The International Chamber of Commerce (ICC) has published an updated edition of Incoterms 2020 terms of trade for the sale of goods. This ninth edition of Incoterms sees changes to both the structure and content of the rules. Although the changes are not as radical as expected, it is useful to understand the new rules and to be able to apply them successfully in new contracts.
In this newsletter we offer a brief overview of the most important changes.
When do the updated rules go into effect?
Incoterms 2020 goes into effect on 1 January 2020. All contracts concluded under the terms of the previous Incoterms 2010 edition will continue to be valid. Buyers and sellers will also be able to continue using Incoterms 2010 in new contracts. However, they will have to clearly state their choice to use the earlier version of Incoterms in their contracts so as to avoid unpleasant surprises – additional costs and unplanned liabilities – if it subsequently emerges that the parties have different understandings of the rules to be followed.
Key innovations of Incoterms 2020
- Easier to choose the most appropriate terms: Incoterms 2020 aims to define the content of each of the terms more clearly, group similar terms and allow comparison of the elements of each Incoterms rule (eg the moment of risk transfer from seller to buyer, distribution of costs, obligation to pack or arrange shipment, and others). This enables parties to choose the option that best suits their situation and interests.
- Bill of Lading for sea transport of goods: When selling goods to be transported by sea under the FCA (Free Carrier) term, a seller or buyer (or banks that issue guarantees to them) requests a bill of lading, confirming loading on board. However, under the FCA term, the seller’s delivery obligations expire upon delivery of the goods to the port (prior to loading on board), so the seller has no further control over the cargo. Incoterms 2020 enables the parties to agree that the buyer instructs the carrier to issue to the seller a bill of lading confirming loading of the cargo on board. Thus it is now advisable for traders to opt for FCA rather than FOB (Free on Board) terms for container shipping.
- Specified cost allocation: Disputes between buyers and sellers regarding cost allocation are quite frequent, especially when costs are incurred at ports or at destination. Incoterms 2020 has refined and detailed attribution of costs to the buyer and seller by providing a list of eligible costs.
- Enhanced insurance coverage for manufactured goods: In Incoterms 2010, the CIP term (Carriage and Insurance Paid) stipulates that the buyer delivers the goods to the carrier and insures them against possible damage or loss during transportation. The CIF (Cost, Insurance and Freight) term imposes a similar obligation on the buyer when goods are transported by sea. Required insurance coverage – cargo insurance covered under Institute Cargo Clauses (C). This is the minimum insurance coverage that does not necessarily meet the buyer’s cargo protection requirements. Though usually suitable for bulk transport, it does not provide sufficient protection for manufactured goods.
Incoterms 2020 has increased the level of protection to the level of condition A “full load protection” when the CIP term is applied (CIP is the most commonly used when transporting manufactured goods). When CIF is applied the requirements for insurance coverage remain unchanged.
- New: option to transport goods by buyer’s or seller’s transport: Incoterms 2010 assumes that freight would be outsourced. Under the FCA, DAP, DPU and DDP terms of Incoterms 2020, the buyer or seller undertakes to “carry out or arrange transportation”.
- Misleading delivery location definition removed: Under the DAT (Delivered at Terminal) term in Incoterms 2010, the seller would be deemed to have delivered the goods when they are unloaded at the specified terminal. Under Incoterms 2010, the term “terminal” meant “any place, whether or not it is covered”. In order to define the point of delivery more accurately and eliminate the misleading reference to the terminal, Incoterms 2020 introduces a new term – DPU (Delivered at Place Unloaded).
- Detailed security obligations of each party: Transport safety requirements are becoming increasingly important, so Incoterms 2020 specifies the parties’ security obligations and allocation of related costs.
How to prepare to use Incoterms 2020?
We advise our clients to identify the Incoterms rules that are most commonly used in their business, review their version in the Incoterms 2020 edition, and evaluate the impact of the changes on their business practices. We recommend using Incoterms 2020 instead of Incoterms 2010 when concluding new contracts to be implemented after 1 January 2020.
We are ready to answer any questions you may have about the new edition of Incoterms 2020.