Incoterms® 2020 Explained, how they will affect global trade.
The International Chamber of Commerce has published new Incoterms® 2020 that have come into effect from the 1st of January 2020. The ICC originally published Incoterms® in 1936 and has continually made updates to reflect the changes in the Global Trade environment. It’s important that all parties involved in trade clearly understand the changes and how they apply to global supply chains.
Incoterms® play such a vital role in the world of global trade. Incoterms® 2010 or Incoterms® 2020 may seem complicated, but it’s imperative that buyers and sellers clearly understand how they work and their own obligations along the supply chain. In this article, we explain the updates made and provide simple explanations, along with an Incoterms® infographic to explain Incoterms® 2020.
Note: The content of this article and chart is only for general information purposes and shall not in any circumstances be considered bespoke legal advice or professional advice.
What are Incoterms®?
Incoterms® are referred to as International Commercial Terms. They are a set of rules published by the International Chamber of Commerce (ICC), which relate to International Commercial Law. According to the ICC, Incoterms® rules provide internationally accepted definitions and rules of interpretation for most common commercial terms used in contracts to sell goods.
All International purchases will be processed on an agreed Incoterm to define which party legally incurs costs and risks. Incoterms® will be clearly stated on relevant shipping documents.
An overview of Incoterms® 2020 for 11 Terms, 7 for any mode of transport.
Why are Incoterms® vital in International Trade?
Incoterms® are referred to as International Commercial Terms. They are a set of rules published by the International Chamber of Commerce (ICC), which relate to International Commercial Law. According to the ICC, Incoterms® rules provide internationally accepted definitions and rules of interpretation for most common commercial terms used in contracts to sell goods.
All International purchases will be processed on an agreed Incoterm to define which party legally incurs costs and risks. Incoterms® will be clearly stated on relevant shipping documents.
An overview of Incoterms® 2020 for 11 Terms, 7 for any mode of transport.
EXW – Ex-Works or Ex-Warehouse
Ex-works is when the seller places the goods at the disposal of the buyer at the seller’s premises or at another named place (i.e., works, factory, warehouse, etc.).
The seller does not need to load the goods on any collecting vehicle. Nor does it need to clear them for export, where such clearance is applicable.
FCA – Free Carrier
The seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises or another named place.
The parties are well advised to specify as explicitly as possible the point within the named place of delivery, as the risk passes to the buyer at that point.
FAS – Free Alongside Ship
The seller delivers when the goods are placed alongside the vessel (e.g., on a quay or a barge) nominated by the buyer at the named port of shipment.
The risk of loss of or damage to the goods passes when the products are alongside the ship. The buyer bears all costs from that moment onwards.
FOB – Free On Board
The seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered.
The risk of loss of or damage to the goods passes when the products are on board the vessel. The buyer bears all costs from that moment onwards.
CFR – Cost and Freight
The seller delivers the goods on board the vessel or procures the goods already so delivered.
The risk of loss of or damage to the goods passes when the products are on board the vessel.
The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.
CIF – Cost, Insurance, and Freight
The seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the products are on the ship.
The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.
The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage.
The buyer should note that under CIF the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.
CPT – Carriage Paid To
The seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such site is agreed upon between parties).
The seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.
CIP – Carriage And Insurance Paid To
The seller has the same responsibilities as CPT, but they also contract for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage.
The buyer should note that under CIP the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.
DAP – Delivered At Place
The seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination.
The seller bears all risks involved in bringing the goods to the named place.
PDF – Delivered At Place Unloaded (replaces Incoterm® 2010 DAT)
DPU replaces the former Incoterm® DAT (Delivered At the Terminal). The seller delivers when the goods, once unloaded are placed at the disposal of the buyer at a named place of destination.
The seller bears all risks involved in bringing the goods to and unloading them at the named place of destination.
DDP – Delivered Duty Paid
The seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport ready for unloading at the named place of destination.
The seller bears all the costs and risks involved in bringing the goods to the place of destination. They must clear the products not only for export but also for import, pay any duty for both export and import, and carry out all customs formalities.
What are the differences between Incoterms® 2010 and Incoterms® 2020?
The main explanations of Incoterms® 2020 have remained the same, with a few key updates and changes. The main change includes a new DPU term replacing DAT, along with other changes to Incoterms® as below. It’s imperative that all parties involved in global trade understand these updates and how they may affect your supply chain.
New Incoterm® DPU Replaces DAT
The previous Incoterm® DAT (Delivered at Terminal) is now called DPU (Delivered at Place Unloaded. It was decided to change the term to DPU to remove the confusion that arose in the past. In the past, DAT required ‘Delivery at Terminal (unloaded)’, however, the word “terminal” caused confusion. The new term DPU (Delivery at Place Unloaded) covers ‘any place, whether covered or not’.
