Incoterms® 2020: practical overview

Summary

On 10 September 2019, the International Chamber of Commerce (ICC) released the new Incoterms 2020 worldwide, effective from 1 January 2020. The Incoterms set globally valid standards for delivery terms and are used in around 90% of all international sales contracts. The problem: 90 to 95% of those contracts contain an unsuitable clause, often without the parties noticing. Choosing the unsuitable clause can lead to significant economic disadvantages, legal risks, and strain on the business relationship.

The Incoterms 2020 are designed to reduce misunderstandings and prevent disputes. They bring a wealth of structural and substantive changes. A better overview of the individual rights and obligations is also intended to reduce misjudgements. This article gives an overview of the changes and approaches for greater legal certainty.

Introduction

International trade between exporters and importers only runs smoothly where their delivery and payment terms include standardised, generally accepted trade clauses that govern the transfer of risk, transport costs, and transport risk. Those clauses must make clear whether the exporter or the importer bears these alone, or both share them.

The Incoterms, the ICC’s official rules for the interpretation of national and international trade clauses, have made global trade easier since they were first published in 1936. Where the parties agree on an Incoterms clause, they no longer need to spell out the allocation of cost and risk in detail; those aspects are interpreted uniformly worldwide.

On 10 September 2019, the ICC released the new Incoterms 2020 worldwide. They were developed by 500 experts (20 of them from Germany) from more than 40 countries, drawing on over 3,000 comments from trade practice that were evaluated and incorporated as relevant. The key results are summarized below.

The Incoterms do not apply automatically; they apply only where the parties agree on them. Where the Incoterms are contained in standard terms (for example, in general conditions of purchase or general conditions of sale), those terms must actually become part of the contract, which in international trade does not happen as a matter of course. What that requires and how incorporation succeeds is shown in the article “How to incorporate standard terms internationally”.

When wording the Incoterms, take care to designate the place as fully and precisely as possible (place of delivery, destination, and so on):

The Incoterms 2020 at a glance

The eleven clauses fall into two groups: clauses for any mode of transport and clauses for sea and inland-waterway transport only. For every clause, risk passes from the seller to the buyer at the place of delivery. “Transfer of risk” here means the place and time at which the risk of the goods being damaged or lost passes from the seller to the buyer. That is an important aspect of how risk is allocated between the parties.

Clauses for any mode of transport

Clauses for sea and inland-waterway transport only

Incoterms 2020: what is new?

The Incoterms 2020 contain a number of structural and substantive changes, set out below.

Introductory notes

The ICC sets out, in a comprehensive and readable introduction, the foundations of the Incoterms 2020, how best to incorporate them into contracts, how to select the right Incoterms clause for the situation, and the main differences between the Incoterms 2010 and Incoterms 2020. The introduction also covers what the Incoterms do, and, equally important for awareness, what they do not do.

Order and wording of the interpretation rules

The ten A/B interpretation rules for each Incoterms clause have been redrafted and reordered. The sequence is now:

• A1/B1 General obligations

• A2/B2 Delivery / Taking delivery

• A3/B3 Transfer of risks

• A4/B4 Carriage

• A5/B5 Insurance

• A6/B6 Delivery / Transport document

• A7/B7 Export / Import clearance

• A8/B8 Checking / Packaging / Marking

• A9/B9 Allocation of costs

• A10/B10 Notices

Comments on the individual clauses

The application notes introduced in 2010 have been revised and recast as comments. These comments explain the essential content of each Incoterms clause: when a particular clause should be used, when risk passes, and how costs are shared between seller and buyer.

In practice, the comments are a useful aid because they point the user quickly and precisely to the right Incoterms clause for the situation and provide orientation for interpretive questions in disputes.

Horizontal presentation of the interpretation rules

The Incoterms 2020 include, for the first time, a user-friendly horizontal presentation that arranges all interpretation rules side by side, so the user can compare how each Incoterms clause handles a given question.

Clearer presentation of costs within the rulebook

A9/B9 of the individual Incoterms 2020 clauses now contains a compact, consistent list of the various cost elements, giving the parties a better overview of cost allocation. Individual cost elements are nonetheless still mentioned in the other interpretation rules.

