A Guide to Incoterms Risk and Responsibilities · 2020. 3. 3. · The Incoterms rules are created...

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A Guide to Incoterms Risk and Responsibilities

Each Incoterms rule specifies:• the obligations of each party (e.g. who is responsible

for services such as transport; import and export clearance etc)

• the point in the journey where risk transfers from the seller to the buyer

• which party is responsible for payment of costs

By agreeing on an Incoterms rule and incorporating it into the sales contract, the buyer and seller can achieve an understanding of exactly what each party has agreed to do, and where responsibility lies in event of loss or damage.

All Incoterms are based on the principle that the risk of loss or damage is transferred from the seller to the buyer when the seller has fulfilled the delivery obligation according to the applicable term. It is important to note that this point can be different to the point at which the seller is responsible for paying for the carriage to.

What has changed between the 2010 and 2020 terms? As well as adopting a new layout with clearer and expanded explanations and a reordering to add emphasis to delivery and risk the new terms address other new issues such as Verified Gross Mass (VGM), Security related issues and a centralising and repositioning of Costs the main changes were:

Different levels of insurance cover provided for under CIF and CIP The previous 2010 rules under CIF and CIP terms imposed on the seller an obligation to provide cargo insurance to a minimum cover level as applicable under Institute Cargo Clauses (C) which only provide for restricted cover for losses resulting from a specified list of major risk perils. The 2020 rules have significantly changed this position with different levels of minimum cover being required under CIF and CIP terms. CIF terms remain unchanged with the minimum level of cover remaining on the restricted cover option as provided

The Incoterms rules are created and published by the International Chamber of Commerce (ICC) and are revised periodically, the most recent revision is Incoterms 2020. The Incoterms are standard sets of trading terms and conditions designed to assist companies when goods are sold and transported.




for under Institute Cargo Clauses (C) as the terms are aimed more for commodity trade and bulk risks but now CIP rules requires cover to comply with Institute Cargo Clauses (A) unless the parties agree to a lower level of cover. Whilst this is a good protection this may lead to issues with purchase of cover especially if you are dealing with used or unpacked cargoes and any on-deck cargo with is not fully containerised.

Bills of Lading with on-board notation shipped under FCA termsUnder an FCA sale an on-board bill of lading bill might be required, such as a Letter of Credit requirement, however under FCA delivery is completed before loading on board the vessel so the new revision allows for the on board bill to be issued after the loading of the goods but when adopted the seller is under no obligation to the buyer as to the terms of the contract of carriage.

Sellers or Buyers arranging for carriage on own vehicles under FAC, DAP, DPU and DDP termsPreviously assumed that carriage would be by third party carriers the new 2020 rule allows for situations where goods may be carried on the parties own vehicles

DAT terms amended to DPUThe only difference between DAT and DAP was that under DAT the seller delivered the goods once unloaded from the arriving means of transport into a terminal whereas DAP it was when the goods were placed at the buyers disposal on the arriving means of transport for unloading. DAT has been changed to DPU to (Delivered at Place Unloaded) to widen the delivery point from not only the terminal but to any place.

There are eleven 2020 rules which are divided into two main groups:


Rules for ANY TRANSPORT MODE

• Ex Works (EXW – insert named place of delivery)

• Free Carrier (FCA – insert named place of delivery)

• Carriage Paid To (CPT – insert named place of destination)

• Carriage & Insurance Paid to (CIP – insert named place of destination)

• Delivered AT Place (DAP – insert named place of destination)

• Delivered AT Place Unloaded (DPU – insert named place of destination)

• Delivered Duty Paid (DDP – insert named place of destination)

Rules for SEA & INLAND WATERWAY ONLY

• Free Alongside Ship (FAS – insert named port of shipment)

• Free ON Board (FOB – insert named port of shipment)

• Cost and Freight (CFR – insert named port of destination)

• Cost Insurance and Freight (CIF – insert named port of destination)




The “transport by sea or inland waterway only” rules should only really be used for bulk cargos (e.g. oil, coal etc.) and non-containerised goods, where the exporter can load the goods directly onto the vessel. Where the goods are containerised, the “any transport mode” rules may actually be more appropriate. A critical difference between the rules in these two groups is the point at which risk transfers from seller to buyer. For example, the “Free on Board” (FOB) rule specifies that risk transfers when the goods have been loaded on board the vessel. However, the “Free Carrier” (FCA) rule specifies that risk transfers when the goods have been taken in charge by the carrier.

