Timed to coincide with the organization’s 100th anniversary, the International Chamber of Commerce recently published Incoterms® 2020, the long-awaited ninth revision to their international trade terms for the sale of goods.
Widely used in international commercial transactions and procurement processes, the Incoterms® rules are intended to clearly communicate the division of responsibilities between a seller and a buyer for the tasks, costs, and risks associated with the global transportation and delivery of goods. First published in 1936, the Incoterms® have been revised on a regular basis — once every decade for the last 40 years — to reflect changes in international trade.
What’s New in Incoterms® 2020?
Aiming to reduce the risk of error in choosing the most appropriate rule for a given transaction, Incoterms® 2020 has been significantly re-designed to make the publication more user-friendly by incorporating enhanced graphics, plainer, easier-to-understand language, and more detailed explanatory notes.
DAT Replaced by DPU
The most notable update in the new rules is that DAT (Delivered At Terminal) will be replaced by DPU (Delivered at Place Unloaded). The ICC says this change was made primarily to eliminate confusion between DAT where delivery takes place once the goods have been unloaded from the carrying vessel and made available to the buyer at a specified place within the terminal and DAP (Delivered At Place), where delivery occurs before the goods are unloaded, when they are placed at the buyer’s disposal on the arriving transport. DPU is essentially a DAP, with unloading.
Another reason for renaming DAT was to provide for greater flexibility in determining the place at which delivery occurs, given that not all destination points necessarily include a “terminal” and the physical place of delivery may be anywhere at the discharge point.
It should be noted that DPU is now the only Incoterm® where the seller has the responsibilities and costs of unloading at final destination. Import Customs clearance and related costs, however, remain for the account of the buyer.
FCA, FOB and Bills of Lading
Another key change in the Incoterms 2020® is the adoption of language in the FCA (Free Carrier – named place of delivery) term to allow the seller to require the buyer to procure an on-board bill of lading. In many ways the FCA Incoterm has replaced FOB (Freight/Free on Board) in modern usage, although the critical point at which the risk passes moves from loading aboard the vessel to the named place can be problematic for sellers.
Typically, a seller of a containerized shipment loses control of the goods on their arrival at the export container port, but still remain liable until the container is loaded onto the ship. This exposes the seller to cost and risk.
Although Incoterm® FCA would seem to be the answer to this problem, because in that case the seller doesn’t actually deliver the containers on-board the vessel and therefore cannot obtain the onboard bill of lading that’s often required when payment is being secured by means of a letter of credit. To address this issue, Incoterms® 2020 FCA has been changed to allow the parties to agree for the buyer to direct the carrier to issue the onboard bill of lading to the seller.
Change of Insurance in CIP/CIF
Under Incoterms® 2010, the seller was required in both CIF and CIP contracts to provide a basic level of insurance for the buyer equivalent to Clause C (Institute of Cargo Clauses). However, given that in practice these two terms usually apply to different classes of goods which call for different levels of insurance coverage, in Incoterms® 2020 the ICC has sought to clarify this distinction.
Accordingly, Incoterms® 2020 CIF keeps the same insurance requirements (i.e. Clause C) but CIP has increased the level of insurance required to Clause A (Institute of Cargo Clauses). The reasoning behind this is that CIF is more often used with bulk commodity trades and CIP (as a multimodal term) is more often used for manufactured goods.
Reflecting various risk factors in the geopolitical environment since the last revision, the ICC has expanded security-related requirements in Incoterms 2020®, including new provisions to allocate responsibility for these between seller and buyer. Expanding on existing requirements, the Incoterms® 2020 makes security obligations more prominent throughout; something that could pose a challenge to shippers in terms of cost, and risk delay if not fulfilled.
Past editions of the Incoterms® assumed that transportation would be carried out by third-party carriers. However, in light of the growing trend of shippers investing in their own logistics supply chains, the language in Incoterms® 2020 now clearly provides that the relevant party must “contract or arrange at its own cost for the carriage of the goods from the named place of delivery.”
Incoterms® 2020 comes into force on January 1, 2020. This means that if a contract is entered into on or after that date, then Incoterms® 2020 will apply unless the contract specifies otherwise. You can, however, start using the new Incoterms® immediately as long as this is clearly indicated in the contract. Likewise, parties to a contract don’t have to switch over to the new Incoterms® rules and are free to choose which version they prefer using in their contracts; a vendor could, for example, continue using Incoterms® 2010 if they want to, provided this is clearly stipulated in the contract.
Obtaining Incoterms® 2020
Incoterms® 2020 and other useful tools can be obtained from the International Chamber of Commerce (the creator and “owner” of the Incoterms® rules) here. In addition to the hard-copy version, the ICC recently announced the release of a free mobile application that can be downloaded from via the Apple App Store and Google Play.
Need More Information?
Should you have questions about this latest revision to the Incoterms® or need more information about how the various trade terms relate to your own international shipping transactions, don’t hesitate to contact us – our trade experts are here to help.