Different levels of insurance coverage between CIF and CIP
CIF and CIP are the only two Incoterms® that require the seller to purchase insurance in the buyer’s name. Under Incoterms® 2010 the insurance cover for both CIF and CIP was required under Institute Cargo Clause C. Under the new Incoterms® 2020, CIP requires insurance coverage complying with Institute Cargo Clause A. Clause A covers a more comprehensive level of insurance which is usually suitable for manufactured goods, whereas Clause C would likely apply to commodities.
In summary:
CIF remains the same, it requires ‘Institute Cargo Clause C’ insurance cover – The number of listed risks, subject to itemized exclusions.
CIP now requires an upgraded ‘Institute Cargo Clause A’ insurance cover – All risk, subject to itemized exclusions.
Updated Costs and Listings
Costs became quite a problem with Incoterms® 2010 with some parties. In some cases, carriers were changing their pricing so sellers were often faced with new back-charged terminal handling charges. Incoterms® 2020 now provides much more detail around costs and now appears under the A9/B9 sections of the rule. This clearly states which costs are allocated to each party.
Increased Security Requirements, Allocations, and Costs
In a world with increased security requirements, the Incoterms® 2020 rules now provide more detail about security allocations and necessary costs. For each Incoterm® rule, the security allocations have been added to A4/A7 and the associated costs have been added to A9/B9.
Buyer’s and Seller’s Own Transport
Under Incoterms® 2010 it was assumed that all transport would be undertaken by a third-party transport provider. Updates to Incoterms® 2020 allow for the provision for the buyer or seller’s own means of transport. This recognizes that some buyers and sellers are using their own methods of transport, including trucks or planes to get goods delivered.
This allows for the buyer’s own means of transport under the FCA rule
This allows for the seller’s own means of transport under DAP, DPU, and DDP.
FCA, FOB, and the Bill of Lading Process
Updates were made to the previous Incoterms® 2010 to encourage exporters of containerized goods to use the FCA Incoterm®. In reality, most parties were still using FOB when they should have been using FCA. This is because even experienced sellers still wanted to use FOB because they wanted the contract to be under a Letter of Credit.
Therefore provisions have been made to the Incoterms® 2020 to state that the buyer must instruct the carrier to issue a transport document stating that the goods have been loaded – i.e a Bill of Lading with an ‘on board’ notation. In the past carriers have frequently refused to issue a Bill of Lading with a notation to the seller if they have received the goods from an intermediary transport (such as a truck), instead of directly from the seller.
How to put Incoterms® 2020 into Practice on Sales Contracts
The new Incoterms® 2020 has come into effect on the ‘effective’ date of the 1st of January 2020. What does that actually mean for your business? Trading partners can still carry on using Incoterms® 2010 if they prefer to, which may occur when it is being used to confirm complex commercial agreements.
All parties must make it clear in contracts which Incoterms® version is being referred to in order to avoid any misunderstanding. Different trading partners will incorporate Incoterms® into contracts at different times.
It is imperative that you check existing contracts to ensure that the Incoterms® edition year is included. If there is no year stated then the following will apply:
• Up to 31st December 2019 – Incoterms® 2010
• From 1st January 2020 – Incoterms® 2020
• If a different year is stated, for example, Incoterms® 1990, then the respective terms will apply
Below is the structure that should be used on Sales Contracts:
[Incoterm® rule] [Named port/place/point] Incoterms® 2020
Examples:
CIF Sydney Incoterms® 2020
DPU Newcastle warehouse, NSW Incoterms® 2020
How to Prepare Your Business for Incoterms® 2020
As Incoterms® are updated you should always take the time to assess how any changes may impact your business. It’s much better to be proactive rather than reactive should some big issues arise with any of your orders or shipments. Always refer to professional legal advice before making any changes to your business. To prepare for the changes, here are a few things that you may consider:
• Identify the Incoterms® that your business typically uses
• Audit any contracts that are extended into 2020 or that renew in 2020
• If you are buying or selling under a Letter of Credit, you may consider the option to use FCA instead of FOB (refer to notes above). This will involve instructing carriers to issue Bills of Lading. Always refer to professional legal advice before making any changes.
• Ensure that you make changes to any contracts and documents as necessary
• Ensure that you are stating the Incoterms® edition year that both parties are referring to in sales contracts
• Look further into the updated costs and listings to see if it has any impact on your landed cost calculations
• Increase the level of insurance coverage to satisfy the new CIP requirements
• Structure tighter security for imports and exports
• Understand who has the responsibility for loading and unloading charges
• Know where the risk of loss is transferred
• Contract professional legal advice from experienced supply chain and legal analysts to audit current procedures