The International Chamber of Commerce (ICC) has published the new Incoterms 2020, rules that define the responsibilities of buyers and sellers for the delivery of tangible goods in international trade. The terms also identify when the risk/responsibility for those goods transfer from the seller to the buyer. The new terms took effect on January 1, 2020, and can replace the last version, which is Incoterms 2010.
Incoterms—The Fine Print
Key points to remember is that Incoterms are voluntary, they are not law, and they don't replace a sales contract. Your international sales contracts should reference the Incoterms to define who is responsible for what in the transaction. Also, Incoterms reflect current trade practices, instead of creating them. And Incoterms by themselves do not address the legal Title Transfer of the cargo, a topic that should also be covered by your international sales contract.
Any Mode Terms: EXW, FCA, CPT, CIP, DPU, DAP, DDP
Ocean/Inland Waterway Terms: FAS, FOB, CFR, CIF
Which Incoterms Should Be Used for Container Shipments
Contrary to standard norms in international trade, the Incoterms 2020 version makes it very clear that traditional terms such as FAS, FOB, CFR, and CIF are not meant to be used for container shipments, when typical transfer of the container happens at the terminal instead of on board the vessel. The recommended terms for full container shipments are FCA (instead of FOB), CPT, or CIP (instead of CFR and CIF respectively). FAS, FOB, CFR, and CIF are to be used for break bulk, lose type cargo that is not shipped in containers.
DAT Becomes DPU
Incoterms 2010 Delivered at Terminal (DAT) was changed to Delivered at Place Unloaded (DPU) in the new 2020 version. This new DPU term allows the buyer and seller to handle the delivery of goods somewhere other than a terminal. This term is often used for consolidated containers with multiple consignees and is the only term that assigns the seller with the task of unloading the goods at the destination.
FCA and On-Board Bills of Lading
Under FCA, the seller is responsible for either making the goods available at its own door or dock, or at a named place. In either case, the seller is responsible for loading the goods onto the buyer's means of transport.
The problems ensued when the seller was responsible for loading the goods on a truck hired by the buyer, and not directly on the international carrier. If a Letter of Credit is being used as the payment method, banks often require the seller to present an on-board Bill of Lading before they can get paid. And an international carrier won't typically provide a seller, who did not present the goods directly to them, with such a Bill of Lading. Under the new Incoterms 2020 rules, the buyer can now instruct its carrier to issue an on-board Bill of Lading to the seller so that the seller may satisfy the terms of a Letter of Credit.
Different Levels of Insurance Coverage
Cost Insurance and Freight (CIF) and Carriage and Insurance Paid To (CIP) are the only two Incoterms that require the seller to purchase insurance for the transaction. Incoterms 2010 specified that under both terms, the seller was only required to obtain the minimum level of insurance coverage.
In Incoterms 2020, under CIP, the seller is now required to purchase a higher level of insurance coverage—at least 110% of the value of the goods as detailed in Clause A of the Institute Cargo Clauses, while the insurance requirement has not changed for CIF.
Redstone Government Consulting—Your Source for Information on International Trade Requirements
If you have additional questions about this or any other new rules which affect your organization’s international business practices, reach out to the experts at Redstone Government Consulting. Our team offers training and consulting packages to help you manage your company’s contracts, understand recent changes to regulations, and even offer strategic planning services.