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. TFG heard from ICC United Kingdom at today’s Incoterms® 2020 UK launch.
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 is 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, following on from feedback to the drafting committee, it was 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
Under CIF / CIP, the seller buys insurance for the buyer. 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. Why? Because Clause A covers a more comprehensive higher level of insurance (e.g. for the 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 confusions. Because the ordering of articles within the Incoterms 2020 rules have 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 collects 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 9/11, 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 own means of transport by the buyer in the FCA rules and by the seller 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’.
There is a gap in delivery between FCA and FOB. If you’re selling FCA, your delivery point is different to FOB. The difference between FCA and FOB to the seller is a significant cost and risk. 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.
Why? 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 buyers 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!
What is ‘Effective date’ in Incoterms?
Despite an ‘effective’ date of the 1st January 2020, Incoterms 2020 can be used now. That said, after this date, there is still no obligation to use Incoterms 2020.
So what does ‘Effective 1st 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.
Not bored? We have an Incoterms 2020 Podcast for you, brought to you by the ICC United Kingdom
A note from the Editor
I don’t write many notes, but I wanted to update you on TFG’s Incoterm’s pages. We’re still updating our TFG website on Incoterms 2020 and what this means for you. Please bear with us whilst we update our Incoterms hub! Thanks, Deepesh