The New Incoterms® 2020
The 2020 edition represents the ninth edition of the Incoterms® rules. The differences between the editions are not by any means radical but do highlight the attention paid by the ICC to industry consultation on market usage, addressing misuse of the Incoterms and the increasing prominence of security considerations in the carriage of goods.
Brief Introduction to the Incoterms®
Incoterms were first published in 1936 by the ICC to introduce clarity and consistency in the interpretation of trade terms internationally and to reduce the number of disputes. Parties to a commodity sale contract need not draft bespoke arrangements to cover the terms required for delivery, duty payments and insurance arrangements for the transport of the goods. A standard form contract can be incorporated in to the supply contact to cover these issues, the Incoterms®.
The 11 trade terms used in Incoterms® 2020 can be seen as escalating in degrees by relation to the allocation of risk and cost to buyer and seller. By this measure EXW (Ex Works) represents the minimum obligation for the Seller and DDP (Deliver Duty Paid) represents the maximum obligation. Incoterms® beginning with “C” or “F” are contracts where the obligations of the seller are undertaken in the country of embarkation. Incoterms beginning with “D” are contracts where the seller is responsible for the goods in the destination country and bears the risk and costs of their transportation.
Differences between the Incoterms® 2020 and 2010 Editions
- Bills of Lading with On-Board Notation under FCA
It is now possible under FCA (Free Carrier) to select and option for the carrier to issue a bill of lading with an on board notation even though the goods are delivered by the seller to the buyer prior to loading on a ship simply by handing over the goods to the carrier. It would appear that this change was due to the pressure of banks concerns where letters of credit were in place.
- Listing of Costs and Rearrangement of Articles
The ICC took the opportunity in the latest edition to reorder the articles of the Incoterms® to ensure that the cost consequences of the terms are consistently displayed and to give more prominence to delivery and risk issues. Additionally more emphasis is placed on explaining how the incoterms® are to be used and address the confusion and bad practice noticed in the usage of the terms.
- Insurance Cover in CIP and CIF
The minimum insurance cover which the seller is to obtain under term CIP (Carriage and Insurance Paid to) differs between the two editions. In the 2020 Incoterms®, therefore, the minimum insurance cover now differs between the CIP and CIF (Cost Insurance and Freight).
- Arranging for Carriage in FCA, DAP, DPU and DDP
The Incoterms® now expressly allow for the transport of goods by the seller or buyer themselves rather than assuming they would enter into a contract of carriage with a third party in FCA (Free Carrier), DAP (Delivered at Place), DPU (Delivered at Place Unloaded) and DDP (Delivered Duty Paid).
- Change from DAT to DPU
The three letter initials for the previous rule DAT (Delivered at Terminal) has been changed to DPU (Delivered at Place Unloaded). The reason for this change is to emphasise that the destination for the goods could be a place where it is possible to unload the goods rather than limiting the destination to a terminal (however widely “terminal” was defined in the 2010 edition.
- Security Requirements
The security related requirements for each Incoterm® rule are now more prominent and clear allocation of such obligations are included in articles A4 and A7 of each rule. More prominence has also been given to the costs requirements of the security obligations.
Common areas of Confusion in the Use of Incoterms®
As we have seen one of the main themes of the changes made to the 2010 edition is to reduce the confusion seen in practice. Examples of confusion I have seen in the use of Incoterms® include:
- Mistakenly viewing Incoterms® as contracts of carriage rather than forming part of a contract of sale. Whilst the contract of sale is necessarily between the seller and the buyer, the contract of carriage is between the party responsible for arranging transport within the contract of sale as determined by the appropriate term, and a shipping company.
- Mistakenly considering that Incoterms® constitute an entire contract of sale rather than being a part of it.
- Mistakenly applying Incoterms® to intangible goods such as software, irrespective of whether that intangible good accompanies a physical commodity.
- Confusing port of shipment or delivery destination references. Tour of the terms relate only to transportation by water (FAS, FOB, CFR and CIF) but there have been occasions when an airport is named as the destination for such Incoterms®.
- Procurement teams of traders simply utilising their standard terms and conditions without reconciling these terms to the chosen Incoterm®. This error can arise from the desire of sellers only to transfer title in goods upon payment whilst also wishing to offload the cost and responsibility of delivery as soon as possible.
It often seems that the meaning of incoterms® are only inferred from the flowcharts that accompany them rather than from a review of the articles. Whilst it is hoped that the changes made in the 2020 edition will make the application of the correct term easier it will still require engagement with the published terms by the procurement team rather than a scan of the out of date quick reference chart taped to a filing cabinet.