Another useful way of classifying the rules is by considering who is responsible for the main carriage – the buyer or the seller?

If the seller is responsible for the main carriage, where does the risk pass from the seller to the buyer – before the main carriage, or after it?

Lets now look at the individual terms.





Carriage The seller has no obligation to make a contract of carriage nor even to load the goods.

The buyer is responsible for carriage from loading the goods onto a vehicle (even though the seller may be better able to do this and does often load the vehicle this would still be considered as the buyers risk); for all export procedures; for onward transport and for all costs arising after collection of the goods.

Delivery and Risk TransferThe seller delivers, and risk transfers, when the goods are placed at the disposal of the buyer at an agreed delivery point, commonly the seller’s premises, not loaded to the collection vehicle.

Insurance The seller has no obligation to insure.

The goods are at the buyers risk from the point they are placed at their disposal at sellers premises and they should consider purchasing insurance to include risks of loading to the vehicle at the collection point until received at final destination.

General CommentCan be used for any transport mode, or where there is more than one transport mode.

IMPORT/EXPORT CLEARANCE - The seller has no responsibility for export clearance - the buyer is responsible for both export and import clearance.

This can present operational difficulties as the seller may still need to be involved in export reporting and clearance processes and cannot realistically leave these entirely to the buyer. Consider Free Carrier (seller’s premises) instead.


EX WORKS (EXW – insert named place of delivery)Risk transfers when the goods are made available to the buyer at the seller’s premises, or at a named place. The buyer bears risk from point of loading until delivered at destination.

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FREE CARRIER (FCA – insert named place of delivery)Risk transfers after the seller delivers the goods to the carrier’s custody at a named place loaded to the buyer’s collection transport or when delivered to the carrier ready for unloading on the seller’s transport.

Carriage The seller has no obligation to make a contract of carriage but are responsible for loading of the goods to the collection vehicle at the seller’s premises or they may be required to arrange for transport to a nominated place such as the terminal or a forwarders warehouse.

The buyer is responsible for arranging carriage.

Delivery and Risk TransferDelivery of the goods takes place, and risk transfers from seller to buyer, at the named place is the sellers’ premises at the point the goods are loaded on to the buyers arranged transport. If the named place is a place other than the seller’s premises (e.g. a terminal or transport hub, forwarder’s warehouse etc) at the point the goods are placed at the disposal of the carrier or another person nominated by the buyer on the sellers means of transport ready for unloading.

Insurance The seller has no obligation to insure but can if they wish arrange insurance up to the point of delivery to the carrier.

The goods are at the buyer’s risk thereafter and they should consider purchasing insurance from point of delivery to the carrier until received at final destination.

General CommentCan be used for any transport mode, or where there is more than one transport mode but most suitable rule for containerised goods where the buyer arranges for the main carriage.

IMPORT/EXPORT CLEARANCE - The seller is required to clear the goods for export, if applicable. The buyer assumes all risks and costs after the goods have been delivered at the named place.

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Carriage The seller is responsible for arranging and paying cost of carriage to the agreed named place of destination.

Delivery and Risk TransferDelivery of the goods takes place, and risk transfers from seller to buyer, at the point where the goods are handed over to the first carrier, unless otherwise specified.

Insurance The seller has no obligation to insure the goods but can if they wish arrange insurance up to the point of delivery to the carrier.

The goods are at the buyers risk thereafter and therefore they should consider purchasing insurance from point of delivery to the carrier until received at final destination.


IMPORT/EXPORT CLEARANCE - The seller is required to clear the goods for export, if applicable. The buyer is responsible for import clearance and any applicable local taxes or import duties.


CARRIAGE PAID TO (CPT – insert named place of destination)Risk transfers to the buyer when the goods are handed over to the carrier at an agreed place. The seller pays for the carriage to the named destination.

