What you need to know when applying Incoterms 2020?

The latest version of INCOTERMS – 2020 has many differences from INCOTERMS 2010. In particular, many rules have been modified, omitted, optimized or new terms have been replaced and added to facilitate users in the process of applying Incoterms to commercial transactions. In addition, Incoterms 2020 takes into account the emergence of more and more customs exemption zones, the increasing use of electronic communications in business, high concern about security in the movement of goods and also changes in transport practices.

1. What is Incoterms 2020?

Incoterms (International Commerce Terms) were first established in 1936 and have become an important source of law regulating the international trade in goods. Incoterms are a set of international trade rules drafted by the International Chamber of Commerce (ICC) and widely used. Incoterms go through 8 versions and the latest version is Incoterms 2020.

Incoterms help determine the responsibilities and costs of sellers and buyers in each stage of the international shipping process. This includes determining who is responsible for:

• cargo insurance;
• import and export procedures;
• transportation costs, and 
• risk division in case goods are lost or damaged. 

Incoterms also help define when and where goods are transferred, thereby minimizing misunderstandings and disputes in the international trade process. This is especially important in the context of a diverse legal and commercial environment, when participants may have different rules and regulations.

Incoterms 2020 includes 11 commercial rules divided into 2 groups: 

• rules applicable to all modes of transport or multimodal transport (EXW, FCA, CPT, CIP, DAP, DPU, DDP) and 
• ones used for sea and inland waterway transport (FAS, FOB, CFR, CIF).

2. Notable points when using Incoterms 2020

To maximize the effectiveness when using Incoterms, companies should note some of the following points:

• Incoterms are commercial customs, not laws, so they are not mandatory. Therefore, the buyer and the seller will not be bound by Incoterms if they do not select one of these rules and expressly stipulate it in the signed contract of sale.
• The latter version of Incoterms does not invalidate the previous versions. The parties can fully agree to use rules in the Incoterms 2010, 2000, 1990 or 1980, etc but it must be stated clearly which version: in the absence of specific mention of the version of Incoterms to which the parties refer, the most recent version (2020) will apply.
• Incoterms only determine the time risk passed from the buyer to the seller. It does not determine the moment of passing of ownership of goods, as well as the consequences of breach of contract. These matters are usually stipulated in other clauses of the contract or in the law governing contracts.
• As mentioned above, Incoterms are not laws, therefore, laws chosen to govern contracts may invalidate any of the contents of the contract, including previously selected Incoterms. Therefore, during negotiations, the parties must ensure that the Incoterms rule used comply with the law governing their contract.

3. Some important changes in the Incoterms 2020

• Incoterms 2020 officially defines “freight” term as the time when risks of loss or damage passed from the seller to the buyer, whereas in previous versions it was only interpreted informally. Knowing the point of risk transfer will facilitate the trade process for the Parties in international commercial relations.
• Incoterms 2020 have also been updated to focus more on security by listing import-export security requirements and specifying which party is responsible for meeting each requirement.
• The updated rules divide the Incoterms 2020 into two groups, each related to a specific mode of transport (including multimodal transport and sea transport and inland waterways), in which some outstanding changes are as follows:
  • FCA (Free Carrier) now allows the buyer to instruct the freight intermediary to provide the seller with the bill of lading along with the approval to load the vessel to satisfy the terms of the Letter of Credit.
  • In the past, many exporters preferred to apply FOB (Free on Board) to be able to make payments through Letter of Credit, although the FCA clause was much preferable for shipping containerized goods due to the difference in shipping costs between FCA and FOB.
  • New rule – DPU (Delivered at Place Unloaded) is intended to replace DAT (Delivery at Terminal). The reason for this change is that the term “Terminal” in the old terms often causes confusion, and the DPU terms cover all modes of transportation.
  • Newly amended CIP (Carriage and Insurance Paid To), the seller must purchase a higher level of insurance under the Commodity Insurance clause A, up to 110% of the invoice value, a more suitable level for finished goods. For CIF (Cost, Insurance & Freight) applicable to the transportation of raw goods, the required insurance rate does not change and is specified in Cargo Insurance clause C.
  • FCA (Free Carrier), DAP (Delivered at Place), DPU (Delivered at Place Unloaded) and DDP (Delivered Duty Paid) now take into account that the buyer and the seller arrange the transportation of goods themselves instead of using a third party.

The distribution of costs between the buyer and the seller are now listed more accurately to avoid confusion. In Incoterms 2010, costs sometimes become a major issue when intermediaries change their service fee through the addition of surcharges and therefore, the seller incurs additional charges for handling goods at the terminal.

4. Commonly used rules of Incoterms 2020

The Incoterms 2020 rules commonly used by Vietnamese exporters are EXW, FOB and CIF.

4.1 EXW (Ex Work)

This rule stipulates the seller’s minimum responsibility for the goods – only obliged to ensure the goods are ready for the buyer at the workshop. All remaining responsibilities including loading and unloading of goods, export procedures, transportation of goods, risks, and fees incurred after receiving goods belong to the buyer. The buyer should consider the possibility of transportation and complete export procedures at the place of purchase if this rule is to apply.

4.2 FOB (Free On Board)

The traditional FOB stipulates that the risk is transferred from the seller to the buyer when the goods have passed through the railing of the vessel, but this provision is no longer reasonable in practice, so since the Incoterms 2010 there has been a change. 

Accordingly, in Incoterms 2010 and Incoterms 2020, the said milestone is transferred from the seller to the buyer when the goods have been loaded onto the deck at the specified port of loading. The seller is responsible until the goods have been loaded onto the vessel, including the following tasks carrying out export procedures, transporting goods to the port of loading, and loading goods on board. The buyer is responsible for purchasing cargo insurance, freight transportation, and subsequent works.

4.3 CIF (Cost Insurance and Freight)

Similar to FOB, the risk is transferred to the buyer once the goods have been loaded onto the vessel. However, compared to FOB, the seller must bear additional costs of purchasing cargo insurance, transporting goods to the port of unloading and unloading goods.

Corresponding to the constituent levels of liability and cost, the price of goods under EXW conditions is the lowest, followed by FOB and the highest is CIF. To choose the appropriate application rule, the parties need to carefully consider the transport capacity and profitability that can be achieved.

5. Conclusions

Incoterms have been widely used for international commercial activities. The Parties may select the corresponding Incoterms rule to apply depending on modes of transport (air, sea, land, etc.) and the type of transport (bulk cargo, container, barge, etc.). However, it should also be noted that knowing what Incoterms are is essential so as not to affect the process of negotiating and conducting international commercial transactions.