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Incoterms

The global economy implies greater access to international markets, increasing the volume and complexity of commercial transactions, which also increases the possibilities of misunderstandings and/or large disputes between merchants.

The Incoterms 2020 rules on the use of commercial terms, issued by the International Chamber of Commerce (ICC), facilitate and simplify communications, reducing the risk of misunderstandings in commercial operations. 

The first background document of Incoterms dates back to 1936 and since then it has not only been globally accepted, but has also been updated periodically, thus keeping pace with the evolution of international trade. 

The Incoterms rules are a set of commercial terms designated by three letters (Example CIF), in order to summarize the main obligations, costs and risks assumed by the parties in a contract for the sale of goods (risks, costs, organization of transport and customs clearance). However, Incoterms do not replace specific obligations of the sales contract, therefore, it is the responsibility of the parties to provide for the respective particularities of the business in the contract. 

There are eleven Incoterms 2020 rules, four of them are the so-called “maritime” ones applicable to “Maritime Transport and inland waterways” (FAS/ FOB/ CFR/ CIF) and the remaining seven are “multimodal” or applicable to “any mode or modes of transport” (EXW/ FCA/CPT/CIP/ DAP/ DPU/ DDP).

The Incoterms 2020 rules are: EXW, FCA, CPT, CIP, DAP, DPU, DDP, FAS, FOB, CFR and CIF.

Although its inclusion in commercial contracts is not mandatory, its scope and meaning is accepted in all customs and courts in the world, however, for its applicability, specific reference must be made to the chosen term, the year of its revision and geographical location.

EXW: Ex-works

This Incoterm is applicable to any means of transport and establishes the seller’s obligation to simply make the merchandise available to the buyer at the agreed point, with the buyer assuming all costs and risks that occur from receipt of the merchandise to the final destination.

FCA: Free Carrier

This Incoterm is applicable to any means of transport and increases the obligations and risks borne by the seller, who complies by delivering the merchandise in its own facilities when loading it on the means of transport provided by the buyer or, if the place designated for the delivery is other, when it transports it in its means of transport and not only arrives at the agreed place, but also prepares it for unloading from its means of transport, leaving it at the disposal of the carrier or any other person designated by the buyer.

CPT: Carriage Paid to

It is applicable to any means of transport. It means that the seller pays for transportation to the agreed destination, but delivers the merchandise to the buyer, with the corresponding transfer of risk, when it places them in the possession of the carrier.

CIP: Carriage and Insurance Paid To

It is applicable to any means of transport. Although the seller pays for transportation to the agreed destination, he delivers the merchandise, with transfer of risk, when it places them in the hands of the carrier that the seller himself contracted, but in this case the Incoterm requires the seller to take out insurance.

DAP: Delivered at Place

It is applicable to any means of transport. In this case, the seller delivers the merchandise with transfer of risk, when it is made available to the buyer in the means of transport prepared for unloading at the agreed destination.

DPU: Delivered at Place unloaded

It is applicable to any means of transport and is new to Incoterms 2020, deleting the “DAT” (Incoterms 2010). In this case, the seller delivers the merchandise with transfer of risk, when it, once unloaded from the means of transport, is made available to the buyer at the agreed destination.

DDP: Delivered Duty Paid

It is applicable to any means of transport. In this case, the seller delivers the merchandise with transfer of risk, when it is made available to the buyer cleared for importation in the means of transportation of prompt arrival for unloading at the agreed destination.

FAS: Free Alongside Ship

It is applicable to maritime transport and inland waterways. In this case, the seller delivers the merchandise with transfer of risk, when it is placed next to the ship or barge designated by the buyer at the port of shipment.

FOB: Free on Board

It is applicable to maritime transport and inland waterways.

The seller delivers the merchandise on board the ship established by the buyer at the port of shipment. The risk is transferred when the merchandise is on board the ship.

CFR: Cost and Freight

It is applicable to maritime transport and inland waterways.

The seller assumes the cost and freight, duties not paid until arriving at the agreed port of destination. Delivery is verified and risk is transferred when the merchandise is on board the vessel.

CIF: Cost, Insurance and Freight

It is applicable to maritime transport and inland waterways.

The seller assumes the cost, insurance and freight, duties not paid until arriving at the agreed port of destination. Delivery is verified and risk is transferred when the merchandise is on board the vessel. This incoterm requires the seller to take out insurance.

Changes in Incoterms 2020:

DAT (Delivered at Terminal) is deleted and a new Incoterm appears: DPU (Delivered at Place Unloaded): Delivery and unloading at the agreed place.

FCA (+ agreed delivery place): It allows to issue a bill of loading
After loading the merchandise with the expression “ON BOARD” to meet the requirements of a documentary credit.

CIP and CIF are updated in terms of insurance.

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