Prior to the pandemic, the International Chamber of Commerce (ICC) released its latest INCOTERMS version which took effect in January 1, 2020. With these changes in international trading practices, it is most important that shippers and traders, including freight forwarders and customs brokers, familiarize themselves with the latest INCOTERMS version to minimize risks and reduce costs in international transactions. While transactions among related parties may involve lesser risks, it is always important for buyers and sellers to agree in clear and unequivocal terms the responsibilities and obligations on costs, delivery terms, risk coverage and import/export formalities,
History and Background. Introduced by ICC in 1936, International Commercial Terms (INCOTERMS) provides an international standard for international sales and purchase contracts (cross border transactions) and sets the rules for interpreting the international trade terms. ICC has generally released the latest version every 10 years. The English text is the original and official version of INCOTERMS 2010, which has been endorsed by the United Nations Commission on International Trade Law (UNCITRAL).
Every trading term is referred to by a three-letter abbreviation. The latest version has replaced the term DAT (Delivered at Terminal) with DPU (Delivered at Place Unloaded). INCOTERMS 2020 involves 11 terms as follows:
For Water Transport only (Sea or Inland Waterway):
- FAS – Free Alongside Ship
- FOB – Free On Board
- CFR – Cost and Freight
- CIF – Cost, Insurance and Freight
For Any Mode or Modes of Transport:
- EXW – Ex Works
- FCA – Free Carrier
- CPT – Carriage Paid To
- CIP – Carriage and Insurance Paid
- DAP – Delivered At Place
- DPU – Delivered At Place Unloaded (new)
- DDP – Delivered Duty Paid
Use and Purpose. While the use of INCOTERMS is voluntary and is not meant to replace a sales contract, it is widely accepted by governments, legal authorities and traders. It allows trading parties to immediately agree on certain roles and responsibilities without tedious negotiations. INCOTERMS does not refer to the Contract of Carriage (Freight Contract) nor does it involve third parties (banks, insurance companies, forwarders, carriers). The trading term used will define which party will pay for the insurance, freight or transport costs and, in case of loss or damage to the goods, which party will claim against the insurance. INCOTERMS does not refer to the Contract of Carriage (Freight Contract) and does not involve third parties (banks, insurance companies, forwarders, carriers). Each of the 11 terms defines the roles and responsibilities as to the following:
- Delivery (where and when the seller fulfills obligation to deliver / point of delivery)
- Documents (who provides what documents, whether manual or electronic)
- Risks (who bears the risk of loss or damage at any point of transit / transfer of risk)
- Costs (who pays for what / what is inclusive of the price)
Specifically, each INCOTERMS will determine:
- When and where the seller provides the goods to the buyer and when and where the buyer is obliged to pay the contracted price
- Obligations for export/import licenses, duties, taxes, etc.
- Obligations to arrange and pay for transportation and insurance
- Conditions for delivery by the seller and acceptance by the buyer
- Allocation of responsibility for risk of loss or damage
- Allocation of costs associated with movement of the goods
- Provisions regarding notices of delivery or dispatch of the goods
- Proof of delivery, transport documents or electronic messages
- Requirements of seller to check quantity & conformance of goods with the contract and to provide suitable packaging and markings
- Obligations for mutual assistance, information and documentation
Importance and Benefits. The use of INCOTERMS serves to protect the interest of the buyer and the seller by managing risks in case of loss, by allocating transport and insurance costs between the parties, defining responsibility for customs formalities, minimizing disputes in the absence of well-defined sales contracts, and supplementing international sales contracts.
For traders, INCOTERMS facilitates trade negotiation, minimizes contractual disputes and provides information as to what is inclusive of the price, which costs will be subject to duties and taxes, and who will claim against the insurance in case of loss or damage. For forwarders, the INCOTERMS used can help identify possible opportunity for freight services. For customs, it is the basis for assessing the correct duties and taxes which is generally based on the price of the goods plus insurance and freight.
The author is an international trade lawyer and a logistics and supply chain consultant. He previously served as Deputy Commissioner for Assessment and Operations at the Bureau of Customs and later, as Legislative Liaison of the Department of Finance. For questions, please email at agatonuvero@yahoo.com.
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