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What do Incoterms 2020 define?
Incoterms rules primarily define the division of responsibilities, costs, and
risks between the seller and the buyer. In practice, they indicate who
arranges the carriage of goods, who bears the transport costs, where the seller must
deliver the goods, and at what point the risk transfers to the buyer.
They also specify whether the seller is obliged to arrange insurance and
which party is responsible for selected formalities related to delivery.
It is important to remember, however, that Incoterms are not a complete sales contract and do not
replace its provisions. Among other things, they do not regulate the moment of transfer of
ownership of goods, price, currency, payment terms, goods specification,
consequences of contract breach, or import/export restrictions. There is also no
single default Incoterms rule that applies
automatically. For a specific rule to apply, it must be explicitly
stated in the transactional documents.
How to properly state an Incoterms rule?
An Incoterms rule should ideally be stated as: the chosen rule, the name of the place,
port, or point, and the version of the rules. An example notation might look
as follows: EXW Warsaw Incoterms 2020.
Specifying the year is important because Incoterms rules are updated. It is equally
important to precisely define the place, port, or point, as this
determines the interpretation of the parties' obligations. In rules beginning with E, F, and D,
the specified place defines the place of delivery, and therefore the moment of risk transfer. In
D rules, it is also the place of destination, to which the
seller arranges carriage. However, in C rules, the specified place
means the place of destination, for which the seller arranges and pays for
carriage.
Classification of Incoterms 2020 Rules
Incoterms 2020 rules are divided into groups. The first group covers rules for any
type of transport, and the second set of rules is intended for sea and
inland waterway transport.
Rules applicable to any mode of transport include EXW, FCA, CPT, CIP, DAP, DPU
and DDP. These can be applied regardless of whether the goods are
transported by sea, road, rail, air, or in
multimodal transport.
EXW, or Ex Works, means 'from the factory' and a specified place of delivery. Under this
rule, the seller makes the goods available to the buyer at their premises or another
specified location. This rule signifies the minimum scope of
seller's responsibility.
FCA, or Free Carrier, means delivering the goods to the carrier at the
named place of delivery. The seller hands over the goods to the carrier at the
agreed place. This rule is often more practical than EXW, as it
includes loading upon collection.
CPT, or Carriage Paid To, means carriage paid to the named place
destination. The seller delivers the goods to the carrier and pays for carriage to
a specified place. However, the risk transfers to the buyer when the goods are
handed over to the carrier.
CIP, or Carriage and Insurance Paid To, operates similarly to CPT, but additionally
the seller pays for insurance to the named place of destination.
DAP, or Delivered at Place, means the seller delivers the goods to the named
place of destination. The seller bears the costs, risks, and responsibility until
the goods are made available to the buyer at that place. The seller is responsible for
export clearance, but not for import clearance.
DPU, or Delivered at Place Unloaded, means the seller delivers the goods to the
named place of destination, unloaded. The DPU rule replaced
the previous DAT rule.
DDP, or Delivered Duty Paid, means the seller delivers the goods with duties paid
to the named place of destination. This is a rule under which the seller
bears the greatest extent of responsibility. They are responsible for delivery, import customs
clearance, duties, and taxes. The buyer is responsible for unloading.
The second group consists of rules for sea and inland waterway transport.
It includes FAS, FOB, CFR, and CIF.
FAS, which stands for Free Alongside Ship, means delivering the goods alongside the vessel
at the named port of shipment. Risk transfers to the buyer when
the goods are delivered alongside the vessel. The seller is responsible for export customs
clearance.
FOB, which stands for Free On Board, means delivering the goods on board the vessel at the named
port of shipment. Risk transfers to the buyer when the goods are
delivered on board the vessel.
CFR, which stands for Cost and Freight, means cost and freight to the named port
destination. The seller delivers the goods onto the vessel, and the risk then transfers
to the buyer. At the same time, the seller arranges and pays for the freight to
the named port of destination.
CIF, or Cost, Insurance and Freight, operates similarly to CFR, but additionally
the seller arranges and pays for insurance. Risk transfers to the buyer
when the goods are delivered on board the vessel.
EXW and DDP – Two Extreme Models of Responsibility
EXW and DDP represent two extreme approaches to the division of responsibilities. With EXW,
the seller bears the least responsibility, as they make the goods available
to the buyer at a specified location. With DDP, the seller bears
the greatest responsibility, as they are responsible for delivering the goods to the
place of destination, import clearance, duties, and taxes.
At Insphera S.A., we know that choosing the right Incoterms rule has a real impact
on the costs, responsibilities, and security of the entire transport process. We help
companies select delivery terms appropriate for a specific transaction, route, and scope
obligations of the buyer and the seller.
Are you planning to import or export and want to avoid misunderstandings during the delivery stage?
Contact our experts – we'll help you translate Incoterms rules
into a safe and transparent logistics process for your company.
