Incoterms® (or international commercial terms) designed to assist traders when goods are sold and transported. Published by the International Chamber of Commerce, the terms clearly communicate the costs and risks associated with the transportation and delivery of goods.
The ICC publishes an updated set of Incoterms every ten years and just released Incoterms® 2020 in early October, which will go into force on January 1, 2020.
There are basically two ways of looking at Incoterms for most buyers and sellers:
- First is looking at the rules as they’re written and including them in your company's terms of sale. What term should our company use when buying or selling to minimize costs and risks? The rules are pretty straightforward, and taking them as they are can be an efficient way to define the terms of a transaction.
- Second is interpreting the rules. Do both parties understand and interpret them the same way? What happens if one party does not live up to their obligations? The interpretation of these straightforward terms, and the impact of any changes to the terms, is where Incoterms get complicated.
While the industry will likely be publishing reams of articles and blog posts interpreting and postulating how the new terms should be applied, the best source of information about the terms, are the terms themselves, which can be found directly on the ICC’s website.
In fact, the biggest initiative between the last version of the terms in 2010 and this most current version has been to clarify and support buyers and sellers toward choosing the right terms for their sale contract.
This has resulted in new expanded Explanatory Notes for each term, along with other supportive changes to emphasize the importance of choosing the right term.
Other changes between the 2010 version and the new Incoterms® 2020 include:
- Bills of lading with an on-board notation and the FCA Incoterms rule
- Costs, where they are listed
- Different levels of insurance coverage in CIF and CIP
- Arranging for carriage with seller’s or buyer’s own mean of transport in FCA, DAP, DPU, and DDP
- Change in the three-letter initials for DAT to DPU
- Inclusion of security-related requirements within carriage obligations and costs
- Explanatory Notes for Users (formerly Guidance Notes)
While the Incoterms® 2020 document is the best source for in depth information on each of these changes, two changes worth expanding on are:
1. The rule DAT Delivered at Terminal (DAT) has been renamed Delivered at Place Unloaded (DPU)
In Incoterms® 2010, DAT (Delivered at Terminal) means the goods are delivered once unloaded at the named terminal. The feedback was that users wanted an Incoterm that allowed delivery at not just a terminal.
For example, a capital equipment manufacturer might agree to deliver at the site of the factory, unloaded.
The "unloaded" part is what would make someone choose the DPU Incoterm versus the DAP Incoterm.
2. For Carriage and Insurance Paid (CIP), the level of freight insurance provided is now Institute Clauses (A), and not the lower level Institute Clauses (C)
For Cost Insurance and Freight (CIF), the level of freight insurance provided has remained unchanged at Institute Clauses (C).
The Incoterm CIP (Carriage and Insurance Paid to) means that the seller delivers to the carrier, but then pays for the carriage and insurance to the named destination. CIF (Carriage Insurance and Freight) is the same, except that it can only be used for maritime transport (delivery is onto a ship and the destination needs to be a port).
Under Incoterms® 2010, the seller is obliged to provide insurance for the buyer that is equivalent to Clause C (Institute of Cargo Clauses). This is a basic level of insurance which typically might be suitable for bulk commodity cargoes but may not be appropriate for manufactured goods.
In ICC Incoterms® 2020, CIF keeps the same insurance requirements (Clause C), but CIP has increased the insurance required to Clause A (Institute of Cargo Clauses).
The reasoning behind this is that CIF is more often used with bulk commodity trades and CIP (as a multimodal term) is more often used for manufactured goods.
If you have more detailed questions about the new version of Incoterms, reach out to our experienced professionals – they are well-versed in the correct use of Incoterms® 2020 and keep current with the ever-evolving world of international trade.
Explaining Incoterms®. It's what we do.
Information provided by: Freight Dept. - Cole International