International Chamber of Commerce (ICC) has been publishing Incoterms since 1930. In last decades there has always been a revision of the Incoterms coinciding with the first year of each of them: 1990, 2000 and 2010. The latest version is that of Incoterms 2020 which is expected to stay there for another decade i.e. until December 2029.
This time Incoterms 2020 have been drafted by a group, which for the first time included representatives from China and Australia, although most of the members are European. This Committee has taken into consideration the issues and suggestions coming from the 150 members (mainly Chambers of Commerce) that are part of the International Chamber of Commerce. The details of key amendments are as under:
Different levels of Insurance coverage in CIP and CIF
In CIF term, delivery of the cargo occurs at origin when goods are loaded on board the vessel, but the seller pays for ocean freight up to the named port of destination. The seller has to contract for carriage with an ocean carrier, as well as to provide the buyer with an ocean bill of lading. Formalities of custom clearance is also the responsibility of the seller.
In CIP term the risk passes at origin, but the seller pays for transportation up to a named port or place at destination and it has the flexibility of using any mode of transport.
CIF term was originally meant for bulk cargo, not suitable for containerized shipments and can only be used for waterborne transportation whereas CIP has the flexibility of using any mode of transport.
Cost Insurance and Freight (CIF) and Carriage and Insurance Paid (CIP)are the only two Incoterms that require the seller to purchase insurance in the buyer’s name. The CIF term is usually reserved for use in maritime trade and is often used with bulk commodity trades whereas CIP term is used for manufactured goods. However, the Institute Cargo Clauses (C) remained the default level of coverage, giving parties the option to agree to a higher level of insurance cover.
Now the Incoterms 2020 rules provide for different levels of insurance coverage in the CIF rule and CIP) rule. It was felt that manufactured goods (under CIP terms) tend to require a higher level of insurance as compared to bulk commodities (under CIF terms). Therefore , keeping in view the demand of international traders , the CIP Incoterms rule
now requires a higher level of cover, compliant with the Institute Cargo Clauses (A) or similar clauses which provide for more comprehensive level of insurance which is usually suitable for manufactured goods, whereas Institute Cargo Clause C would likely apply to commodities insured under CIF terms.
DAT (delivered at terminal) has changed to DPU (delivered at place unloaded):
This term was added in Incoterms 2010 which means that the goods are delivered once unloaded at the named terminal. In 2020 it was decided to change the term to DPU to remove confusion that arose in the past. In the past, DAT required ‘Delivery at Terminal (unloaded)’, however the word “terminal” caused confusion. As DAT limits the place of delivery to a terminal, in Incoterms 2020, the reference to terminal has been removed to make it more general.
DPU means,the seller delivers when the goods, once unloaded are placed at the disposal of the buyer at a named place of destination (which can now be used for all modes of transportation). The seller bears all risks involved in bringing the goods to and unloading them at the named place of destination.
FCA: option of Bill of Lading (BL) with on-board notation
FOB (free on board) should not normally be used for container shipments. This is because a seller usually loses control of the container once the container arrives at the port of export before the container is loaded. However, FOB means the seller takes all the risk and cost of the export, port terminal handling charges and loading costs/risks. Most of the parties were still using FOB terms when they should have been using Free Carrier (FCA) because the letter of credit from the bank often requires an onboard bill of lading for the seller to get paid.
Under FCA term the seller delivers the goods, cleared for export, at a named place. This can be to a carrier nominated by the buyer, or to another person nominated by the buyer.
However, if delivery occurs at any other place, the seller is deemed to have delivered the goods once their transport has arrived at the named place; the buyer is responsible for both unloading the goods and loading them on to their own carrier. FCA, unlike FOB and FAS, can be used with all forms of transport, including container traffic carried by sea or
It should be noted that the chosen place of delivery has an impact on the obligations of loading and unloading the goods at that place. If delivery occurs at the seller’s premises, the seller is responsible for loading the goods on to the buyer’s carrier.
inland waterways. The risk (of loss or damage) passes to the buyer from the seller when the goods are physically delivered to the buyer’s nominated carrier, or another party nominated by the buyer, at an agreed point on either a specific date or within an agreed period.
In order to encourage exporters of containerized goods to use the FCA terms this term has been revised in Incoterms 2020 to cater to a situation where goods are sold under FCA for carriage by sea and buyer or seller (or either party’s bank) requests a bill of lading with an on-board notation.
Therefore provisions have been made in the Incoterms 2020 to state that the buyer must instruct the carrier(shipping company or its agent) to issue a transport document to the seller stating that the goods have been loaded on board – i.e. a Bill of Lading with an ‘on board’ notation. This is the most common shipment document which is used in the letter of credit transactions to substantiate the delivery of the goods and, thereby, payment of the credit to the seller.
In the past carriers have frequently refused to issue a Bill of Lading with a notation to the seller if they have received the goods from an intermediary transport (such as a truck), instead of directly from the seller.
Usage of own transport by Seller / Buyer
Under Incoterms 2010 it was understood that all transport would be undertaken by a third – party Transport Service provider. In the updated Incoterms 2020, provision for usage of buyer or seller’s own means of transport (trucks or planes) has been allowed. So, a buyer can use his own means of transport under the FCA rule and seller under DAP, DPU and DDP Incoterms 2020.
Customs clearance – Export, Transit, and Import
Incoterms 2020 explains more precisely as to which party, seller or buyer, is responsible for carrying out customs formalities and clearance, assuming the costs and risks thereof. And the release of goods in transit is included for the first time. For the latter, the rule which is used is that the liability is assigned to whoever assumes the risk of transport to the place of delivery.
Therefore in the Incoterms EXW, FCA, FAS, FOB, CPT, CFR, CIP and wherein the risk of transport is transferred at origin (country of the seller) the liability in the customs transit clearance is assumed by the buyer; on the contrary, in Incoterms DAP, DPU and DDP the risk is passed on at the destination (country of the buyer), the seller bears the liability. This change may be significant in the Global Trade where the goods must pass through customs of some countries with complex cargo clearance procedures, prior to arriving at the customs of the importing country.
Transport security requirements
In recent years, transport security requirements have become more prevalent in international trade and Incoterms 2020 reflects such a change by detailing security requirements for each Incoterms rule. The liability as regards to security is addressed more precisely under two circumstances: transport from the country of origin to that of the destination and customs clearance formalities and procedures. For example, CPT (carriage paid to) includes a specific requirement that the seller must comply with any security-related requirements for transport to the destination.
Hopefully, these amendments will further reduce the areas of conflict/dispute regarding duties/ responsibilities and obligations of seller and buyer in Global Trade.