the transportation and delivery of goods. The latest edition, Incoterms 2020, offers a refined and updated set of rules that reflect the changing dynamics of international commerce.

Why Incoterms 2020 Matter in Global Trade

Incoterms are crucial in mitigating risks, reducing misunderstandings, and streamlining the process of international trade. By specifying who is responsible for the shipping, insurance, and tariffs, these terms eliminate ambiguities that could lead to disputes between trading partners. The Incoterms 2020 edition simplifies these concepts further, making them more accessible for businesses of all sizes.

Overview of Incoterms 2020

The Incoterms 2020 rules are divided into two categories based on the mode of transport:

  1. Rules for Any Mode of Transport
  2. Rules for Sea and Inland Waterway Transport

Each category has specific terms that define the buyer’s and seller’s responsibilities at different stages of the shipping process.

Rules for Any Mode of Transport

This category includes seven Incoterm rules that can be applied to any mode of transport, including road, rail, air, and sea. These terms are versatile and can be used regardless of whether the goods are shipped via a single or multiple modes of transport.

1. EXW (Ex Works)

Ex Works (EXW) is the term that places the maximum obligation on the buyer. Under EXW, the seller’s responsibility ends when the goods are made available at their premises (e.g., factory, warehouse). The buyer bears all costs and risks involved in taking the goods from the seller’s premises to the desired destination. This term is often used in situations where the buyer has greater access to shipping logistics or when the seller is inexperienced in handling international shipments.

Key Points:

  • Seller’s responsibility: Make goods available at their premises.
  • Buyer’s responsibility: All transport costs, insurance, and customs duties.
  • Risk transfer: At the seller’s premises.

2. FCA (Free Carrier)

Free Carrier (FCA) is a flexible Incoterm that can be used for any mode of transport. The seller delivers the goods, cleared for export, to the carrier or another party nominated by the buyer at the seller’s premises or another named place. The risk transfers from the seller to the buyer at this point.

Key Points:

  • Seller’s responsibility: Deliver goods to the carrier nominated by the buyer.
  • Buyer’s responsibility: All subsequent transport costs and risks.
  • Risk transfer: At the point of delivery to the carrier.

3. CPT (Carriage Paid To)

Under Carriage Paid To (CPT), the seller arranges and pays for the transportation of goods to a named place of destination. However, the risk transfers to the buyer once the goods are handed over to the first carrier, not at the destination.

Key Points:

  • Seller’s responsibility: Pay for transportation to the destination.
  • Buyer’s responsibility: Risk of loss or damage during transit.
  • Risk transfer: When goods are handed to the first carrier.

4. CIP (Carriage and Insurance Paid To)

Carriage and Insurance Paid To (CIP) is similar to CPT but with the added responsibility for the seller to provide insurance against the buyer’s risk of loss or damage to the goods during transit. The seller is only required to obtain insurance with minimum coverage.

Key Points:

  • Seller’s responsibility: Pay for transportation and minimum insurance.
  • Buyer’s responsibility: Risk of loss or damage after goods are with the first carrier.
  • Risk transfer: When goods are handed to the first carrier.

5. DPU (Delivered at Place Unloaded)

Delivered at Place Unloaded (DPU) is a term introduced in Incoterms 2020, replacing the former DAT (Delivered at Terminal). The seller is responsible for delivering the goods, unloading them at the agreed destination. The risk transfers to the buyer once the goods have been unloaded at the destination.

Key Points:

  • Seller’s responsibility: Deliver and unload goods at the destination.
  • Buyer’s responsibility: Costs and risks after unloading.
  • Risk transfer: After unloading at the destination.

6. DAP (Delivered at Place)

Under Delivered at Place (DAP), the seller delivers when the goods are placed at the buyer’s disposal on the arriving means of transport, ready for unloading at the named place of destination. The seller bears all risks associated with delivering the goods to the named place.

Key Points:

  • Seller’s responsibility: Deliver goods to the named place, ready for unloading.
  • Buyer’s responsibility: Unloading and subsequent costs.
  • Risk transfer: At the named place of destination, before unloading.

