Trade Credit Letter of Credit Magazine Section

INCOTERMS® 2020 RULES

INCOTERMS 2020 Key ChangesIn order to lend uniformity to the subject of trade related terms infused in international trade, in 1936, the International Chamber of Commerce (ICC) came-up with Incoterms rules. Incoterms® is short for International Commercial Terms and is a registered trademark of the ICC. Their key objective is to bring consistency to the commercial and legal system that differed from country to country. Before ICC developed the Incoterms® rules, trade terms were subject to varying interpretation by different countries and that resulted in misinterpretation, dispute and legal action.   Incoterms® helps minimize these misconceptions by clearly defining the trade relevant obligations of buyers and sellers.

ICC is the originator and developer of the Incoterms® rules and it protects the name “Incoterms” and the Incoterms® logo as trademarks to help the trading community identify official and authentic ICC products and services relating to the Incoterms® rules.

Incoterms® contributed to consistency and unified interpretation of trade terms in international trade and by far are the most widely used terms by, exporters, importers, sales managers, purchasing managers, freight forwarders, customs brokers, carriers, credit professionals, insurers, trade consultants, international bankers, lawyers and governments worldwide.

There are 11 Incoterms® rules in all. Each one is represented by a three letter acronym. These fundamental set of rules that support global trade are used in over 140 countries and translated into 31 different languages. They are a voluntary code of rules that international traders can incorporate in to  their international sales contract at any stage.  The essence of these international commercial terms is to delineate the point at which the delivery of goods occur in a trade transaction and lay-out with clarity the shift of costs, risks and responsibilities from a seller to a buyer from that point onwards. (Example: who has responsibility to clear the export; who has the responsibility to pay for carriage; who bears the risk of things going wrong.) 

Incoterms® do not determine transfer of ownership or title of goods. Incoterms® do not address remedies for breach of contract. Incoterms® do not apply to service contracts. Incoterms® are not law; they are mere rules that can be voluntarily incorporated into a sales contract. The law of the land may override Incoterm rules.

Since its inception in 1936 the Incoterms® have been revisited several times to adapt to the ever-changing global commercial trade practices, markets and trends. They are now revised every 10 years by the ICC.   There are 8 previous editions of Incoterms®. The latest issue of Incoterms® is Incoterms® 2020. They are effective January 1, 2020. The complete text of Incoterms® constitutes a book of its own that is published by the ICC. Although a trader can incorporate any version of the Incoterms®, it is always advisable to cite Incoterm’s latest version (i.e. now it’s ‘Incoterms® 2020’) as the latest version embodies the most current international trade orientations. Incoterms® 2010 remains in effect for those using them.

What is New in Incoterms® 2020?

Premise for the changes made in Incoterms® 2020

The bitter truth of Incoterm rules is that more often than not, users end up selecting the wrong Incoterm for their sales contract. Users don’t fully know what the selected Incoterm rule means and just have a general idea. Or it could be that they have just done things that way in the past. ICC felt with these revisions should be made in order to help the users, who more often than not are not experts, make the right choice. The main framing of the 2020 revision was to try and help users avoid expensive mistakes when things go wrong. This time around in Incoterms® 2020 the introduction is more in a conversational tone and it is highly recommended that the user read the introduction. It provides users with a capsulation of key issues along with how to select the appropriate rule for a given sales transaction.

The explanatory note to each Incoterm 2020 rule now has been bolstered by improved graphics to help the users better comprehend and grasp the aspects of each rule. It also contains better tips for its application and issues to watch out for.  

Other than the name change of DAT Incoterms®  2010 to DPU  there are minimal substantive changes/revisions made to the Incoterms® rules in the 2020 version.  Instead an attempt has been made to make the rules easy to read in order for the users to understand them plainly and help avoid making costly mistakes. There are significant presentational changes. The content is sequenced more fittingly and presented better than before with added matrix and illustrations making it more annotative and instructive.

The Ten Articles in each Incoterms® Rule

How the 11 Incoterms® rules are laid:
In each Incoterm rule there is a ‘Guidance Note’ which is followed by 10 Articles each for the Seller and the Buyer respectively. That is, 10 articles list the seller’s obligations numbered as A1 to A10 and 10 Articles that list the Buyer’s obligations numbered as B1 to B10.  

In Incoterms® 2020 for the first time, all these A (Seller’s Obligation) and B (Buyer’s Obligation) articles pertaining to all the 11 incoterm rules are now consolidated and written in one place in the latter half of the Incoterms® 2020 rule book. This now allows the users to compare the main components of the 11 Incoterms® rules at a glance. It is in matrix form. This format can quickly assist the user in picking a particular Incoterm rule by selecting a desired delivery point for goods in the articles where risk passes from seller to buyer. It’s like a reverse search for a user to arrive at a fitting/appropriate Incoterm rule.  In earlier versions the user would have to scour through the 11 Incoterm rules individually to make such a pick.

The ten articles that are written under each of the eleven Incoterm rules have also been rearranged in such a way that they now more or less tally with the sequence of events that occur in a typical sale of goods and in order of importance. As an example in earlier versions of Incoterm rules, Articles A4 and B4 that determined ‘Delivery’ obligations for the Seller and Buyer respectively are now sequenced A2 and B2 (moved up) in Incoterms® 2020. Also, key elements such as costs are repeated in multiple articles for easier reference. Example: Individual costs are Articled A4 and B4 for paying for carriage; A7 and B7 costs for export formalities and then all these costs are consolidated and repeated in Articles A9 and B9.

So, in Incoterms® 2020 the costs and cost structures are better spelled-out than in previous versions of Incoterm rules.

