The ICC has released the Incoterms® 2020 rules, which update the previous version: Incoterms® 2010. The ICC's aim has been to bring the rules in line with modern trade practices and requirements, whilst also making them easier to use. The Commercial team has produced an article which:
- discusses the key changes that will come into effect on 1 January 2020; and
- provides a general reminder of best practice when using Incoterms® rules.
The new Incoterms® 2020 come with a variety of changes to both format and substance.
The changes to format aim to provide a more accurate and efficient use of Incoterms®. For example, the order of the articles in each Incoterm has changed to give the articles relating to delivery and risk more prominence.
The changes to the substance of the Incoterms® seek to bring the Incoterms® in line with the ever-changing nature of sale of goods transactions by incorporating provisions that are better suited for the operational realities of global trading.
FCA and transport documentation
Under Incoterms® 2010 where goods are sold FCA for carriage by sea, delivery is completed when the goods are delivered by the seller to the carrier and are available for loading on-board the vessel. The seller often cannot obtain an on-board bill of lading from the carrier as these can only be issued by the carrier once the goods have been loaded on board the vessel. The ICC identified that there is often a market need to obtain bills of lading in such circumstances. FCA has been amended to provide that if the parties agree, the buyer, at its cost and risk, must instruct the carrier to issue to the seller a transport document (e.g. a bill of lading with an on-board notation) stating that the goods have been loaded, which the seller must then provide to the buyer.
Buyer and Seller's costs
In addition to the buyer and seller's respective costs being set out in the relevant article of each Incoterms® rule, each Incoterms® rule now includes a full summary of all the costs allocated to the buyer and the seller.
CIF and CIP cargo insurance
Incoterms® 2020 extend the level of cargo insurance cover which a seller must obtain when trading under the CIP Incoterms® 2020 rule. Under Incoterms® 2010, sellers had to obtain cargo insurance cover which was at least equal to the cover provided under Clauses C of the Institute Cargo Clauses (LMA/IUA) which, subject to certain exclusions, provide cover for specific risks. Under Incoterms® 2020, when using the CIP Incoterms® rule sellers will need to obtain cargo insurance cover which complies with Clauses (A) of the Institute Cargo Clauses (LMA / IUA) which, subject to certain exclusions, cover "all risks". The right for the parties to agree to a higher or lower level of cover is retained.
DAT becomes DPU
The ICC has:
- changed the initials of DAT (Delivered at Terminal) to DPU (Delivered at Place Unloaded); and
- has also moved the DPU rule behind the DAP rule as delivery under DAP happens earlier than under DPU.
The ICC have also amended the wording of DPU - "terminal" is no longer the place of delivery. This has been replaced with "a named place of destination". Practically this means that the place of destination could be any place i.e. not just a terminal as was the previous inference. It is recommended that the named place of destination is a location where goods can be unloaded.
Third party carriers?
Under Incoterms® 2010, the common assumption was that good transported FCA, DAP, DAT (now called DPU) or DDP would be transported from the seller to the buyer by a third party carrier engaged by one of the parties. The ICC identified that in practice this did not always happen as sellers with their own transport means would prefer to use their own transport rather than instruct a third party carrier. Helpfully, the position is clarified in Incoterms® 2020 such that FCA, DAP, DPU allow the Seller to either contract or arrange for the transport of goods.
Incoterms® 2020 place an increased focus on the security risks associated with the transportation of goods. Incoterms® 2020 expressly call out security-related requirements placed upon buyers and sellers. This is a shift from Incoterms® 2010 where security related requirements were not given prominence and were considered to be part of the package of general authorisation requirements.
Incoterms® Best Practice
When used correctly, Incoterms® can be extremely beneficial to businesses involved in the sale of goods, both domestically and internationally. They clearly define and set a universal standard for certain obligations on sellers and buyers. We have set out below four handy reminders for when using Incoterms®:
1. Choosing the right Incoterm
You should carefully consider which Incoterm best suits the circumstances surrounding the agreement. Cost should not be the determining factor. You should consider, amongst others, the following:
- the type of goods being sold and how best they will be transported e.g. sea, air, rail;
- the position of each party and whether they will be able to comply with the obligations imposed on them under the chosen Incoterms® rule; and
- whether a letter of credit is being used for payment.
2. Drafting with Incoterms®:
Best practice: "[Incoterm], [Named port, place or point], Incoterms® 2020"
For example, EXW, One St Peter's Square, Manchester, UK, Incoterms® 2020
Once you have identified the best Incoterms® rule for your transaction, include the specific location where the goods should be delivered along with the version of the Incoterms® to which you are seeking to rely. It is better to be as precise as possible when identifying the specific location to ensure the obligations in the Incoterm bite. We also recommend including the version of the Incoterms® rule you are seeking to rely on to remove any ambiguity/scope for challenge.
3. Title to the goods
Incoterms® rules do not deal with the position on the title to the goods nor are they a contract of sale. Incoterms® reflect trade practices and are no substitute for specific provisions.
4. Varying Incoterms
Incoterms® are flexible and therefore can be varied. However, you should approach varying an Incoterms® rule with caution to ensure you do not inadvertently create conflicting obligations. You should:
- make clear which part of the relevant Incoterms® rule is being varied and how it is varied;
- assess the impact on the agreement and the other obligations in the Incoterms® rule; and
- consider whether another Incoterm could better reflect the parties obligations.
The Incoterms® 2020 are effective from January 2020. Businesses should consider Incoterms® 2020 when negotiating contracts for the sale of goods, and consider any amendments to existing contracts that are required.
Please get in touch with our Commercial team to discuss Incoterms® rules or any other aspect of contracts for the supply of goods.