UNDERSTANDING INCOTERMS 2020

Trade between people and countries is as old as human history and sea routes connected the first civilizations in Mesopotamia and around the Mediterranean.

INCO terms means International Commercial Terms. These are standard trade definitions mostly used in international sales contracts. First version was introduced by ICC in 1936. The Incoterms or International Commercial Terms are a series of pre-defined commercial terms published by the  (ICC) relating to International Commercial Law.

Incoterms inform sales contracts defining respective obligations, costs, and risks involved in the delivery of goods from the seller to the buyer.

The Incoterms 2020 which for the first time have been joined by 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 that are part of the International Chamber of Commerce.

• There were only 6 Terms in the first introduction. INCO Terms 2010 is the latest version
• In last decades there has always been a revision of the Incoterms coinciding with the first year of each of them: 1990, 2000, 2010.

Incoterms 2020: Main Changes

DPU: renaming of DAT

The only new Incoterm is DPU (Delivered at Place Unloaded), which replaces DAT (Delivered At Terminal) from the 2010 edition.

DPU is the only Incoterm in which the goods are delivered unloaded at the place of destination. In the Incoterms 2020 a new Incoterm DPU (Delivered at Place Unloaded) is created replacing the DAT (Delivered at Terminal). With DPU, there are no restrictions on the named place – for example it can be a transport hub, a warehouse or the buyer’s depot. The seller's responsibility extends to arranging carriage and delivering the goods, unloaded from the arriving conveyance, at the named place. Risk does not transfer from the seller to the buyer until the goods have been unloaded at the named place.

FCA: option of Bill of Lading (BL) with on-board notation

In the Incoterms 2020 version, this option is specified, for maritime transport, so that the buyer may instruct the carrier (shipping company or its agent) which has been contracted in order to issue a Bill of Lading (B/L – Bill of Lading) on behalf of the seller with the annotation of “aboard” (on-board), which specifies that the goods have been loaded aboard the ship. This is the most common shipment document which is used in the letter of credits transactions in order to substantiate the delivery of the goods and, thereby, payment of the credit to the seller.

CIP and CIF: different coverage of transport insurance

In Incoterms CIP the seller is under the obligation to take out under contract transport insurance in favor of the buyer with extensive coverage, which corresponds to Clause A of the Institute Cargo Clauses (IUA/LMA). Nevertheless, the parties may agree to take out insurance which offers reduced coverage (Clause C of the Institute Cargo Clauses).

In Incoterms CIF the seller is only under the obligation to take out under contract insurance with minimum coverage, which corresponds to Clause C of the Institute Cargo Clauses (IUA/LMA). This difference with CIP is justified on the basis that as the CIF is commonly used for bulk maritime transport (raw materials, minerals etc.) whose price per kilo is very low and the requirement of insurance with maximum coverage which would drive up considerably the policy premium, making it much more expensive, and which is detrimental to margin for negotiation of the sellers.

Customs clearance: export, transit and import

Incoterms 2020 more precisely explains which party, seller or buyer, is responsible for carrying out customs formalities and clearance, assuming the costs and risks thereof. 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. This change may be significant in international sales wherein the goods must pass through customs of complex countries prior to arriving at the customs of the import country.

Transport security requirements

In the Incoterms 2020, liability as regards 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 (export/transit/import).

In addition to these changes, Incoterms 2020 introduces other improvements to facilitate the understanding and use of the Incoterms rules. Among them:

·        More simple language, with less legal content

·        More detailed explanatory content.

·        Further breakdown in cost allocation.

·        The relationship between Incoterms and International Commercial Contracts.

·        Comparison of obligations between the 11 Incoterms.

Final Note: Parties adopting Incoterms should be wary about their intention and variations. Making additions or variations to the meaning of a certain term should be carefully done as parties' failure to use any trade term at all can produce unexpected results.

 copied & revised by Percy Jal Engineer

*reference Practical Guide to Incoterms 2020 ____________________________________________________