Additional option for on-board bills of lading with the FCA clause

A6/B6 of the FCA Incoterms clause now offers an additional option: buyer and seller can agree that the buyer instructs its carrier to issue an on-board bill of lading to the seller after the goods are loaded, whereupon the seller has to hand that bill of lading over to the buyer, typically through the banks. This also applies where the goods are loaded not onto a ship but onto another means of transport (for example, a truck).

Change of clause DAT to DPU

The former DAT clause (Delivered at Terminal) has been changed to DPU (Delivered at Place Unloaded) to underline that the destination can be any place and need not be a “terminal”. Where the place is not a terminal, however, the seller should make sure that the goods can actually be unloaded at the agreed location.

Security-related requirements added to carriage obligations and costs

The Incoterms 2020 now contain clear rules on how security-related requirements during the carriage of goods and the associated costs are allocated.

Examples of security-related requirements: the International Ship and Port Facility Security Code (ISPS Code), the U.S. Importer Security Filing (ISF), the Container Security Initiative (CSI), the Transported Asset Protection Association (TAPA) standards, EU rules on civil aviation security. The security-related obligations are set out in the A4 (Carriage) and A7 (Export / Import clearance) interpretation rules of each Incoterms clause.

The resulting costs are also now reflected more clearly in A9/B9 (Allocation of costs).

Organising carriage with the seller’s or buyer’s own means of transport

The Incoterms 2020 take into account the increasing practice of the seller or buyer organizing carriage with its own means of transport in the FCA (Free Carrier), DAP (Delivered at Place), DPU (Delivered at Place Unloaded), and DDP (Delivered Duty Paid) clauses. Alongside the previously envisaged option of concluding a contract of carriage with a third party, there is now the option to organize the carriage in-house.

Insurance coverage levels in CIF and CIP

The Incoterms align the insurance coverage in the CIF (Cost, Insurance and Freight) and CIP (Carriage and Insurance Paid To) clauses with current commercial practice.

For CIF, the previous level based on Institute Cargo Clauses (C) is retained, although the parties are of course free to agree on higher coverage.

For CIP, the seller now has to provide the wider insurance coverage of Institute Cargo Clauses (A), although here too the parties can agree on a lower minimum level. For sea transport under CIF the customary minimum coverage remains in place, while for CIP, which is used for multimodal transport and particularly container traffic, that level was considered insufficient.

Approaches for greater legal certainty

Many contracts contain inappropriate Incoterms clauses, which can lead to significant economic disadvantages and legal risks for the parties involved.

The often-used EXW (Ex Works) and DDP (Delivered Duty Paid) clauses are, contrary to common assumption, only the best solution in exceptional cases.

Agreeing DDP often leads to difficulties on the customs and tax side. That is particularly true for international sales contracts that require export and import processing. DDP is often agreed without the parties being aware of the difficulties caused by customs- and tax-law requirements or restrictions. Under DDP the seller is responsible for customs clearance, but for customs-law reasons the seller is not always entitled to actually carry out customs clearance in the buyer’s country. How to avoid customs pitfalls specifically for exports to the U.S. is shown in the article “How to Avoid U.S. Tariffs as an International Supplier”.

The ICC has, for example, been pointing out for years that the FAS, FOB, CFR, and CIF clauses are suitable only for sea and inland-waterway transport. For container shipments, the ICC recommends FCA, CPT, or CIP instead. How FCA and CPT work in practice is shown in the article “Incoterms® 2020 FCA and CPT – Best practice”.

The Incoterms do not address cargo securing. That is governed by the statutory rules of transport law. Under German law (Section 412(1) sentence 1 HGB), it is in principle the consignor who is responsible for transport-safe loading. The consignor in the sense of transport law (Section 407(2) HGB) is solely the carrier’s principal. That is not necessarily the seller or the loader. Where the buyer instructs the carrier to collect a shipment from the seller, for example, the buyer is at the same time the consignor. In those cases the seller is not responsible for cargo securing.

The Incoterms also do not govern the contract of carriage between the principal and the carrier. Through interpretation rule A4/B4 they merely determine which party has to organise the carriage and conclude the contract of carriage, not its content.