7. DDP (Delivered Duty Paid)

Delivered Duty Paid (DDP) represents the maximum obligation for the seller. The seller is responsible for delivering the goods to the buyer’s location, paying all costs involved, including import duties and taxes. The buyer only needs to handle the unloading.

Key Points:

  • Seller’s responsibility: All costs, including duties, taxes, and delivery to the buyer’s location.
  • Buyer’s responsibility: Unloading the goods.
  • Risk transfer: At the buyer’s location, before unloading.

Rules for Sea and Inland Waterway Transport

This category includes four Incoterm rules that are specifically designed for sea and inland waterway transport. These terms are used when the point of delivery and the destination are both ports.

1. FAS (Free Alongside Ship)

Free Alongside Ship (FAS) requires the seller to place the goods alongside the ship at the named port of shipment. The buyer bears all costs and risks from that point forward, including loading the goods onto the ship and all subsequent transport costs.

Key Points:

  • Seller’s responsibility: Deliver goods alongside the ship at the port.
  • Buyer’s responsibility: Costs of loading, shipping, and risks from the port.
  • Risk transfer: When goods are placed alongside the ship.

2. FOB (Free on Board)

Under Free on Board (FOB), the seller’s responsibility ends once the goods have been loaded onto the vessel at the named port of shipment. The buyer assumes all risks and costs from that point, including freight, insurance, and unloading.

Key Points:

  • Seller’s responsibility: Load goods onto the ship at the port.
  • Buyer’s responsibility: Freight, insurance, and all risks after loading.
  • Risk transfer: When goods are on board the vessel.

3. CFR (Cost and Freight)

Cost and Freight (CFR) requires the seller to pay the costs and freight necessary to bring the goods to the named port of destination. However, the risk of loss or damage transfers to the buyer once the goods are loaded on the vessel.

Key Points:

  • Seller’s responsibility: Pay for costs and freight to the destination port.
  • Buyer’s responsibility: Risks after goods are on board the vessel.
  • Risk transfer: When goods are on board the vessel.

4. CIF (Cost, Insurance, and Freight)

Cost, Insurance, and Freight (CIF) is similar to CFR, but with the added requirement for the seller to obtain insurance for the goods during transit. The seller must arrange for insurance coverage, but only to a minimum level. The risk transfers to the buyer once the goods are loaded on the vessel.

Key Points:

  • Seller’s responsibility: Pay for costs, freight, and minimum insurance to the destination port.
  • Buyer’s responsibility: Risks after goods are on board the vessel.
  • Risk transfer: When goods are on board the vessel.

Chart for Easy Understanding

Below is a simplified chart that highlights the key responsibilities of sellers and buyers under each Incoterm.

Incoterm Mode of Transport Seller’s Responsibility Buyer’s Responsibility
EXW Any Make goods available at premises All costs and risks after pick-up
FCA Any Delivery to carrier, export clearance Main carriage, insurance, risk after handover
CPT Any Pay for transport to destination Insurance, import clearance, risk after handover
CIP Any Pay for transport and insurance Import clearance, risk after handover
DPU Any Deliver and unload at destination Import clearance, subsequent transport
DAP Any Deliver to destination, ready for unloading Unloading, import clearance
DDP Any All costs and risks to buyer’s location Unloading only
FAS Sea/Inland Waterway Deliver alongside ship, export clearance Main carriage, insurance, import clearance, risk after handover
FOB Sea/Inland Waterway Deliver on board, export clearance Main carriage, insurance, import clearance, risk after handover
CFR Sea/Inland Waterway Pay for transport to destination port Insurance, import clearance, risk after handover
CIF Sea/Inland Waterway Pay for transport and insurance to destination port Import clearance, risk after handover

How to Choose the Right Incoterm?

