Incoterms® Guide to use in 2024
Incoterms® were first published in 1936 and are continually updated over time to reflect the changing global business environment to be continually used in 2024and beyond.
TheInternational Chamber of CommerceICC published the latest version of Incoterms® 2020. These changes came into effect on the 1st of January 2020 and are being being used in 2024and beyond, until the next changes are published sometime in future. The ICC originally published Incoterms® in 1936 and have continually made updates to reflect the changes to the global trade environment. It’s important that all parties involved in trade clearly understand the changes and how they apply to global supply chains.
Incoterms® play such a vital role in the world of global trade. In 2024, it’s imperative that buyers and sellers clearly understand Incoterms® 2010 or Incoterms® 2020 and clearly understand each party’s obligations along the supply chain.
Note: The content of this article and chart is only for general information purposes and shall not in any circ*mstances be considered bespoke legal advice or professional advice.
What are Incoterms®?
Put simply, Incoterms®are the selling terms that the buyer and seller of goods both agree to during international transactions. These rules are accepted by governments and legal authorities around the world. Understanding Incoterms®is a vital part of International Trade because they clearly state which tasks, costs and risks are associated with the buyer and the seller.
The Incoterm® states when the seller’s costs and risks are transferred onto the buyer, typically at the point they deliver the goods. It’s also important to understand that not all rules apply in all cases. Some encompass any mode or modes of transport. Transport by all modes of transport (road, rail, air and sea) covers FCA, CPT, CIP, DAP, DPU (replaces DAT) and DDP. Sea/Inland waterway transport (Sea) covers FAS, FOB, CFR and CIF.
In choosing the right Incoterm®, businesses must consider the nature of their goods and the specifics of their trade agreements. For instance, DDP (Delivered Duty Paid) is often used when sellers want to provide a clear, all-inclusive price to buyers. In FOB (Free On Board), commonly used in bulk shipping, the seller is responsible to deliver the goods on board the vessel, after which the buyer controls the shipping process.Each Incoterm® plays a unique role in balancing cost, control, and risk of loss or damage between import and export.
Why are Incoterms® vital in International Trade?
Incoterms®are referred to asInternationalCommercialTerms. They are a set of rules published by theInternational Chamber of Commerce (ICC), which relate to International Commercial Law. According to the ICC,Incoterms®rulesprovide internationally accepted definitions and rules of interpretation for most common commercial terms used in contracts for the sale of goods’.
All International purchases will be processed on an agreed Incoterm to define which party legally incurs costs and risks. Incoterms®will be clearly stated onrelevant shipping documents.
These terms are crucial as they simplify global trade by reducing misunderstandings between buyers and sellers. By defining who is responsible for shipping, insurance, and customs duties,Incoterms® ensure that both parties in a transaction are clear about their obligations. This clarity is essential in preventing disputes and delays, which can be costly in international trade. Additionally, by defining theresponsibilities for customs clearance, Incoterms® facilitates smoother transitions at international borders, avoiding delays and extra costs.
What’s new for Incoterms® in 2024
In 2024, Incoterms® still follow the 2020 rules. in 2020 these rules saw some changes. They made global trade clearer. For example, they added a new rule, Delivered at Place Unloaded, DPU. This replaced the former Incoterm® Delivered At Terminal, DAT. Under DPU the seller delivers when the goods, once unloaded are placed at the disposal of the buyer at a named place of destination.
These updates mean easier trade across global borders. With clearer rules, sellers and buyers understand their responsibilities. This reduces confusion and disputes.
What are the differences between Incoterms® 2010 and Incoterms® 2020?
The main explanations of Incoterms®2020 have remained the same, with a few key updates and changes. The main change includes a new DPU term replacing DAT, along with other changes to Incoterms®as below. It’s imperative that all parties involved in global trade understand these updates and how they may affect your supply chain.
New Incoterm® DPU Replaces DAT
The previous Incoterm® DAT (Delivered at Terminal) is now called DPU (Delivered at Place Unloaded. It was decided to change the term to DPU to remove confusion that arose in the past. In the past, DAT required ‘Delivery at Terminal (unloaded)’, however the word “terminal” caused confusion. The new term DPU (Delivery at Place Unloaded) covers ‘any place, whether covered or not’.
Different level of insurance cover between CIF and CIP
CIF and CIP are the only two Incoterms® that require the seller to purchase insurance in the buyer’s name. Under Incoterms® 2010 the insurance cover for both CIF and CIP was required under Institute Cargo Clause C. Under the new Incoterms® 2020, CIP requires insurance cover complying with Institute Cargo Clause A. Clause A covers a more comprehensive level of insurance which is usually suitable for manufactured goods, where Clause C would likely apply to commodities.
In summary:
- CIF remains the same, it requires‘Institute Cargo Clause C’insurance cover – Number of listed risks, subject to itemized exclusions.
- CIP now requires an upgraded‘Institute Cargo Clause A’insurance cover – All risk, subject to itemized exclusions.
Updated Costs and Listings
Costs became quite a problem with Incoterms® 2010 with some parties. In some cases carriers were changing their pricing so sellers were often faced with new back charged terminal handling charges. Incoterms® 2020 now provides much more detail around costs and now appear under the A9/B9 sections of the rule. This clearly states which costs are allocated to each party.
