Incoterms 2020 has been published by the ICC. It will come into force from 1st January 2020. However there is good deal of flexibility surrounding it. Any contract entered into after 1st January 2020 can make use of the Incoterms 2020. However, it is not compulsory. If the contracting parties agree, they can continue using Incoterms 2010. Similarly if the parties agree, they can start using Incoterms 2020 even before 1st January 2020 by amending current contracts.
So, what is the big difference between Incoterms 2010 & 2020? Setting to rest various expectations and speculations on what revisions would be done (Emerging trends – Marine cargo insurance), the version which has come out has the same number of Incoterms as in 2010 i.e. 11. Any changes in the 11? Yes, DAT is replaced or modified to DPU ( Delivered at Place Unloaded), which we will discuss in later paragraphs.
Broadly, the changes have been made to recognise the following:
Increased use of multimodal transportation
Satisfy some of the demands from the Banking industry
Provide flexibility in terms of insurance coverage
Clearer allocation of costs between seller & buyer with specific attention given to expenses on security during transit
As in the case of Incoterms 2010, the multimodal incoterms are grouped first and then the last 4 are pure maritime incoterms.
EXW – Ex Works
FCA – Free Carrier
CPT - Carriage Paid To
CIP - Carriage and Insurance Paid To
DPU - Delivered at Place Unloaded
DAP- Delivered At place
DDP - Delivered Duty Paid
FAS - Free Alongside Ship
FOB - Free On Board
CFR - Cost and Freight
CIF - Cost Insurance and Freight
The term DAT ( Delivered At Terminal) appearing in Incoterms 2010 referred to delivery including unloading at any quay, container yard, warehouse or named terminal up to which point all expenses will be to seller’s account while customs duties and taxes would be paid by the buyer. Incoterms 2020 recognises the fact that at times, deliveries need to be made at a place beyond a terminal to suit buyer’s requirement, like in the case of a project site inland. DPU (Delivered at Place Unloaded) replacing DAT serves this purpose — delivery including unloading at a named place beyond a terminal.
This change recognizes the need to protect the seller from unpleasant cost surprises and also to meet the requirements of buyer’s banks.Many a time, for containerised shipments, the incoterm FOB is/was used. Typically when the container is handed over at the CFS, the seller ceases to have control over it, but since the incoterm FOB was used, any loss/expense before the container is loaded on board the vessel would fall on the seller. The right incoterm to be used for such shipments would be FCA, wherein seller’s responsibility would cease on delivery to the CFS, customs cleared for export. The flip-side was if the sale contract was under Letter of Credit, often the banks would insist on an ‘onboard Bill of Lading’, something which would not be available with the seller. Incoterms 2020 provides that the buyer can instruct the carrier to handover the onboard Bill of Lading to the seller after the container has been safely loaded on board the vessel, in case of FCA incoterms, if needed. The seller in turn is obliged to hand over the Bill of Lading to the buyer. This however, does not mean that the seller assumes any liability for the contract of carriage.
Incoterms 2010 cast an obligation on the seller to arrange transit insurance in cases where the incoterms used were CIP or CIF. The insurance however needed to be at the minimum level only i.e. Institute Cargo Clauses – C, though both parties could agree to a wider insurance coverage. Recognizing that CIF is to be used more in case of non-containerised cargo, typically bulk cargo and CIP for multimodal container shipments, the minimum level of insurance coverage has been distinctly defined under Incoterms 2020. In case of CIF incoterm, the minimum insurance cover to be arranged by the seller will still be Institute Cargo clauses -C. However, in case the CIP incoterm is used, the seller is obliged to arrange insurance cover on Institute Cargo clauses -A basis. This works to the benefit of the buyer. The buyer & seller may mutually agree to a lower level of insurance cover too.
Incoterms 2010 carried the assumption that there was always a third=party carrier involved in transportation, arranged by the seller or the buyer. Reality is that often in case of FCA,DAP, DPU & DDP, the seller/buyer uses their own transportation for some of the transit legs. Incoterms 2020 acknowledges this fact and allows for usage of own transportation, the language used being, ” arrangement of carriage or making a contract of carriage”.
The general principle followed under Incoterms as regards costs, has always been that till delivery, seller is responsible for all costs and the costs after delivery become the buyer’s responsibility. Notwithstanding this, there were often disputes as to who was responsible for certain costs. Incoterms 2020 attempts to address this by providing under each Incoterm, a complete list of costs and whose responsibility it would be — seller or buyer.
Transport security has become increasingly necessary and crucial. Eg. X-ray screening of containers. These involve costs and if not carried out casts a risk/responsibility on the party not complying withe same. Incoterms 2020 recognises this and lists out the security-related obligations of the parties with their attendant costs being shown under the list of costs discussed earlier.
Detailed,yet simple explanatory notes have been provided for each Incoterm, spelling out when they should be used, at what point risk transfer takes place and how the costs are allocated.
Let’s wait and watch how the new Incoterms pan out. As of now, still there is a slight haze surrounding the new Incoterms ……..possibly the ICC wanted it this way to generate hype, curiosity & debate.