International Supply Terms - what's new in Incoterms 2020?
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Background
Incoterms stands for international commercial terms. Incoterms are internationally recognised provisions, which facilitate global trade and regulate the rights of buyers and sellers and, in particular, address each party's responsibilities with regard to transport, the allocation of risk, costs and levels of insurance.
The Incoterms are updated approximately every ten years. The 2010 incoterms are currently valid and these entered into force on 1 January 2011 in order to address changes in commercial practice and developments in transport at the time.
What is new in the Incoterms 2020?
The key changes to the Incoterms 2010 are as follows:
- Bill of lading
The Incoterms 2020 provide for an additional option to deal with a situation where goods are sold Free Carrier (FCA). Under the Incoterms 2010 it was not possible to obtain an on-board bill of lading from the carrier (as the FCA is completed before loading of goods on board a vessel). Incoterms 2020 add the option that a buyer and seller can agree that the buyer will instruct a carrier to issue an on-board bill of lading once goods have been unloaded, and the seller is then obliged to tender that bill of lading to the buyer (usually through the banks). This may well be a temporary fix to a problem, which can only be addressed fundamentally by a change in trade finance (so that a seller is able to secure payment with a letter of credit without the need for an on-board bill of lading).
- Costs
There has been a re-ordering of where the costs appear in the terms. They now also appear in a one-stop list of costs.
- Insurance
The Incoterms 2020 provides different levels of cover for CIP and CIF. CIF maintains the default position under Incoterms 2010. CIP, however, is increased so that the seller must comply with Institute Cargo Clauses (A).
- Seller/Buyer using own transport
The Incoterms 2010 assumed that the transport of goods between a seller and a buyer would be carried by a third party carrier. Incoterms 2020 deals with situations where the seller or the buyer uses their own means of transportation.
- Change from DAT to DPU
Incoterms 2020 have changed the terminology so that DAT (Delivered at Terminal) is now DPU (Delivered at Place Unloaded). This aims to reflect the reality of the situation in that the goods can be delivered at any place where the seller is able to unload the goods, not only a "terminal".
- Security-related requirements
An express allocation of security-related obligations has been added to A4 and A7 of each Incoterms rule in order to reflect the growing concerns in this area in recent years.
- Presentation
The accompanying guidance to the Incoterms 2020 states that the "most important initiative" of the updated Incoterms 2020 is a focus on the presentation of the terms to better inform users. The change in presentation also includes a re-ordering within the rules, in order to give delivery and risk more prominence, and a greater emphasis in the introduction to the Incoterms 2020 on "making the right choice".
Comment
Currently the Incoterms 2010 are in force and they will remain in effect for those using them. It is worth remembering that the Incoterms 2020 do not replace the Incoterms 2010 and so it is still possible to agree on the validity of the Incoterms 2010. It is therefore important to always site the date of the Incoterms which are agreed. After January 2020, it is likely that the Incoterms 2020 will apply unless the contract says otherwise.
In any event, the publication of Incoterms 2020 is a timely reminder for businesses, which rely on references to these rules in their supply contracts, to ensure that they fully understand the scope of said rules. In our experience, the Incoterm selected for a supply contract does not always reflect the intention. This misunderstanding can create unforeseen costs and risks for businesses – and there are enough of those already at the moment without adding a self-inflicted one!