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Carriage The seller is responsible for arranging and paying cost of carriage to a nominated person at an agreed place of destination.

Delivery and Risk TransferDelivery of the goods takes place, and risk transfers from seller to buyer, at the point where the goods are handed over to the first carrier.

Insurance The seller contracts and pays for insurance cover under Institute Cargo Clauses (A) (unless a different level of cover is otherwise agreed between the parties) whilst goods are at the buyers risk during carriage to the place of destination. (See separate Insurance Section regarding minimum cover provision with Incoterms.)

The goods are at the buyers risk thereafter and therefore they should consider purchasing insurance from point of delivery to the named place until received at final destination.




CARRIER AND INSURANCE PAID TO (CIP – insert named place of destination)Risk transfers to the buyer when the goods are handed over to the carrier at an agreed place. The seller pays for the carriage to the named destination and insures the goods whilst at the buyers’ risk under Institute Cargo Clauses (A).

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Carriage The seller is responsible for arranging and paying cost of carriage and for delivering the goods ready for unloading at the named place of destination (normally the terminal).

Delivery and Risk TransferDelivery of the goods takes place, and risk transfers from seller to buyer, at the point when the goods are available for unloading at the place of destination. Unloading carried out at the buyer’s risk.

Insurance The seller has no obligation to insure, but can if they wish arrange insurance until discharged at the named place of destination (normally the terminal).

The goods are at the buyers risk thereafter and therefore they should consider purchasing insurance following unloading at the named place until received at final destination.




DELIVERED AT PLACE (DAP – insert named place of destination)Risk transfers to the buyer when the goods are ready for unloading at the named place of destination.

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Carriage The seller is responsible for arranging and paying cost of carriage to the named place of destination or to the agreed point, if any, at the named place of destination. If a specific point has not been agreed or is not determined by practise the seller may select the point at the named place of destination that best suits its purpose.

Delivery and Risk TransferDelivery of the goods takes place, and risk transfers from seller to buyer, at the point when the goods have been unloaded from the arriving transport and placed at the disposal of the buyer at the named place of destination. The seller bears the risks involved in transport and unloading.

Insurance The seller has no obligation to insure, but can if they wish arrange insurance up to the point that the goods have been unloaded from the arriving transport at the named place of destination.

The goods are at the buyers risk thereafter and therefore they should consider purchasing insurance from the point that the goods have been unloaded from the arriving transport at the named place of destination.




DELIVERED AT PLACE UNLOADED (DPU – insert named place of destination)Risk transfers to the buyer when goods are unloaded from the arriving transport at the named place of destination.

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Carriage The seller is responsible for arranging and paying for costs of carriage, import clearance and delivering the goods to the named place of destination, this can be the buyer’s own premises or may be a terminal or other named delivery point.

Delivery and Risk TransferDelivery of the goods takes place, and risk transfers from seller to buyer, at the point when the goods are made available to the buyer, cleared and ready for unloading from the arriving conveyance at the place of destination.

Insurance The seller has no obligation to insure, but can if they wish arrange insurance up to the point of arrival at the named place (normally the terminal).

The goods are at the buyers risk thereafter and therefore they should consider purchasing insurance if the named

place is not their own premises from arrival at the named place, including unloading risk, until received at final destination.


IMPORT/EXPORT CLEARANCE - The seller is responsible for both export and import clearance, duties and taxes. This rule places the maximum obligation on the seller, and is the only rule that requires the seller to take responsibility for import clearance and payment of taxes and/or import duty. This rule can cause difficulties for the seller as in some countries, import clearance procedures are complex and bureaucratic, and therefore may be best left to the buyer who has local knowledge of the processes and best procedures.


DELIVERED DUTY PAID (DDP – insert named place of destination)Risk transfers to the buyer when goods arrive at the named place of destination ready for unloading with duty having been paid by the seller.

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Carriage The seller is responsible only for arranging delivery of the goods alongside the vessel.

The buyer is responsible for arranging and paying cost of carriage from port to place of destination.

