ICC Incoterms® 2020 has arrived! Incoterms are fundamental to international trade, providing a set of contract terms for international freight delivery. These clearly define the delivery point and the seller and buyers' responsibilities, risks and costs. First established in 1936, they are reviewed every 10 years and the new edition has now been published.
In this article David Lowe, Global Co-chair of the Incoterms 2020 drafting group explains the important changes.
- When do Incoterms® 2020
come into force?
Incoterms 2020 although now published come into force on 1 January 2020. This means that if a contract is entered into on or after 1 January 2020 then it is likely that Incoterms 2020 shall apply unless the contract says otherwise.
You can start using Incoterms 2020 before 1 January 2020. If a contract specifies Incoterms® 2020 then they shall apply.
Incoterms users do not have to switch over to Incoterms 2020. Users can, if they clearly specify it in the contract, carry on using Incoterms 2010 if they want to.
We expect that it will take 12-18 months for most Incoterms users to switch over to Incoterms® 2020.
- What should I do about
Identify what Incoterms your business typically uses.
Consider if you are using the right Incoterm. We frequently find that businesses are using an Incoterm which is no longer suitable.
Once you know what Incoterms you are using and checked they are appropriate check the changes introduced by ICC Incoterms® 2020 and consider if that has any impact on you.
Refresh your standard contracts to update them to refer to ICC Incoterms® 2020.
- What are the key changes in
- DAT is changed to DPU
In Incoterms 2010 DAT (Delivered at Terminal) means the goods are delivered once unloaded at the named terminal. User feedback was that users wanted an Incoterm that allowed delivery at not just a terminal. For example, a capital equipment manufacturer might agree to deliver at the site of a factory.
Therefore the reference to terminal has been removed to make it more general.
There is no other change in substance.
Therefore if you currently use DAT Incoterms 2010 and are happy with that then you should change to DPU (ICC Incoterms® 2020).
- Change of insurance in CIP/CIF
The Incoterm CIP (Carriage and Insurance Paid to) means that the seller delivers to the carrier, but then pays for the carriage and insurance to the named destination. CIF (Carriage Insurance and Freight) is the same except that it can only be used for maritime transport (delivery is onto a ship and the destination needs to be a port).
Under Incoterms 2010 the seller is obliged to provide insurance for the buyer that is equivalent to Clause C (Institute of Cargo Clauses). This is a basic level of insurance which typically might be suitable for bulk commodity cargoes but may not be appropriate for manufactured goods.
In ICC Incoterms® 2020 CIF keeps the same insurance requirements (i.e. Clause C) but CIP has increased the 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.
- Costs are clarified
The detail of the precise allocation of costs between seller and buyer has been improved. In each Incoterm 2020 A9/B9 has gathered in all of the cost obligations. This is to respond to user feedback that there were increasing disputes about the allocation of costs, especially those in or around the port or place of delivery.
The broad principle is that the seller is responsible for costs incurred up to the point of delivery, and the buyer is responsible for costs beyond that.
- Security requirements
Transport security (e.g. mandatory screening of containers) requirements have become more prevalent. These requirements bring cost, and risk delay if not fulfilled. Incoterms 2010 did touch on responsibility for security requirements and their costs. ICC Incoterms® 2020 makes security obligations more prominent (e.g. see A4/A7 in each Incoterm 2020).
- Seller/buyer using own
Incoterms 2010 assumed that the transport of the goods between seller and buyer would be carried out by a third party carrier. They did not deal with where the transport is provided by the seller or buyer (e.g. the seller's own truck). ICC Incoterms® 2020 now clarifies the position. For example, the buyer in FCA Incoterms 2020 is required to "contract or arrange at its own cost for the carriage of the goods from the named place of delivery".
- FCA, FOB and bills of lading
The Incoterm FOB is often used for container shipments. In doing this, the seller takes on a significant risk. Typically a seller of a container shipment loses control of the container on arrival of the container at the port. But even though the seller has lost control, they are still liable until the container is loaded onto the ship. This exposes the seller to cost and risk.
For example, if the container is damaged while in the container stack that will be the seller's problem even though they may have no contractual relationship with the stack operator. The ICC's drafting group also heard complaints from sellers who had received surprise invoices from port terminal operators for the cost of storage and loading.
The answer to this issue is for the seller to insist on using the Incoterm FCA. However, sellers often want to secure payment with a letter of credit. Letters of credit often require the presentation of an onboard bill of loding. For the seller using FOB involves it in lading and therefore gives it a chance of obtaining an onboard bill of lading. A seller using FCA will have little prospect of obtaining the onboard bill of lading.
The long-term solution to this issue is for trade finance providers to shift from requiring an onboard bill of lading. Incoterms cannot force change in trade finance. Therefore, as a limited "sticking plaster" in ICC 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.
- Improved presentation
- Explanatory notes and pictures
In ICC Incoterms® 2020 the explanatory note for each Incoterm has been made more detailed and the pictures more useful.
Each Incoterm 2020 has been reordered so that the delivery obligation (which is the key part of each Incoterm) is made more prominent (it is now at A2).
At the back of the ICC Incoterms® 2020 book an extra tool has been included. This sets out the position for each element Incoterm in a way that means it can be compared across all Incoterms. Therefore, if you wanted to look at the delivery point (set out at A2) across all Incoterms it is now possible to do so.
- Multi modal is separate to maritime
ICC Incoterms® 2020 has retained the approach of Incoterms 2010 by setting out the multi modal Incoterms first and then the maritime only Incoterms (FAS, FOB, CFR, CIF). This is to encourage users to use Incoterms which can be used for any form of transport, as that means less risk of using the wrong Incoterm.
- Explanatory notes and pictures
- DAT is changed to DPU
- How do I get a copy of ICC
You can buy the Incoterms text and other useful tools for the International Chamber of Commerce (which "owns" Incoterms). You may also visit the ICC's UK website.
- How can I learn
- There are many trainers in international trade. Make sure you use one who is up to date and familiar with ICC Incoterms® 2020. The ICC has accredited trainers who it recognises as understanding Incoterms 2020.
- The International Chamber of Commerce UK launch (sponsored by Gowling WLG) is on 15 October 2019 in Gowling WLG's 4 More London office. You can book a place with ICC UK.
- We will be issuing alerts and holding training events. If you are not already on our Incoterms contact list, please sign-up to receive more insights and resources on Incoterms from Gowling WLG.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.