Incoterms® 2020: The Terms They Are A-Changin’
On January 1, 2020, certain substantive changes to the international shipping terms known as Incoterms® went into effect.
Incoterms® are a set of standard trade abbreviations that are published by the International Chamber of Commerce (“ICC”) and commonly used in international commercial contracts. They describe the obligations and allocations of risk and cost between seller and buyer, particularly as it relates to the delivery of product.
The ICC first published a set of standard trading terms in 1936 and has been periodically updating them. In recent history, those revised editions have been published every ten years. The most recent edition, Incoterms® 2020, which updated Incoterms® 2010, went into effect on January 1, 2020.
According to the ICC, the “Incoterms® 2020 rules take account of the increased attention to security in the movement of goods, the need for flexibility in insurance coverage depending on the nature of goods and transport, and the call by banks for an on-board bill of lading in certain financed sales under the FCA [Free Carrier] rule.” Incoterms® 2020, International Chamber of Commerce (ICC), Foreword ¶3.
Key Changes in Incoterms® 2020
In addition to improved explanations and presentation, including additional Explanatory Notes and a reordering of terms to emphasize delivery and risk, Incoterms® 2020 incorporates the following key substantive changes from Incoterms® 2010:
On-board notation on bills of lading for FCA deliveries. Under the new FCA (Free Carrier) shipping term, a buyer and seller can agree that the buyer will instruct its carrier to supply an on-board bill of lading to the seller once the products are loaded, which the seller will then tender to the buyer. This change was precipitated by demands by financial institutions for bills of lading where a letter of credit is in place.
Listing of costs. For quick reference, Incoterms® 2020 groups all costs associated with each shipping term under A9/B9 of such term, so that seller and buyer “can now find in one place all the costs for which it would be responsible under that particular Incoterms® rule.” Incoterms® 2020, at 14. One can also still find costs under the applicable articles of each shipping term.
CIF and CIP insurance coverage levels. In Incoterms® 2010, both CIF (Cost Insurance and Freight) and CIP (Carriage and Insurance Paid To) required the same level of insurance coverage. In Incoterms® 2020, the CIP insurance coverage requirement is higher, while the CIF insurance coverage requirements stay the same. Now, CIP deliveries require minimum insurance coverage that complies with Clause (A) of the Institute Cargo Clauses, covering “all risks”. Incoterms® 2020, at 15. As before, CIF requires minimum insurance coverage that complies with Clause (C) of the Institute Cargo Clauses. As is always the case, the parties can agree by contract to higher or lower coverage levels. Id.
Transportation by own transport. Prior versions of Incoterms® assumed that a third party carrier would be enlisted to transport products from seller to buyer. Incoterms® 2020 now takes into account situations in which buyers and sellers use their own transport under shipping terms FCA (Free Carrier), DAP (Delivered at Place), DPU (Delivered at Place Unloaded) and DDP (Delivery Duty Paid).
Replacement of DAT with DPU. The three-letter abbreviation for DAT, standing for “Delivered At Terminal”, changed to DPU (Delivery at Place Unloaded) under Incoterms® 2020. The purpose of this change was to remove the reference to “terminal” to eliminate confusion and make the term more general.
Security requirements. Incoterms® 2020 incorporates express security obligations into articles A4 (carriage) and A7 (export/import clearance) of each shipping term and lists costs associated with new and existing security obligations in A9/B9 of each shipping term. The more prominent placement of these security obligations within articles related to transport was intentional, “connected as they are to carriage requirements”. Incoterms® 2020, at 16.
How To Use Incoterms® 2020
Incoterms® are not rule of law, but are an agreed set of principles created by the ICC. As such, to be used, the parties must agree to them in the contract for the sale of products between the parties. The ICC advises that, for clarity, parties should refer explicitly to Incoterms® 2020 (e.g., refer to the specific year of publication) when drafting contract provisions.
What Incoterms® Do Not Cover
While Incoterms® are a helpful and widely-used convention for shipping and delivery, Incoterms® are not a substitute for a contract governing the sale of products, as the Incoterms® do not cover the specifications of the product sold, the payment terms and price, the remedies for breach, the imposition of tariffs, export controls issues, force majeure, or intellectual property rights, among other things. As such, it is important that the parties enter into a contract to clearly set forth the governing terms of the sale of the product, including, but not limited to, the Incoterms® upon which the product will be delivered.