Delivery and Risk TransferDelivery of the goods takes place, and risk transfers from seller to buyer, at the point when the goods are placed alongside the vessel nominated by the buyer at the named port of shipment. The buyer is responsible for loading the goods and all costs thereafter.

Insurance The seller has no obligation to insure, but can if they wish arrange insurance up to the point of goods being delivered alongside the vessel.

The goods are at the buyers risk thereafter and therefore they should consider purchasing insurance from goods being delivered alongside the vessel, including loading risk, transport until received at final destination.

General CommentUse of this rule is restricted to goods transported by sea or inland waterway. In practice it should be used for situations where the seller has direct access to the vessel for loading, e.g. bulk cargos or non-containerised goods. For containerised goods, consider “Free Carrier FCA”.

IMPORT/EXPORT CLEARANCE - The seller is required to clear the goods for export, if applicable, but not for import. The buyer is responsible for import clearance and any applicable local taxes or import duties.


FREE ALONGSIDE SHIP (FAS – insert named port of shipment)Risk transfers to the buyer when the goods are placed alongside the vessel at port of shipment.

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Carriage The seller is responsible only for arranging delivery of the goods until they are placed on board the vessel. The buyer is responsible for arranging and paying cost of carriage from port to place of destination.

Delivery and Risk TransferDelivery of the goods takes place, and risk transfers from seller to buyer, at the point the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment and bears risk until goods are on board the vessel. Once the goods have been loaded on board, risk transfers to the buyer.

Insurance The seller has no obligation to insure, but can if they wish arrange insurance up to the point of goods being loaded to the vessel.

The goods are at the buyers risk thereafter and therefore they should consider purchasing insurance from the time the goods have been loaded to the vessel, including loading risk, transport until received at final destination.

General CommentUse of this rule is restricted to goods transported by sea or inland waterway. In practice it should be used for situations where the seller has direct access to the vessel for loading, e.g. bulk cargos or non-containerised goods. For containerised goods, consider “Free Carrier FCA”.



FREE ON BOARD (FOB – insert named port of shipment)Risk transfers to the buyer at the point the goods are placed on board the vessel at the port of shipment.

EXW

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

FCA

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

CPT

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

CIP

COSTSRISKS

COSTSRISKS

INSURANCE

Exportformalities

Importformalities

DAP

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

DPU

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

DDP

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

FAS

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

FOB

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

CFR

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

CIF

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

INSURANCE




Carriage The seller is responsible for arranging and paying for costs of carriage, export clearance and delivering the goods to the named place of destination.

Delivery and Risk TransferDelivery of the goods takes place, and risk transfers from seller to buyer, at the point the goods are placed on board the vessel, i.e. before the main carriage takes place.

Insurance The seller has no obligation to insure, but can if they wish arrange insurance up to the point of goods being loaded to the vessel.

The goods are at the buyers risk thereafter and therefore they should consider purchasing insurance from

the time the goods have been loaded to the vessel, including loading risk, transport until received at final destination.

General CommentUse of this rule is restricted to goods transported by sea or inland waterway. In practice it should be used for situations where the seller has direct access to the vessel for loading, e.g. bulk cargos or non-containerised goods. For containerised goods, consider ‘Carriage Paid To CPT’.



COST AND FREIGHT (CFR – insert named port of destination)Risk transfers to the buyer at the point the goods are placed on board the vessel at the port of shipment. The seller pays for the carriage to the named port of destination.

EXW

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

FCA

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

CPT

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

CIP

COSTSRISKS

COSTSRISKS

INSURANCE

Exportformalities

Importformalities

DAP

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

DPU

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

DDP

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

FAS

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

FOB

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

CFR

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

CIF

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

INSURANCE




Carriage The seller is responsible for arranging and paying cost of carriage to the named port of destination.

Delivery and Risk TransferDelivery of the goods takes place, and risk transfers from seller to buyer, at the point the goods have been loaded on board the vessel, i.e. before the main carriage takes place.

Insurance The seller arranges and pays for insurance for the goods for carriage to, at least, the named port of destination. The rule only requires a minimum level of cover under Institute Cargo Clause (C), which may be commercially unrealistic. Therefore, the level of cover may need to be addressed elsewhere in the commercial agreement.

