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UPDATES ON MAJOR CHANGES IN INCOTERM 2020



INCO Terms are set of rules, published by the International Chamber of Commerce to govern trade worldwide. The full meaning of INCO Term is International Commercial Terms. Incoterms prevent confusion in foreign trade contracts by clarifying the obligations of buyers and sellers. Parties involved in domestic and international trade commonly use them as a kind of shorthand to help understand one another and the exact terms of their business arrangements. Some Incoterms apply to any means of transportation; others apply strictly to transportation across water. The ICC developed Incoterms in 1936 and updates them periodically to conform to changing trade practices. Because of these updates, contracts should specify which version of Incoterms they use—e.g., Incoterms 2020 (the latest version). Trade terms used in different countries may appear identical on the surface, but they can have different meanings when used domestically.

In last decades there has always been a revision of the Incoterms coinciding with the first year of each of them: 1990, 2000, 2010. The latest version is that of Incoterms 2020 which is expected to be in effect for a decade, until December 2029. The Incoterms 2020 have been prepared by a Drafting Group, 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 (mainly Chambers of Commerce) that are part of the International Chamber of Commerce.
 Some of the new issues and changes that have been considered in the meetings of the Drafting Committee and, therefore, have been introduced in the new edition of the Incoterms 2020 are:

DPU: renaming of DAT
In the Incoterms 2020 a new Incoterm DPU (Delivered at Place Unloaded) is created replacing the DAT (Delivered at Terminal). This change of acronyms is a simple renaming given that the obligations and functions of both terms are the same. DPU is the only Incoterm in which the goods are delivered unloaded at the place of destination. The change of name is substantiated as the goods cannot only be unloaded at a transport terminal or infrastructure (port, airport, dock etc.) but likewise at any other point in the destination country which has facilities for the unloading of the goods from the means of transport, such as for example a factory or warehouse.

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 favour 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. In either event, just like in Incoterms CIP the parties may agree to take out insurance which offers broader coverage (Clause A of the Institute Cargo Clauses) which will be compulsory, if the payment of the sale is made by means of a letter of credit.

Customs clearance: export, transit and import
In Incoterms 2020 is more precisely explained which party, seller or buyer, is responsible for carrying out customs formalities and clearance, assuming the costs and risks thereof. And 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. Therefore in the Incoterms EXW, FCA, FAS, FOB, CPT, CFR, CIP and CIP wherein the risk of transport is transferred at origin (country of the seller) the liability in the customs transit clearance is assumed by the buyer; on the contrary, in Incoterms DAP, DPU and DDP the risk is passed on at the destination (country of the buyer), the seller bears the liability. 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).
During the transport of the goods the security liability is assumed by the party who executes the carriage of goods contract:  Seller (CPT, CFR, CIP, CIF, DAP, DPU and DDP) or buyer (EXW, FCA, FAS and FOB).  As customs clearances are concerned, the safety liability lies with the party which must undertake the clearance.
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. 


To have a full understanding of Export Business, you can join any of our Online Training on Agricultural and Mineral Commodity Export Business also for mentoring and to keep up to date with latest trends and business opportunities in International Business worldwide, subscribe to our Export Advisory Service. Contact us with our information below.

Cheers!

Gbeke Faith
Chief Consultant
TOSFAT Concepts
Phone: +2348076000259, +2348038248222
(Call/Whatsapp/Text any of these lines)

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