Also outside the scope of the Incoterms are the obligations and costs in connection with determining and recording the verified gross mass of freight containers (VGM, Verified Gross Mass). The international drafting committee took the view that this topic is too specialized and complex; it should be agreed between the parties.

Another issue is that companies frequently amend Incoterms clauses (for example, “EXW with loading”). Amendments are in principle possible. To avoid unnecessary discussion in a dispute, however, the parties should look carefully at the legal and practical consequences of the intended amendments and spell out their intended effect in the contract very precisely. That is particularly important for the question of whether the transfer of risk between seller and buyer shifts as a result.

Caution is also warranted where what is “lived” differs from what was contractually agreed. In those cases a court may, in a dispute, conclude that the parties have implicitly agreed on a different clause.

The parties also have to consider what the Incoterms do not cover. They must address these important aspects in the sales contract, to avoid unnecessary discussion and risk. This includes, for example, specifications for the goods sold, warranty, time, place, method, and currency of payment, transfer of title including retention of title, liability or limitation of liability, legal consequences of default, breaches and their legal consequences, the impact of sanctions, the imposition of customs duties, export or import prohibitions, force majeure, intellectual property rights, choice of law (in particular UN Sales Law / CISG) and domestic mandatory law (safety, health, environmental protection, and so on), rules on evidence, form of dispute resolution, and forum-selection or arbitration clauses.

Unclear, contradictory, or missing provisions can lead to unnecessary disputes and litigation between the parties. Failures around choice of law and forum are particularly critical. Many companies are not aware that judgments of ordinary courts in Germany are not enforceable in many countries.

Operational staff also regularly report poor coordination between departments. The same goes for communication with external parties (freight forwarders, carriers, banks, insurers, lawyers, tax advisers, customs and tax authorities, and so on). The Incoterms sit at an important interface between several topics (sales contract, export and import controls, taxes, customs law, contract of carriage, insurance contract, and financing). International trade only runs smoothly where everyone involved is aligned and the individual contracts are consistent with each other. In-house training that involves all departments is one practical way to get there.

Conclusion

The new Incoterms 2020, used with the right clause and in combination with professionally drafted international sales contracts, bring greater legal certainty. That requires problem awareness and a critical engagement with the topic.

First published in FOREIGN TRADE 4/2019, revised and expanded for inn.law.

Frequently asked questions

What are the Incoterms® 2020?

The Incoterms® 2020 are standardised, generally accepted delivery terms issued by the International Chamber of Commerce (ICC). They govern the seller’s and the buyer’s obligations (packaging, carriage of the goods, insurance, obtaining the shipping documents, export and import authorisation, and so on), the transfer of risk, and costs. The current version has applied since 1 January 2020. The Incoterms are used in around 90% of all international sales contracts.

What is new compared with the Incoterms 2010?

Among other things, DAT became DPU; CIP now carries the wider insurance under Institute Cargo Clauses (A); FCA gained the on-board bill of lading option; carriage with the parties’ own means of transport is now reflected; and the security-related obligations and costs are governed more clearly.

Which Incoterms clause applies to which mode of transport?

The Incoterms 2020 fall into two groups: clauses for any mode of transport (EXW, FCA, CPT, CIP, DAP, DPU, DDP) and clauses for sea and inland-waterway transport only (FAS, FOB, CFR, CIF). The pure sea clauses are tailored to handover on board or alongside the ship.

When does risk pass from the seller to the buyer?

Risk passes upon delivery at the agreed place. Under the C clauses (CPT, CIP, CFR, CIF), risk passes as early as handover to the carrier, not at the destination, even though the seller pays the freight up to that point.

What do the Incoterms not govern?

Among other things, they do not govern transfer of title, warranty, payment, liability, choice of law (in particular CISG), forum or arbitration clauses, force majeure, sanctions, and customs duties. These points must be governed in the sales contract itself.

Reference: Poleacov, P. (2026). Incoterms® 2020: practical overview. INN.LAW. https://inn.law/en/perspectives/incoterms-2020-practical-overview/

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