The goods are at the buyers risk thereafter and therefore they should consider purchasing insurance from the

time the goods are delivered at the named port of destination until received at final destination.

The buyer can ask the seller to arrange insurance to the final delivery point at destination.

General CommentUse of this rule is restricted to goods transported by sea or inland waterway. In practice it should be used for situations where the seller has direct access to the vessel for loading, e.g. bulk cargos or non-containerised goods. For containerised goods, consider ‘Carriage and Insurance Paid CIP’.



COST, INSURANCE AND FREIGHT (CIF – insert named port of destination)Risk transfers to the buyer at the point the goods are placed on board the vessel at the port of shipment. The seller pays for the carriage to the named port of destination and insures the goods whilst at the buyers’ risk under a minimum level of Institute Cargo Clauses (C).

EXW

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

FCA

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

CPT

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

CIP

COSTSRISKS

COSTSRISKS

INSURANCE

Exportformalities

Importformalities

DAP

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

DPU

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

DDP

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

FAS

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

FOB

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

CFR

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

CIF

COSTSRISKS

COSTSRISKS

Exportformalities

Importformalities

INSURANCE




Insurance In general, most of the rules are silent on the matter of insurance – the buyer and the seller each decide whether they wish to insure the cargo for that part of the journey for which they bear the risk of loss or damage. The Incoterm rules deal with the seller’s obligation to take out insurance to the benefit of the buyer only under CIP and CIF terms where goods are intended to be sold in transit. In both cases, the seller is required to buy cargo insurance covering the portion of the journey where the seller is “off risk”, once the goods have been delivered to the carrier.

The 2020 Incoterms have brought in a significant change to the previous rules in terms of the insurance coverage. Under the 2010 Rules both CIP and CIF terms required that the seller take out insurance on minimum terms of Institute Cargo Clauses (C) which provides only for loss or damage resulting from a specified list of major perils such as fire, explosion, vessel sinking or grounding, overturning of land conveyance, vessel collision and jettison. This would often not be suitable for the buyer’s requirements and ideally the level of insurance should have been amended as part of the sales contract although this rarely occurred.

Whilst it is still felt that this minimum level is still suitable for CIF sale terms, which the Chamber feel are intended to apply more to commodity trades and bulk cargoes, the requirement for CIP terms applying to all modes of transport has been widened and now require the seller to provide cover for all risks of physical loss and damage in accordance with Institute Cargo Clauses (A) rather than the restricted major perils cover.

In practice most insurances are arranged under Institute Cargo Clauses (A) but the buyer should be aware that cover may cease at the port of arrival rather than

continuing until the final delivery point. Also, if you are arranging insurance for used or unpacked goods you may need to check the terms of the insurance as it is not uncommon for cover to be provided on a restricted basis under Institute Cargo Clauses (C) and likewise where goods shipped on deck which are not fully containerised. In these cases, you may need to advise Insurers of the Incoterm requirement and negotiate a change in the standard cover offered.

It is common that the more well known CIF term is applied to modes of transport other than seafreight, which should more correctly have the CIP term applied, and this can therefore lead to a case of buyer beware as it would be beneficial for the buyer to ensure the correct CIP term is applied to benefit from the new 2020 widened insurance requirement.

If goods are not intended to be sold in transit, it is natural for the parties to arrange their own insurance, should they so wish, in order to protect them for their own risk. The Seller can protect himself for risks of loss or damage to the goods up to the point they are at risk, agreed point of delivery according to the F, C or D term. There is no need for the seller to insure goods sold Ex Works EXW. The buyer should then arrange their own insurance from the point of delivery where they are at risk.

It is the contractual delivery point under the Incoterm, the point at which risk transfer takes place, which should be established when buying insurance cover so as to establish that the party has an insurable interest (risk) in the goods otherwise the cover may be invalid.

If you need help to establish the Insurable Interest do always contact your insurance provider.


A Guide to Incoterms Risk and Responsibilities · 2020. 3. 3. · The Incoterms rules are created...

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Transcript of A Guide to Incoterms Risk and Responsibilities · 2020. 3. 3. · The Incoterms rules are created...