Incoterms are fundamental to international trade by providing a set of contract terms for freight delivery. The ICC (International Chamber of Commerce) publishes these incoterms every ten years that define the responsibilities of buyers and sellers while delivering goods in the global market. They also specify when the risk is shifted from the seller to the buyer of the product. The authority of incoterms lies with ICC, and they can decide to publish new terms any time they feel is necessary for international trade practices.
Understand in detail the latest incoterms and changes they bring. Image source: canva.com
ICC has recently published the incoterms latest for 2020, which will be effective immediately from the start of 2020 (January first). You can check them here. This suggests that if a contract is entered after, the latest incoterms will be applied unless stipulated otherwise. The existing incoterm users can keep using incoterms 2010; the change to the incoterms latest is presumed to take within twelve to 18 months. It is essential to be aware of the latest incoterms as this ensures correct usage of terms for business purposes.
- DAT is changed to DPU
Delivered at Terminal stands for DAT and has been replaced by Delivered at Place Unload, also known as DPU. This is because, at oftentimes, buyers/sellers require an incoterm that enables delivery somewhere other than a terminal. The substance of incoterm, however, remains the same. Therefore, if someone uses a DAT, they can promptly shift to DPU.
- Costs are clarified
The precise detail of cost allocation between buyers and sellers has been defined. This is to solve the problem of increasing disputes about the distribution of costs reported by users. According to the latest incoterm 2020, the seller is responsible for the expenses incurred and involved until the products’ delivery, after which the buyer becomes responsible for the same.
- Change of insurance in CIP/CIF
The CIP, acronymous to Carriage and Insurance Paid to, indicates that the retailer conveys the consignment to the carriers. Furthermore, the former also has to compensate for the carriage and insurance to the named destination. The Carriage Insurance and Freight (CIF) are related but can only be used for maritime transport where the delivery is onto the ship, and the destination address is another port. In accordance with the latest ICC Incoterm, CIF has kept former insurance requirements which is the Clause C. However, CIP has raised the insurance requirement to the Institute of Cargo Clauses- Clause A. This is majorly due to types of goods, CIF is usually used for bulk commodities, and CIP is used for printed products and necessitates better insurance.
- Security Requirements
Transport security requirements have become more stringent than ever. If they are not followed correctly, they raise the risk factor and even the expense incurred. Incoterm 2010 didn’t focus on security requirements, but the latest incoterms emphasize security obligations.
- Seller/Buyer using own transport
Incoterm 2010 doesn’t administer the transportation of goods. It is considered to be provided by a third-party transmitter and not the buyer or the seller. However, Incoterm 2020 stipulates that in the case of FCA incoterm, the buyer is responsible for managing the carriage and acquiring the same costs.
- FCA, FOB, and Bills of Lading
FOC is customarily used for container freights, and in doing so, a seller carries some jeopardy. Typically a trader loses control over the freight as soon as it arrives on the port, yet the seller is taken responsible until the cargo is loaded on the ship. Consequently, this puts the seller in a dubious situation.
For instance, if a container is broken during the stacking process or damaged before loading, the seller is required to bear the cost of damage. This led to various complaints by sellers as the entire process is not controlled by the seller.
The solution to this issue is using incoterm FCA. Nevertheless, the traders oftentimes want to secure payments by letter of credit and require an onboard bill of lading. A trader using FOB uses this in lading, but the FCA seller has a slight likelihood of using the bill of lading. A more permanent solution to the obstacle would be to eradicate the need for a bill of lading.
- Improvement in Presentation
This is introduced in incoterms 2020 to facilitate better understanding and usage of incoterms. Some of the major points covered under this are:
- Easy to understand language with minimal legal content
- More detailed and explanatory content
- Proper breakdown in price allocation
- Comparison of obligations between 11 incoterms
The final set of changes to incoterms 2020 relates to how the terms are organized and described in incoterm 2020.
It is crucial to understand that incoterms are voluntary, and they are not a replacement for sales documentation. If a buyer and seller chose to follow an earlier set of incoterms or completely let go of incoterms and mention all the responsibilities within their rights.