Choosing the right Incoterm depends on several factors:

  1. Mode of Transport: If the primary mode of transport is by sea, consider using Incoterms like FOB, CFR, or CIF. For any other mode, terms like EXW, FCA, or DDP might be more appropriate.
  2. Risk Management: Consider who is better positioned to manage the risk during transport. If the seller is more experienced with shipping, terms like CIF or CIP might be preferable.
  3. Cost Considerations: Depending on who can secure better rates for transport and insurance, the choice between terms like CPT and DAP can impact the overall cost structure of the transaction.
  4. Customs and Duties: Terms like DDP place the burden of customs duties on the seller, which can simplify the process for the buyer but increase costs for the seller.

UCP600 Article 3 Explanation – CDCS Guide: Interpretation

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Clause 1: Article Text: “Where applicable, words in the singular include the plural and in the plural include the singular.”

Explanation: This clause indicates that the interpretation of words in UCP600 should be flexible. If a term is mentioned in the singular, it should be understood to also encompass its plural form, and vice versa, unless the context explicitly requires otherwise.

Example: If a credit refers to “invoice,” it can be understood as referring to one or more invoices, depending on the situation.

Clause 2: Article Text: “A credit is irrevocable even if there is no indication to that effect.”

Explanation: All credits under UCP600 are automatically considered irrevocable, meaning they cannot be amended or canceled without the consent of the beneficiary. This holds true even if the credit document does not explicitly state that it is irrevocable.

Example: If a letter of credit issued by a bank does not mention whether it is revocable or irrevocable, it is to be treated as irrevocable by default.

Clause 3: Article Text: “A document may be signed by handwriting, facsimile signature, perforated signature, stamp, symbol or any other mechanical or electronic method of authentication.”

Explanation: This clause broadens the definition of a “signature” under UCP600. It allows for various forms of signatures, including electronic or mechanical methods, to authenticate documents, provided these are commonly accepted.

Example: An invoice signed with a stamp or an electronic signature is considered valid under UCP600.

Clause 4: Article Text: “A requirement for a document to be legalized, visaed, certified or similar will be satisfied by any signature, mark, stamp or label on the document which appears to satisfy that requirement.”

Explanation: When a document is required to be legalized, certified, or visaed, any apparent mark, stamp, or signature on that document that fulfills the requirement will be accepted as sufficient.

Example: If a bill of lading is required to be certified by a chamber of commerce, a stamp or seal that appears to come from the chamber will satisfy this requirement.

Clause 5: Article Text: “Branches of a bank in different countries are considered to be separate banks.”

Explanation: Under UCP600, each branch of a bank in different countries is treated as an independent entity. This means obligations or actions of one branch do not automatically bind another branch, even if they belong to the same banking institution.

Example: If a credit is issued by the New York branch of a bank, the London branch of the same bank is not bound to honor or amend that credit unless it explicitly agrees to do so.

Clause 6: Article Text: “Terms such as ‘first class’, ‘well known’, ‘qualified’, ‘independent’, ‘official’, ‘competent’ or ‘local’ used to describe the issuer of a document allow any issuer except the beneficiary to issue that document.”

Explanation: Descriptive terms like “first class” or “official” do not restrict the issuer to a specific entity. Any entity, except the beneficiary, that appears to fulfill the description can issue the required document.

Example: If a letter of credit requires a “first-class insurance company” to issue a certificate, any reputable insurance company, other than the beneficiary itself, can issue the certificate.

Clause 7: Article Text: “Unless required to be used in a document, words such as ‘prompt’, ‘immediately’ or ‘as soon as possible’ will be disregarded.”

Explanation: Vague terms such as “prompt” or “immediately” do not have specific deadlines associated with them and therefore are disregarded unless a document explicitly requires their interpretation.

Example: If a credit instructs a shipper to send goods “immediately,” without specifying a date, this term will not be interpreted as imposing a strict deadline under UCP600.

Clause 8: Article Text: “The expression ‘on or about’ or similar will be interpreted as a stipulation that an event is to occur during a period of five calendar days before until five calendar days after the specified date, both start and end dates included.”

Explanation: The phrase “on or about” is interpreted as a flexible time frame, allowing an event to happen within a window of five days before or after the specified date.