Incoterm rule DAT now renamed to DPU

The previous version of Incoterms® was Incoterms® 2010. It had the following 11 Incoterms®:

(the 11 ICC Incoterms® rules are each denoted by a three letter acronym.)

  1. EX Works (EXW)
  2. Free Carrier (FCA)
  3. Carriage Paid to (CPT)
  4. Carriage and Insurance Paid to (CIP)
  5. Delivered at Place (DAP)
  6. Delivered at Terminal (DAT)
  7. Delivered Duty Paid (DDP)
  8. Free Alongside Ship (FAS)
  9. Free on Board (FOB)
  10. Cost and Freight (CFR)
  11. Cost Insurance and Freight (CIF)

The first 7 terms were for ‘Any Mode’ of transportation and last 4 were specific for ‘Sea and Inland Waterway’ transportation.

The latest version of Incoterms® (Incoterms® 2020®) still contains the same 11 terms and they still remain arranged in the same two groups i.e. ‘Any Mode(s) of transport’ and ‘Sea and Inland Waterway’ transport only. However the Incoterm Delivered at Terminal (DAT) has been renamed to Delivered at Place Unloaded (DPU).

The 11 Incoterms® 2020® now as follows:

  1. EX Works (EXW)
  2. Free Carrier (FCA)
  3. Carriage Paid to (CPT)
  4. Carriage and Insurance Paid to (CIP)
  5. Delivered at Place (DAP)
  6. Delivered at Place Unloaded (DPU)
  7. Delivered Duty Paid (DDP)
  8. Free Alongside Ship (FAS)
  9. Free on Board (FOB)
  10. Cost and Freight (CFR)
  11. Cost Insurance and Freight (CIF)

The first 7 terms are for ‘Any Mode’ of transportation and last 4 are specific for ‘Sea and Inland Waterway’ transportation. These last 4 Incoterms® are to be used when the delivery point and where the goods are carried to the buyer are both ports

The rationale behind changing the name from DAT (Delivered at Terminal) to DPU (Delivered at Place Unloaded):

The word ‘Terminal’ in DAT caused most of the confusion. In the previous version of Incoterms® i.e. Incoterms® 2010 the marked difference between Incoterm rule DAT (Delivered at Terminal) and Incoterm rule DAP (Delivered at Place) was that under DAT the seller unloaded the goods from the arriving means of transport and delivered them into a terminal. Terminal was broadly defined as a place that was either covered or not covered, which means that terminal could be any place and not just a terminal. Whereas under the Incoterm rule DAP (Delivered at Place) the seller’s responsibility ended and goods deemed delivered when the goods were placed at the disposal of the buyer ready for unloading from the arriving means of transport at a named place. Thus the primary difference between DAT and DAP was whether the goods had to be unloaded or not from the arriving mode of transportation. In order to clarify or remove the confusion DAT (delivered at Terminal) has been renamed as DPU (Delivered at place Unloaded) in Incoterms® 2020 rules.

Incoterms® rule FCA (Free Carrier) and Bill of Lading with ‘on-board’ notation

Incoterms® rule FCA (Free Carrier) was amended in the Incoterms® 2020 allowing the seller on an FCA sale to require the buyer to procure an on-board bill of lading.

Where the sale of goods requires a letter of credit for payment, the issuing bank of the letter of credit (which is typically the buyer’s bank) may seek a bill of lading (B/L) with an ‘on-board’ notation. This can pose a problem for the seller if the seller is using a FCA trade term and delivering goods (containerized) to a container consortium at a loading port where the goods will eventually be loaded onto a vessel to be transported by sea. To accommodate the need for an on-board notation Incoterms® 2020 rule FCA in its article A6/B6 now provides the option to the buyer and seller to agree that the buyer will instruct its carrier to issue a B/L with ‘on-board’ notation to the seller after loading of the goods on to a carrier. This way the seller is equipped with an on-board B/L document to claim payment from the issuing bank. (Earlier a B/L with on-board notation could only be obtained under FOB (Free on Board) term when the goods were on board a sailing vessel.)

Different Levels of Insurance Coverage in Incoterms® 2020 rules Cost Insurance and Freight (CIF) and Carriage and Insurance Paid to (CIP)

 CIP and CIF are the two rules that impose insurance requirements on the seller. Under the 2010 version of Incoterms®, the seller was required to contract for insurance only on ‘minimum cover’ as set out in Clause C of the Institute Cargo Clauses, against the buyer’s risk of loss of or damage to the goods during the carriage.

In the 2020 Incoterms® rules, the default insurance requirement now under CIP has been expanded and elevated to ‘all-risk’ cover as set out in Clause A of the Institute Cargo Clauses (Lloyd’s Market Association/International Underwriting Association). CIF remains at minimum cover which is mostly used in maritime commodity trade.

Under Incoterms® Rules FCA, DAP, DPU and DDP arrangements for carriage with own means of transport

Under Incoterms® 2020 rules a buyer or seller can use their own means of transportation to move the goods. This means that the buyer or seller can now either make a contract of carriage or simply arrange for carriage. In earlier versions it was assumed that the goods will be carried by a third-party carrier hired either by the seller or the buyer depending on which Incoterm rule was used.

Enhanced Security- Related Requirements in Incoterms® 2020

Security related requirements with carriage have burgeoned with the turn of the century mainly due to increased risk of terrorist activities. Buyers and sellers are now faced with extra costs that are ultimately buried into carriage costs. These costs are by way of Terminal Security Fee, Security Costs related to Export and Import Clearance. In Incoterms® 2020 security related obligations for the buyer and seller are added to articles A4/B4 and A7/B7. They are then further clarified in the Article related to costs i.e. A9/B9.

Author: Puru Grover © Credit Guru Inc | CreditGuru.com

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