The release of the new Incoterms® 2020 is a much-welcomed development for international trade. This article discusses the key differences between Incoterms® 2010 and Incoterms® 2020.
In this fast-paced, evolving world, the release of the new Incoterms® 2020 is a much-welcomed development for international trade. It was about time we dusted off the old Incoterms® 2010, which were anchoring the industry to the past. However, at first glance, the changes appear to be rather modest. Nevertheless, the actual impact thereof can only be assessed once incorporated in import-export transactions.
It goes without saying that the principal purpose of the Incoterms® 2020 remains unaltered (i.e.: identifying the responsibilities of purchasers and sellers for the delivery of goods and the transfer of risk from seller to purchaser).
The key differences between Incoterms® 2010 and Incoterms® 2020 are:
- FCA (Free Carrier) now provides the additional option
to make an on-board notation on the Bill of Lading prior to loading
the goods on a vessel.
Under this term, the seller is responsible for loading the goods on the purchaser's transport.
This term was problematic for parties when the seller was responsible for loading the goods on a truck (or other mode of transport) hired by the purchaser and not directly on the international carrier.
If the parties agree on using a letter of credit as the payment method for such transaction, banks often require the seller to present a bill of lading with an on-board notation before payment. An international carrier is unlikely to issue a seller with a bill of lading if the seller did not present the goods directly to it. Hence the new FCA Incoterms 2020 rules, which allows the parties to agree in the sale and purchase agreement that the purchaser should instruct its carrier to issue a bill of lading with the on-board notation to the seller. - The costs now appear centralised in A9/B9 of each Incoterms® rule.
- CIP (Carriage and Insurance Paid To) increases
insurance. CIP now requires at least an insurance with the minimum
cover of the Institute Cargo Clause (A) (All risk, subject to
itemised exclusions).
CIF (Cost, Insurance and Freight) and CIP (Carriage and Insurance Paid To) are the only two Incoterms that identify which party must purchase insurance for a portion of the export journey. For both instances, the seller bears that responsibility.
Incoterms 2010 dictated that, for both these terms, the seller was responsible for obtaining the minimum level of coverage identified by Clause C of the Institute Cargo Clauses.
In Incoterms® 2020 rules, the seller is now responsible for purchasing a higher level of insurance coverage—of at least 110% of the value of the goods as detailed in Clause A of the Institute Cargo Clauses—under the revised CIP term.
The insurance requirement hasn't changed for CIF. - FCA (Free Carrier), DAP (Delivered at Place), DPU
(Delivered at Place Unloaded) and DDP (Delivered Duty Paid) now
take into account that the goods may be carried without any
third-party carrier being engaged, namely by using its own
transportation.
Incoterms® 2010 was drafted with the assumption that sellers would be contracting with a third party for the delivery of the goods to the final destination and the language used reflected this assumption.
Incoterms® 2020, however, expressly state that sellers can make a contract for carriage or arrange for the necessary transportation to include "do-it-yourself" sellers. Therefore, the update allows for a broader range of solutions than the traditional hiring of a third-party carrier, recognising that many sellers now use their own methods, including trucks or planes, to deliver goods. - DAT (Delivered at Terminal) has been amended to DPU
(Delivered at Place Unloaded) to clarify that the place of
destination could be any place and not only a
"terminal".
This is one of the most obvious changes.
The term usually applies to consolidated containers with multiple consignees, and it is the only term that tasks the seller with unloading the goods. - Customs clearance: export, transit and
import
Incoterms 2020® clarifies which party, seller or purchaser, is responsible for carrying out customs formalities and clearance, assuming the costs and risks thereof. (For the first time, Incoterms 2020® makes reference to the release of goods in transit.) The liability is assigned to whoever assumes the risk of transport to the place of delivery.
Therefore, under the Incoterms EXW, FCA, FAS, FOB, CPT, CFR, CIP and CIP risk is transferred at origin (country of the seller) and therefore the liability for the customs transit clearance is assumed by the purchaser; and, on the contrary, under Incoterms DAP, DPU and DDP, risk is transferred at the destination (country of the purchaser), therefore, the seller bears the liability. This amendment may be significant in international transactions where the goods must pass through customs of complex countries prior to arriving at the customs of the import country. - The Incoterms® 2020 now explicitly shifts the
responsibility of security-related requirements and ancillary costs
to the seller.
Import and export security requirements have increased exponentially since Incoterms® 2010. The 2020 edition stipulates specific, new security responsibilities related to goods, cash, and documents under individual trade terms.
Each of these updates may trigger a torrent of tweaks to your company's supply chain and logistic operations. Of course, incorporating Incoterms® into any agreement is voluntary and is at the discretion of the parties concerned. They do however aid interpretation when disputes arise. Edition specificity (specifying in the contract which version of the Incoterms® is to apply) is a requirement of the rules — and without it, the prevailing terms become one more issue to argue out in court! Be sure to state which edition applies to avoid later disputes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
