You may have heard that a new version of Incoterms® will take effect on 1st January 2020 and will include a number of changes. We explain what Incoterms® are, how they are used, what the changes for 2020 will be and how they might affect you.
What are Incoterms?
Incoterms® is an acronym for International Commercial Terms. They are a collection of internationally recognised standardised trade terms that define responsibilities for the sale and delivery of goods contracts.
Incoterms® are published by the International Chamber of Commerce (ICC) and are widely used in international transportation. Shippers use Incoterms® to outline who is responsible for the arrangement and payment of shipping, insurance and customs duties. The main goal of Incoterms® is to reduce confrontation and misunderstandings between traders and in turn this minimises trade disputes and litigation.
“Incoterms® make business work for everyone. They help importers and exporters around the world to understand their responsibilities and avoid costly misunderstandings, the rules form the language of international sales transactions and help build confidence in our valuable global trading system.” General Secretary of the ICC.
When did Incoterms begin?
The ICC published the first set of Incoterms® in 1936. Since then there have been developments and improvements to Incoterms® rules resulting from feedback from the transport industry. As such in the last decades there has always been a revision of the Incoterms coinciding with the first year of each of them: 1990, 2000, 2010. The latest version is Incoterms® 2020 which is expected to be in effect for a decade, until December 2029.
What do Incoterms cover?
Incoterms® cover various practical elements of a sale contract such as the primary obligations of the seller and the buyer; the responsibilities of each; time of delivery and the transfer of risk. They also deal with insurance, export and import clearance and the division of other costs pertaining to the delivery of goods.
Why are they changing?
The ICC’s revision of Incoterms® aims to respond to changes in the market so that they continue to be relevant and useful to global trade. With this particular revision, the ICC aims to take account of:
- The growth of the global economy and greater access to markets worldwide
- Increasing attention to security in the transportation of goods
- The need for flexibility when considering insurance coverage, depending on the type of goods and transport
- Calls from banks for an on-board bill of lading in some financed sales under the Free Carrier (FCA) rule
Changes to Incoterms 2020
This ninth revision of Incoterms® improves certain aspects of Incoterms 2010 and address issues which were not prevalent in 2010.
The main differences between Incoterms® 2020 and Incoterms® 2010 set out by the ICC are:
- The most significant change relates to the term Free Carrier (FCA). Under this term, the buyer can now instruct its carrier to issue a bill of lading with an on-board notation to the seller so that they may satisfy the terms of a letter of credit – that the goods have been physically loaded onto the vessel.
- Under the revised term Carriage and Insurance Paid (CIP), the seller is now responsible for purchasing a higher level of insurance coverage – as detailed in Clause A of the Institute Cargo Clauses. (The insurance requirement hasn’t changed for Cost Insurance and Freight (CIF)).
- Incoterms® 2020 rules recognise sellers who may use their own transport to deliver the goods and now includes arrangements for carriage with own means of transport in FCA, Delivered at Place (DAP), Delivered at Place Unloaded (DPU), and Delivered Duty Paid (DDP).
- There is a change in the three-letter name for Delivered at Terminal (DAT) to Delivery at Place Unloaded (DPU). Under DPU the goods are delivered at a named place or agreed point with that place, such a site at a factory.
- Incoterms® 2020 includes security-related requirements within carriage obligations and costs. The rules now specifically identify the import and export security requirements and whether the buyer or seller is responsible for meeting those requirements.
Incoterms® 2020 also introduces improvements to the presentation of the guidance to make it more accessible and easier to use. Including:
- More detailed explanatory notes with enhanced graphics to illustrate the responsibilities of importers and exporters for each Incoterms® rule.
- A more detailed explanation on how to choose the most appropriate Incoterms® rule for a given transaction, or how a sales contract interacts with ancillary contracts.
How the changes might affect you
The new rules will enter into force on 1st January 2020. As of this date all sales contracts should make reference to the Incoterms® 2020 rules.
Any of our customers who are International buyers and sellers should be aware of these changes. We would advise you to review your contracts to understand if the change of terms will impact you.
If you have any questions about Incoterms®, please get in touch and we would be happy to help.