Example: If a shipment date is stated as “on or about 10th August,” it will be acceptable if the shipment occurs anytime between 5th August and 15th August.

Clause 9: Article Text: “The words ‘to’, ‘until’, ’till’, ‘from’ and ‘between’ when used to determine a period of shipment include the date or dates mentioned, and the words ‘before’ and ‘after’ exclude the date mentioned.”

Explanation: This clause clarifies how specific prepositions should be interpreted concerning dates. If a credit mentions a period “from 1st August to 10th August,” both the start and end dates are included. Conversely, if it says “before 10th August,” the 10th is excluded.

Example: If a letter of credit states “shipment from 1st August to 10th August,” the shipment can occur on either 1st August or 10th August, or any day in between. But if it states “shipment before 10th August,” the latest acceptable shipment date is 9th August.

Clause 10: Article Text: “The words ‘from’ and ‘after’ when used to determine a maturity date exclude the date mentioned.”

Explanation: When determining a maturity date, the terms “from” and “after” exclude the starting date.

Example: If a bill of exchange is payable 30 days “from 1st August,” the due date would be 31st August, excluding 1st August from the calculation.

Clause 11: Article Text: “The terms ‘first half’ and ‘second half’ of a month shall be construed respectively as the 1st to the 15th and the 16th to the last day of the month, all dates inclusive.”

Explanation: The term “first half” of a month refers to the period from the 1st to the 15th, while “second half” refers to the 16th to the last day, including all these dates.

Example: If a letter of credit requires shipment in the “first half of August,” it means the shipment should occur between 1st and 15th August.

Clause 12: Article Text: “The terms ‘beginning’, ‘middle’ and ‘end’ of a month shall be construed respectively as the 1st to the 10th, the 11th to the 20th and the 21st to the last day of the month, all dates inclusive.”

Explanation: The terms “beginning,” “middle,” and “end” of a month are clearly defined periods. “Beginning” is from the 1st to the 10th, “middle” from the 11th to the 20th, and “end” from the 21st to the last day.

Example: If a letter of credit specifies shipment in the “middle of August,” the acceptable shipment dates would be from 11th to 20th August.

UCP600 Article 19: Transport Document Covering at Least Two Different Modes of Transport Explanation

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UCP600 Article 19: Transport Document Covering at Least Two Different Modes of Transport

Clause (a): Requirements for Transport Document

Clause (a)(i): Indication and Signature

  • Clause: “A transport document covering at least two different modes of transport (multimodal or combined transport document), however named, must appear to: indicate the name of the carrier and be signed by:
    • the carrier or a named agent for or on behalf of the carrier, or
    • the master or a named agent for or on behalf of the master. Any signature by the carrier, master or agent must be identified as that of the carrier, master or agent. Any signature by an agent must indicate whether the agent has signed for or on behalf of the carrier or for or on behalf of the master.”
  • Explanation: The transport document must indicate the name of the carrier and be signed by the carrier, the master, or a named agent on behalf of the carrier or the master. The signature must clearly identify the signer as the carrier, master, or agent and specify on whose behalf the agent is signing.
  • Example:
  • A multimodal transport document shows the carrier as “ABC Shipping Co.” and is signed by “John Doe, Agent for ABC Shipping Co.”
  • A multimodal transport document shows the carrier as “ABC Shipping Co.” and is signed by “ABC Shipping Co.”
  • A multimodal transport document shows the carrier as “XYZ Maritime” and is signed by “Jane Smith, Master of MV Oceanic.”