Increased Security Requirements, Allocations and Costs
In a world with increasing security requirements, the Incoterms® 2020 rules now provide more detail around security allocations and necessary costs. For each Incoterm® rule, the security allocations have been added to A4/A7 and the associated costs have been added to A9/B9.
Buyer’s and Seller’s Own Transport
Under Incoterms® 2010 it was assumed that all transport would be undertaken by a third party transport provider. Updates to Incoterms® 2020 allows for the provision for the buyer or seller’s own means of transport. This recognizes that some buyers and sellers are using their own methods of transport, including trucks or planes to get goods delivered.
- This allows for the buyer’s own means of transport under the FCA rule
- This allows for the seller’s own means of transport under DAP, DPU and DDP.
FCA, FOB and the Bill of Lading Process
Updates were made to the previous Incoterms® 2010 to encourage exporters of containerized goods to use the FCA Incoterm®. In reality most parties were still using FOB when they should have been using FCA. This is because even experienced sellers still wanted to use FOB because they wanted the contract to be under a Letter of Credit.
Therefore provisions have been made to the Incoterms® 2020 to state that the buyer must instruct the carrier to issue a transport document stating that the goods have been loaded – i.e a Bill of Lading with an ‘on board’ notation. In the past carriers have frequently refused to issue a Bill of Lading with a notation to the seller if they have received the goods from an intermediary transport (such as a truck), instead of directly from the seller.
Recommendations for Effectively Leveraging the Latest Incoterms®
Businesses should study these changes well. Knowing them helps in making better contracts. It’s wise to consult experts in international trade. They can give advice on the best Incoterm® to use. Also, always check the latest rules before making deals to reduce the risk level in your global trade shipments.
An overview of the 11Incoterms® used in 2024
Chart showing new Incoterms® 2020 rules andupdates for global trade
Below is a list of the Incoterms® 2020 that came into effect on the 1st of January 2020. Click each to go to a detailed description of each Incoterm®.
- EXW | Ex-Works or Ex-Warehouse
- FCA | Free to Carrier
- FAS | Free Alongside Ship
- FOB | Free On Board
- CFR | Cost and Freight
- CIF | Cost, Insurance and Freight
- CPT | Carriage Paid To
- CIP | Carriage And Insurance Paid To
- DAP | Delivered At Place
- DPU | Delivered At Place Unloaded (replaces Incoterm® 2010 DAT)
- DDP | Delivered Duty Paid
How to utilize Incoterms® 2020 on Sales and Purchasing Contracts
The new Incoterms® 2020 came into effect on the ‘effective’ date of the 1st January 2020. What does that actually mean for your business? Trading partners can still carry on using Incoterms® 2010 if they prefer to, which may occur when it is being used to confirm complex commercial agreements.
All parties must make it clear in Sales and Purchasing contracts which Incoterms® version is being referred to in order to avoid any misunderstanding. Different trading partners will incorporate Incoterms® into contracts at different times. The Sales and Purchasing Contracts, or Proforma Invoices and Purchase Orders should both be counter signed by each party. Read more aboutcounter-signing trade contracts here.
It is imperative that you check existing contracts to ensure that the Incoterms® edition year is included. If there is no year stated then the following will apply:
- Up to 31st December 2019 – Incoterms® 2010
- From 1st January 2020 – Incoterms® 2020
- If a different year is stated, for example Incoterms® 1990, then the respective terms will apply
The below is the structure that should be used on Sales Contracts:
[Incoterm® rule] [Named port of destination/place/point] Incoterms® 2020
Examples:
CIF Longbeach Incoterms® 2020
DPU 4300 Longbeach Blvd, Longbeach, United States Incoterms® 2020
Get a copy of the official ICC Incoterms® 2020 book
You can purchase the official Incoterms® 2020 book from theInternational Chamber of Commerce here.
How many Incoterms® are thereto use in 2024?
Incoterms® use in 2024 comprises 11 trade terms that define the specific obligations and responsibilities of buyers and sellers in international commercial transactions.These terms are EXW, FCA, CPT, CIP, DAP, DPU, DDP (applicable for all modes of transport), and FAS, FOB, CFR, CIF (specifically for sea and inland waterway transport). Each term provides clear guidelines on the division of costs, risks, and responsibilities between the buyer and seller.
How can Incoterms® be used in international trade transactions?
In international trade, Incoterms® play a crucial role in contracts between buyers and sellers. They clearly define where goods will be delivered, who takes the risk at each stage, and how responsibilities are shared between the buyer and seller. The agreed Incoterm® should be clearly stated on sales contracts and shipping documentation. This standardization ensures that every party involved understands their responsibilities, reducing misunderstandings and disputes.
Who is responsible for paying freight charges under Incoterms®?
Under Incoterms®, the party that pays for the freight charges depends on the Incoterm® that is chosen. For instance, under CIF (Cost, Insurance, and Freight), the seller arranges and covers the cost of transporting goods to the named port. In contrast, under EXW (Ex Works), the buyer takes full responsibility for all freight charges incurred after the shipment leaves the seller’s warehouse or location.. Each Incoterm® clearly defines these responsibilities, ensuring both parties know their obligations for freight arrangements.
How can Incoterms® help in defining the costs and risks associated with the delivery of goods?
Incoterms® clearly defines the point at which the costs and risks are transferred from the seller to the buyer, providing transparency and clarity in international trade transactions and minimizing potential disputes.
