Estimated reading time: 3 minutes
Updated every 10 years, ICC Incoterms 2020 rules define the responsibilities of buyers and sellers for the delivery of goods under sales contracts.
They are the authoritative rules for determining how costs and risks are allocated to the parties.
Incoterms rules are all about the delivery, which is reflective of the key changes in Incoterms® 2020.
There are very few court cases on the interpretation of Incoterms rules, rather, the problems that normally arise are due to the wrong use of an Incoterms rule.
Buyers and sellers using the right Incoterms rules are often set up well, therefore it’s essential for businesses to fully understand the risks and delivery associated with each incoterms rule.
7 Key changes to Incoterms 2020
- DAT Incoterm changed to DPU
- Insurance points are clarified in CIF and CIP Incoterms rules
- Costs and cost structures are now clarified
- Security in relation to transport is now clearly detailed
- Provisions to allow for own transport rather than assuming 3rd party transport
- FCA, FOB, and bills of lading
- Presentation and design are much more user friendly
The substance of Incoterms 2020 has not changed considerably, but the small subtle changes are absolutely crucial for trade specialists.
1. DAT Incoterm changed to DPU (Delivery at Place Unloaded)
Following on from several rounds of consultation, the drafting group made the choice of removing the word ’terminal’ as it often caused confusion.
DAT required Delivery at Terminal (unloaded), however, after receiving feedback from practitioners, the drafting committee decided to change the term to DPU (Delivery at Place Unloaded), to broadly cover ‘any place, whether covered or not’.
2. Insurance cover differs between CIF and CIP
In Incoterms® 2010, insurance is required under clause C, but in Incoterms® 2020, CIP requires insurance complying with Institute Cargo Clause (A) whereas CIF requires insurance under Clause C.
Because Clause A covers a more comprehensive higher level of insurance (e.g. for manufactured goods), whereas a lower level of cover from Clause C would probably apply to the commodities world.
3. The listing of costs
All costs are now listed in the ‘Allocation of Costs’ sections for each rule, to avoid confusion.
As the ordering of articles within the Incoterms 2020 rules has also changed, these now appear in the A9/B9 section of each rule.
Costs were a big issue in the 2010 Incoterms®.
Carriers often changed their pricing structure to deal with add ons and sellers were often surprised by being back-charged terminal handling charges.
The A9 sections in the Incoterms rules guide now collect together the costs, with the principle aim of clearly stating the costs to each party.
4. Security Requirements
Cargo security has been particularly important since the 11 September 2001 World Trade Centre attacks, and the 2020 rules now address many of the security-related requirements that became so prevalent in the early part of this century.
From a carriage requirements perspective, security-related allocations have been added to A4 and A7 of each Incoterms rule and the necessary costs associated have been added to A9/B9 (see 3).
5. Own transport
Incoterms 2010 rules assumed that goods carried from the seller to the buyer were via a 3rd party.
Incoterms 2020 allows for the buyer to use their own means of transport in the FCA rules and the seller to use their own means in the D rules.
6. FCA and Bills of lading
According to FCA, part B4, ‘The buyer must contract or arrange at its own cost for the carriage of the goods’.
In the 2010 Incoterms rules, exporters of goods in containers were encouraged to use FCA, which seemed best for both parties.
However, many people were using FOB when they should’ve really been using FCA.
Even sophisticated sellers said they wanted to use FOB, because a standard letter of credit requires an onboard bill of lading to be presented.
Therefore the sellers were often taking the risk and using FOB instead because they wanted to get paid under the LC.
The Incoterms® 2020 FCA extra provision now states that if the parties have so agreed, the buyer must instruct the carrier to issue to the seller, at the buyer’s cost and risk, a transport document stating that the goods have been loaded (such as a bill of lading with an on board notation).
7. Presentation and design
Incoterms® 2020 rules have much more extensive explanatory notes, with better diagrams, a different structure for users and a reordering of rules to make delivery and risk more obvious.
Maritime-related rules still haven’t changed and remain at the back of the rule book as they still might be used for bulk commodities.
That’s not all folks! We’ve got two more points worth mentioning when it comes to Incoterms 2020!
Despite an ‘effective’ date of 1 January 2020, there is still no obligation to use Incoterms 2020.
As long as both parties agree and clearly state so, they can use any set of Incoterms that they want – even the original Incoterms 1936 if they really want to (although we do not recommend this!).
So what does ‘effective 1 January 2020’ actually mean?
If you haven’t made it clear in your contract which Incoterms version to refer to, or have a flexible contract which states that when the contract is effective, the latest Incoterms® rules apply, then the 2020 rules will apply in these circumstances.
That said, it’s estimated that the Incoterms 2020 rules might take 1-2 years for the market to adopt.
3 tips on how to use Incoterms correctly:
- Choose the right rule
- Specify the place / port precisely
- Incorporate them into the contract as well as the LC and invoice
Special thanks to Bob Ronai for his amends on this article. Read his e-book here.
We have an Incoterms 2020 Podcast for you, brought to you by the ICC United Kingdom
Incoterms – All you need to know
The Incoterms are a series of pre-defined commercial terms designed to help prevent confusion in foreign trade contracts by clarifying the obligations of buyers and sellers.
While they are in heavy use today, their origin dates back to the early 20th century.