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Incoterms®: What they are, what they address and what they don’t

If you read part 1 of the ‘Incoterms®: Explained series’, by now you understand that they are incredibly important, useful and accessible tools. In this second part, we outline each Incoterm®, what they are, what they do, and importantly, what they do NOT do for importers or exporters.

Incoterms® – updated for 2022

While the terms have changed over the decades, below are the most recent versions:

Incoterms® consist of eleven rules divided into four ‘water’ rules and seven that are applied to any mode of transportation. Each rule has a three-letter acronym at the beginning of the term. Via the ICC:

The four Incoterms® 2020 rules for Sea and Inland Waterway Transport are:

1. FAS – Free Alongside Ship (insert name of port of loading)
2. FOB – Free on Board (insert named port of loading)
3. CFR – Cost and Freight (insert named port of destination)
4. CIF – Cost Insurance and Freight (insert named port of destination)

All manners of transport:

1. EXW – Ex Works (insert place of delivery)
2. FCA – Free Carrier (Insert named place of delivery)
3. CPT – Carriage Paid to (insert place of destination)
4. CIP – Carriage and Insurance Paid To (insert place of destination)
5. DAP – Delivered at Place (insert named place of destination)
6. DPU – Delivered at Place Unloaded (insert of place of destination)
7. DDP – Delivered Duty Paid (Insert place of destination).

What don’t they do?

Powerful and useful as they are, Incoterms® don’t take care of everything. The onus is still on the seller and the buyer regarding:

  • Addressing all the conditions of a sale
  • Identifying the goods being sold and listing the contract price
  • Referencing the method and timing of payment negotiated between the seller or buyer
  • When title, or ownership of the goods, passes from the seller to the buyer
  • Specifying which documents must be provided by the seller to the buyer to facilitate the customs clearance process at the buyer’s country
  • Addressing liability for the failure to provide the goods in conformity with the contract of sale, delayed delivery, and dispute resolution mechanisms.

What has changed?

While no rules have been removed or added, terms have been adjusted from 2010 to current day.

The Main changes are:

1. The DAT rule Delivered At Terminal has been renamed DPU Delivered at Place Unloaded.

This change underlines the fact that delivery can happen anywhere, and not just at a transport “terminal”. As with DAT, this is the only rule that requires the seller to unload the goods at their destination.

2. Freight insurance – in CIP (Carriage and Insurance Paid to)
For the CIP rule, the level of cover required (unless otherwise specified in the agreement) is Institute Cargo Clauses (A), a higher level of cover than specified in Incoterms® 2010, where the level of cover is Institute Cargo Clauses (C). For the CIF rule, there has been no change – the default level of cover remains at Institute Cargo Clauses (C).The reasoning here is that CIF is popular with commodities transactions, where this lower level of cover is widely accepted.

3. Incoterms® 2020 tries to assist the seller when the FCA rule is used in conjunction with a letter of credit. The parties can agree that the buyer should instruct the carrier to issue the seller with a document such as an on-board bill of lading. A bill of lading is a detailed list of a shipment of goods in the form of a receipt given by the carrier to the person consigning the goods and something that banks often require under a letter of credit. This is clearly a “stopgap” solution to banks’ insistence on asking for on-board bills of lading for containers. It also does little to mitigate the underlying risk when allowing a buyer to arrange transport.

4. The Incoterms® 2020 rules now cover the situation where either the buyer or the seller transports the goods using their own vehicles, without engaging the services of a third party.

5. There is more detail on allocation of costs arising from security-related obligations.

How do we help?

Abiding by Incoterms® is one of the best ways to have a clear shipping experience. It ensures accountability and responsibility for all parties involved, laid out clearly, contractually, without room for ambiguity. It’s important to note that A & A, and any customs broker for that matter, is not able to negotiate Incoterms®. That is part of their power; they are indisputable. We can ensure you understand and apply them appropriately, which can be a lot to manage for anyone, no matter the size of your business. We can help drive down costs and remove friction.

Give us a call or send us an email, our A & A customs brokers love to figure out how Incoterms® can help you with your diverse, streamlined supply chain. A & A – your Incoterms® compatibility experts.

NOTE: All details pertaining to CARM R2 processes are based on the current information available at the time of writing. As this is subject to change, it’s recommended you periodically check in with the CBSA or your customs broker.