INCOTERMS are standard trade definitions that define responsibilities for the delivery of goods sold internationally and identify when the risk of cargo loss transfers from the seller to the buyer. January 1st the International Chamber of Commerce’s 2020 version of INCOTERMS went into effect. What’s changed, and how does it impact business practice?
First, it’s important to note that INCOTERMS rules are voluntary and don’t replace the important information included in a sales contract. For example, INCOTERMS don’t define when title transfer takes place or describe payment methods, obligations and terms or even applicable law. These factors must be agreed to in a sales contract or other document. INCOTERMS provide a short-hand way of describing what costs and responsibilities are included in an international selling price.
Key Changes
The changes that were made to the 2020 version of the rules are modest but improve clarity and reflect today’s international business practices.
1) DAT becomes DPU
Delivery at Terminal has been replaced with Delivered at Place Unloaded. The revised rule allows for more flexibility in the delivery location. DPU is a great solution for situations where an ocean container includes freight for multiple consignees. If the INCOTERMS is DPU, the seller is responsible for both delivery and container unloading.
2) Cargo insurance levels increase
The CIP rule now requires that a seller purchase a higher level of cargo insurance than in the past – coverage to at least 110% of the value of the goods. Under CIF terms, the lower amount of insurance may still be provided.
3) Security costs now considered
In today’s global environment, cargo security requirements can be extensive and expensive. The 2020 INCOTERMS spell out who is responsible for these charges.
4) FCA and On-Board Bills of Lading
Under this term, the seller is responsible for making the goods available at its own premises or at a named place. In either case, the seller is responsible for loading the goods on the buyer’s transport. In the past, problems occurred with this term when the payment method was a letter of credit because banks often require the seller to present an onboard bill of lading. 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, FCA allows the parties to agree in the sales contract that the buyer will instruct its carrier to issue a bill of lading with the on-board notation and provide it to the seller.
Recommendations
As a general rule we encourage businesses to negotiate terms that enhance their flexibility and control. For buyer’s, the FCA term may be most advantageous as the buyer controls the selection of carrier and cargo routing and the amount of freight expense. For sellers, the CPT or DPU terms may be most advantageous.
Now is a great time to review, validate and update the INCOTERMS rules your business is currently using.
· Analyze the most appropriate INCOTERMS rule for your situation.
· Incorporate that INCOTERMS into your buying and selling contacts.
· Compare invoice values with the INCOTERMS rule being used, confirming which costs are already included in prices.
· Verify that cargo insurance arrangements are appropriate for your needs.
· Verify that cargo security costs are in line with your current practice.
Want a bit more information? We’ve created an easy to understand guide to the basics of INCOTERMS.
For further information or to discuss your specific situation, reach out to us at any time. We’re available online at www.bakerlcs.com, or phone us at (312) 971-0680. The 2020 INCOTERMS book is available for purchase at www.iccwbo.org.
The Incoterms® Rules are protected by copyright owned by ICC. Further information on the Incoterm® Rules may be obtained from the ICC website at www.iccwbo.org. Incoterms® and the Incoterms® 2020 logo are trademarks of ICC. Use of these trademarks does not imply association with, approval of or sponsorship by ICC unless specifically stated above. “