Incoterms 2020 – The Reality

In June of 2019, I wrote an article about what changes we could expect to see when Incoterms 2020 would be released.  I was wrong.  Everyone was wrong.  Instead of sweeping changes to Incoterms that we’ve seen in past releases, the changes made to this decade’s version are relatively minor.  The main difference, as you’ll see, comes in the organization of the way the terms are delivered.

Let’s dig in.

First, an update was made to the FCA rule regarding bills of lading.  Incoterms 2020, for the first time, makes a provision for the tender of an on-board bill of lading by the seller.  Under FCA terms, the seller loads the buyer’s carrier.  This created a problem where the bill of lading belonged to the buyer, but the seller needed to submit it to the bank issuing a letter of credit in order to get paid.  Now, under Incoterms 2020, the buyer can instruct the carrier to issue a transport document to the seller that they can submit to the bank issuing the letter of credit and can then receive payment.  Since a letter of credit is usually used in a transaction where there isn’t an established relationship between buyer and seller, this may not fix all the issues.  If the buyer isn’t willing to instruct his carrier to issue the necessary document, the seller will still be without a document to present to the banks.  Hopefully this change will remedy some of the issues involved.

Second, the levels of insurance required by CIF and CIP incoterms have changed.  As a reminder, these are the only two Incoterms that require any level of insurance at all.

Under both Incoterms rules, the insurance must:

  1. Be with “underwriters or an insurance company of good repute”
  2. Cover the goods from the point of delivery to at least the point of destination
  3. Be for at least 110% of the contract price
  4. Entitle the buyer to claim directly from the insurer.

Under CIF Incoterms, the seller is required to obtain insurance only on minimum cover complying with Institute Cargo Clauses C or similar clause, that is “named risks” cover, where only risks expressly listed in the policy are covered.  If the buyer wants more insurance protection than what Clause C requires, he/she should agree on this with the seller or arrange for their own separate insurance policy.

Under CIP incoterms, the seller is required to obtain an “all risks” policy where cover is assumed unless excluded by the policy, that is, the cover provided by Clause A of the Institute Cargo Clauses.

Third, DAT has been renamed to DPU.  The old Delivered at Terminal (DAT) incoterm was very misnamed in that it intended that goods be delivered at a terminal, but really that could be any place like a quay, container yard, warehouse, transport hub, etc.  This misnomer resulted in a change in name in Incoterms 2020 to Delivered at Place Unloaded (DPU).  The only difference between the DPU rule and the DAP rule is that delivery under DPU only occurs once the goods are unloaded, by the seller, at the named place of destination.  DPU is now the only incoterm that requires unloading by the seller at the buyer’s destination.  This means that if damage to the goods were to happen during the unloading process, the risk lies with the seller.  The cost of the unloading operation is also the seller’s responsibility.  If the seller is unable, for whatever reason, to unload the goods at the buyer’s destination, the seller should consider whether DAP is a more appropriate rule to use.

Fourth, Incoterms 2020 has provided us with some updates to security-related obligations.  For example, when the buyer is responsible for arranging carriage, the seller still has the responsibility to provide the buyer with information including transport-related security requirements.  When the seller is performing any portion of the carriage, he is responsible for complying with any transport-related security requirements up to delivery or to the destination, depending on the incoterm selected.  Both parties are responsible for helping the other with security clearances related to import and export procedures.

Finally, the last change to Incoterms 2020 concerns the organization of the responsibilities of the parties for each term.  The responsibilities have been divided into 10 main categories, and within each of these categories, the A term defines the seller’s obligations, and the B term defines the buyer’s obligations.  The ten categories are as follows:

A1/B1:  General obligations
A2/B2:  Delivery/Taking delivery
A3/B3:  Transfer of risks
A4/B4:  Carriage
A5/B5:  Insurance
A6/B6:  Delivery/transport document
A7/B7:  Export/import clearance
A8/B8:  Checking/packaging/marking
A9/B9:  Allocation of costs
A10/B10:  Notices

While this seems to be a very efficient way to organize all the responsibilities involved with Incoterms, some of them are the same for every rule, so it seems redundant.

As a reminder, Incoterms 2020 do not officially go into effect until January 2020.  Your company can switch over to the new version of Incoterms at any time after that date, but there is no rush to do so on January 1st.  You do want to make sure that you specify which version of Incoterms you’re using.  For example, your documents may read “FCA Baton Rouge, LA Incoterms 2020.”

For more information on Incoterms, please visit the website for the International Chamber of Commerce at https://iccwbo.org or e-mail me directly at Bonnie@BraumillerConsulting.com.  I’m happy to help answer any questions that you may have.  Additionally, we offer Incoterms 2020 training courses and I’ll be speaking on Incoterms 2020 at the Spring ICPA Conference.