Incoterms rules for international freight deliveries are changing January 1
If your business participates in international trade, now is the time to familiarize yourself with changes to the Incoterms rules that determine contract terms for international freight deliveries.
Published by the International Chamber of Commerce, the Incoterms -- short for International Commercial Terms – are perhaps better known by the three-letter acronyms – such as FCA, FOB and EXW – that you find on international contracts, purchase orders and invoices. Incoterms are not payment terms, nor do they address breach of contract or product liability issues. Established in 1936 and updated about every decade, they spell out buyer and seller responsibilities when contracted goods are delivered, including those related to transfer of risk/ownership, insurance and other costs.
Many of the changes in the new version are designed to simplify the rules and reduce costly disputes that can occur between buyers and sellers, especially at ports or places of delivery. Known as Incoterms 2020, the new rules take effect January 1, 2020. To be ready – and take advantage of changes that could benefit your business:
Confirm which version of Incoterms are specified in your contracts. Most current contracts use Incoterms 2010, the version of Incoterms that has been in effect since 2010.
Trading partners, however, are free to incorporate any version of the Incoterms rules in their quotes, proforma invoices, sales contracts and commercial invoices for international sales -- as long as they specify it clearly in contract documents. Because both Incoterms 2010 and Incoterms 2020 remain in force, it is a good practice to articulate which version of the rules applies in any commercial agreement.
Determine which version of Incoterms is more suitable for your businesses.
The Incoterms 2010 rules sometimes result in businesses using contract terms that are neither suitable for nor applicable to their situations. The 2020 update seeks to address this issue with changes that could be advantageous for some businesses. Among them:
DAT and DPU — In the Incoterms 2020, DAT (Delivered at Terminal) is being replaced with a new Incoterm, DPU (Delivered at Place Unloaded). This change affects only the Incoterm name. The functions and obligations of DPU are precisely the same as they were for DAT. The change is being made because goods are not always at a transport terminal, such as a port or dock. Rather, DPU acknowledges that some goods are unloaded at a factory, warehouse or other place. An important caveat: if the goods will not be delivered to a terminal, the seller should determine the delivery site is able to unload the goods. If they can’t be unloaded, the appropriate Incoterm is DAP (Delivered At Place).
CIP and CIF — Among the more significant changes in Incoterms 2020 pertains to changes in the default transport insurance coverage. With Incoterm CIP (Carriage and Insurance Paid), which can be used for all modes of transportation, the seller will be obligated to take out Clause A of the Institute Cargo Clauses (All risk under contract) transport insurance. This represents an increase from the Institute Clause C (Free of Particular Average) insurance required for CIP by Incoterms 2010. Incoterm CIF (Cost Insurance and Freight), which is commonly used for maritime shipping of raw materials, minerals and other bulk items, remains at the minimum coverage levels described in Clause C.
FOB — This contract term is often used for international container shipments. With FOB (Free on Board) the seller is responsible for the goods until they are loaded onto a shipping vessel. All risks and costs are then transferred to the buyer. In the case of FOB, the seller can expect the ocean carrier to deliver an on-board bill of lading, which banks often require to provide the letter of credit that sellers need to secure payment.
FCA — Often confused with FOB, FCA assigns responsibility for the goods to the seller until they are delivered into the care of shipper. Since the cargo is not actually loaded onto the vessel itself, the seller cannot typically receive an on-board bill of lading with the FCA approach. Incoterms 2020 seeks to assist these sellers with a stop-gap measure. Buyers can now instruct their carriers to issue a bill of lading to sellers so that they may satisfy letter of credit requirements.
Take advantage of Incoterms support and training opportunities.
EWX, FOB and FCA rules are just three of the changes in Incoterms 2020. There could be others that might be advantageous to your business.
It’s not enough to obtain a copy of the new rules or to expect someone else to know them on your behalf. Mistakes or missed opportunities can be costly, and ignorance is not a useful defense if your trading partner knows more about a rule than you do.
Fortunately, the International Chamber of Commerce (www.iccwbo.org) has scheduled Incoterms 2020 training events around the world through the end of 2020. Sending an international sales representative from your company to Incoterms 2020 training could be a wise investment, both benefiting your business and demonstrating to your international customers your commitment to staying abreast of global trade issues.
Confirm that your partners are also up to speed on Incoterm changes.
It takes a village to ship products internationally. Schedule a meeting with your freight company to discuss their familiarity with the Incoterm 2020 rule changes, along with your strategy for addressing them. You’ll also want to speak with and verify that your international bankers, trade partners and other parties are fully up to speed on the changes. They, too, might have insights on how you might capitalize on the rule changes to your business’ long-term benefit.