23rd October 2019
Updated every 10 years, the Incoterms® rules provide an outline for the allocation of costs and risk, and the respective responsibilities of buyers and sellers for the delivery of goods under sales contracts.
The updated 2020 Rules are substantively the same as the 2010 rules, however, a number of obligations and responsibilities for costs have been tweaked in the aim of making the rules both less ambiguous and more relevant to international trade.
1. DAT is changed to DPU
In Incoterms® 2010, DAT (Delivered at Terminal) means the goods are delivered once unloaded at the named terminal.
Reference to terminal has been removed to make the terms more general (i.e. it may be that delivery is to take place at a site which is not a shipping ‘terminal’ per se). DPU means Delivered at Place Unloaded.
2. Change of insurance in CIP/CIF
CIP (Carriage and Insurance Paid) 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 being a port).
Under Incoterms® 2010 the seller is obliged to provide clause C insurance for the buyer (Institute of Cargo Clauses). This is a basic level of insurance which typically might be suitable for bulk commodity cargoes but not manufactured goods.
CIF keeps the same insurance requirements (i.e. Clause C). However, CIP has increased the insurance required to Clause A insurance. The reasoning is that CIF is more often used with bulk commodity trades and CIP (a multimodal term) is being used for manufactured goods.
3. Costs are clarified
The detail of the allocation of costs has been improved (in a number of terms) in response to feedback that there were increasing disputes surrounding the allocation of costs, especially those in or around the port/place of delivery.
Generally speaking, in most terms, the principle is that the seller is responsible for costs incurred up to the point of delivery, and the buyer is responsible for costs thereafter.
4. Security requirements
Transport security (e.g. mandatory screening of containers) requirements have been made more predominant (e.g. see A4/A7 in each Incoterm® 2020). These requirements bring cost, and risk delay if not fulfilled.
5. Seller/buyer using own transport
This is of particular interest to those businesses that have their own distribution system in place.
Incoterms® 2010 assumed that the transport of the goods between seller and buyer would be carried out by a third party carrier.
They failed to deal with situations where transport is provided by the seller or buyer (e.g. the seller’s own truck). The 2020 Rules now clarify this position, for example, the buyer is now required to “contract or arrange at its own cost for the carriage of the goods from the named place of delivery”.
6. FCA, FOB and bills of lading
FOB is often used for container shipments. In these cases, the seller takes on significant risk. Usually a seller of a container shipment loses control of the container on arrival of the container at the port. But even though having lost control, they are still liable until the container is loaded onto the ship, thus leaving them liable for both cost and risk.
For example, if a container is damaged whilst in the container stack this remains the seller’s issue regardless of the fact that they may have no contractual relationship with the stack operator.
It was also the case that sellers were receiving unexpected invoices from port terminal operators for storage and loading fees.
To avoid such issues a seller should insist on delivering FCA. However, sellers often require payment with a letter of credit. Letters of credit often require the presentation of an onboard bill of lading. For the seller, using FOB involves it loading and therefore gives it a chance of obtaining an onboard bill of lading. On the other hand, using FCA means there is little chance of obtaining this.
In practice this amendment has brought very little meaningful change. To avoid this issue in its entirety an institutional shift would be needed by finance providers to no longer require a bill of lading. However, there seems little chance of this. As this is the case, the amendment merely offers a suggestion that the parties agree that the buyer should direct the carrier to issue a bill of lading.
Although now published, Incoterms® 2020 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 probable that where ‘Incoterms®” are included without nominating a year, the 2020 rules would apply unless the contract specifies otherwise.
You can start using Incoterms® 2020 before this date. If a contract specifies Incoterms® 2020 then they shall apply.
You do not have to switch to Incoterms® 2020. If your contract specifies an alternative set of Incoterms®, you may carry on using those specified, if you wish.