Clause (a)(ii): Indication of Dispatch, Taking in Charge, or Shipped on Board

  • Clause: “indicate that the goods have been dispatched, taken in charge or shipped on board at the place stated in the credit, by:
    • pre-printed wording, or
    • a stamp or notation indicating the date on which the goods have been dispatched, taken in charge or shipped on board. The date of issuance of the transport document will be deemed to be the date of dispatch, taking in charge or shipped on board, and the date of shipment. However, if the transport document indicates, by stamp or notation, a date of dispatch, taking in charge or shipped on board, this date will be deemed to be the date of shipment.”
  • Explanation: The document must indicate that the goods have been dispatched, taken in charge, or shipped on board at the place specified in the credit. This can be shown through pre-printed wording, a stamp, or a notation indicating the date. The date of issuance is considered the date of dispatch unless another date is specified.
  • Example:
  • A multimodal B/L states “Shipped on board MV Horizon on 15th July 2024.” Date of issuance as 08th July 2024. Then 15th July 2024 will be considered as shipment date
  • A multimodal B/L with pre-printed text “Shipped on board” and the date of issuance as 20th July 2024, will have 20th July 2024 as the shipment date unless an on board notation specifies a different date.
  • A multimodal B/L states date is issuance as 08th July 2024 and does not contain any separate onboard notation then issuance date will be considered as shipment date

Clause (a)(iii): Indication of Place of Dispatch and Final Destination

  • Clause: “indicate the place of dispatch, taking in charge or shipment and the place of final destination stated in the credit, even if: a. the transport document states, in addition, a different place of dispatch, taking in charge or shipment or place of final destination, or b. the transport document contains the indication “intended” or similar qualification in relation to the vessel, port of loading or port of discharge.”
  • Explanation: The transport document must show the place of dispatch and the final destination as stated in the credit, even if it mentions other places or uses terms like “intended.”
  • Example: A document shows “Place of Dispatch: Mumbai, Final Destination: New York,” but also mentions “intended final destination: Los Angeles.” This is acceptable as the primary places match the credit terms.

Clause (a)(iv): Sole Original or Full Set

  • Clause: “be the sole original transport document or, if issued in more than one original, be the full set as indicated on the transport document.”
  • Explanation: The document must be the sole original or, if issued in multiple originals, the full set as indicated on the document.
  • Example: If a transport document states “Three originals,” all three must be presented. If only one original exists, it should be the one presented.

Clause (a)(v): Terms and Conditions of Carriage

  • Clause: “contain terms and conditions of carriage or make reference to another source containing the terms and conditions of carriage (short form or blank back transport document). Contents of terms and conditions of carriage will not be examined.”
  • Explanation: The document must include or reference terms and conditions of carriage, but the content of these terms is not subject to examination.
  • Example:
  • A B/L mentions the detailed Terms and Conditions conditions in the back side of documents.
  • A B/L references “Terms and Conditions available at www.abcshipping.com.”

Clause (a)(vi): No Charter Party Indication

  • Clause: “contain no indication that it is subject to a charter party.”
  • Explanation: The document must not indicate that it is subject to a charter party.
  • Example: A document stating “Subject to charter party” is unacceptable. It must not contain such indications. Because there is a separate article available in UCP 600 for checking charter party bill of lading

Clause (b): Definition of Transhipment

  • Clause: “For the purpose of this article, transhipment means unloading from one means of conveyance and reloading to another means of conveyance (whether or not in different modes of transport) during the carriage from the place of dispatch, taking in charge or shipment to the place of final destination stated in the credit.”
  • Explanation: Transhipment refers to unloading from one conveyance and reloading to another during the carriage from the dispatch point to the final destination.
  • Example: Goods are unloaded from a ship at Singapore and reloaded onto a truck to continue to the final destination. This is considered transhipment.

Clause (c)(i): Transhipment Indication

  • Clause: “A transport document may indicate that the goods will or may be transhipped provided that the entire carriage is covered by one and the same transport document.”
  • Explanation: The document may indicate that transhipment will or may occur as long as the entire journey is covered by one transport document.
  • Example: A document states, “Transhipment may occur at Singapore,” but it covers the entire journey from Mumbai to New York under one document. It is acceptable.

Clause (c)(ii): Acceptability Despite Prohibition

  • Clause: “A transport document indicating that transhipment will or may take place is acceptable, even if the credit prohibits transhipment.”
  • Explanation: A transport document indicating possible transhipment is acceptable even if the credit prohibits transhipment.
  • Example: Even if a credit states “No transhipment allowed,” a document indicating “Transhipment may occur” is acceptable as per UCP600 Article 19.