Contracting Excellence Journal

Articles, news and insights from IACCM staffers and over 60,000 Members.

Subscribe and never miss out. There's always something going on here!

This article defines Incoterms® and focuses on current and relevant changes in the Incoterms® rules and how they could impact your enterprise.

The International Chamber of Commerce (ICC) 1 has published new Incoterms® rules 2020 (international commercial terms) explaining buyers’ and sellers’ responsibilities for delivering goods in the global market. The terms also explain when the risk for those goods move from the seller to the buyer.

Simply put, if “you are filing a purchase order, packaging and labelling a shipment for freight transport, or preparing a certificate of origin at a port, the Incoterms® rules are there to guide you.” 2

Incoterms®, a trademark of the ICC and registered in several countries, identify terms, like FOB (Free on Board); DAP (Delivered at Place); EXW (Ex Works), CIP (Carriage and Insurance Paid To) -- all of which have very precise meanings for the sale of goods around the world.

“These terms hold universal meaning for buyers and sellers around the world. If you are a financial analyst in the City of London, then you might associate the acronym “FCA” with the United Kingdom’s Financial Conduct Authority. However, for importers and exporters around the world, FCA are the initials used for “Free Carrier,” or the seller’s obligation to deliver the goods to the carrier nominated by the buyer at the seller’s premises or another named place.”2

Major changes by Incoterms® 2020 are fully explained in many excellent articles online such as:

The following text summarizes major points made in both articles:

  1. A new Incoterm DPU (Delivered at Place Unloaded) replaces the DAT (Delivered at Terminal). 3 “The ICC renamed this term because it became apparent that sometimes the buyer and/or seller want the delivery of goods to occur somewhere other than a terminal.” 4
  1. Bill of Lading (BL) with on-board notation for maritime transport so the buyer may instruct the shipper to issue a BL on behalf of the seller with the on-board annotation specifying that the goods have been loaded aboard the ship. 3 “Under this term, the seller is responsible for either 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.” 4 
  1. Different levels of insurance coverage under contract now apply:
  • Cost Insurance and Freight (CIF) and Carriage and Insurance Paid To (CIP) now have different transport insurance coverages: in very general terms, this means:
  • CIP obligates the seller to take out transport insurance in favor of the buyer.
  • CIF obligates the seller to take out insurance with minimum coverage. 3

“CIF and CIP are the only two Incoterms that identify which party must purchase insurance for at least part of the export journey. In both cases that responsibility falls on the seller… Incoterms 2010 specified that under both these terms the seller was responsible for obtaining the minimum level of coverage identified by Clause C of the Institute Cargo Clauses.” 4

  1. Customs clearance has changed: export, transit and import more precisely explain who -- seller or buyer -- is responsible for carrying out customs formalities and clearance applicable to costs and risks. As well, the release of goods in transit is included for the first time. 3

“In previous versions of the Incoterms, the ICC assumed that sellers would be contracting with a third party for the delivery of the goods to the appropriate place, and the language used in Incoterms 2010 reflected that.  Incoterms 2020 rules, on the other hand, recognize those do-it-yourself (DIY) sellers who may use their own transport to deliver the goods. The terms now expressly state that sellers can make a contract for carriage or simply arrange for the necessary transportation.” 4

  1. Transport security requirements. Liability regarding security is more precisely defined under two circumstances: transport from the country of origin to that of the destination and customs clearance formalities and procedures (export/transit/import). 3

“Import and export security requirements have increased significantly and become more formalized during the past decade, and Incoterms 2020 rules specifically call out those requirements in its discussion of buyer and seller responsibilities under each of the trade terms.” 4

  1. 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 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.”3

“The final set of changes to Incoterms 2020 rules relate to how the terms are organized and described in the ICC's official publication called, believe it or not, Incoterms® 2020. The ICC claims these revisions to the text make the terms easier to understand and use.” 4 

Know what’s within your rights! 

 “It's important to remember that Incoterms® are voluntary, and they don't replace a sales contract. Instead, international sales contracts often specifically reference a set of Incoterms as a shorthand for who is responsible for what in the delivery of the goods. If the buyer and seller choose to reference an earlier set of terms, like Incoterms 2000, or they choose to ignore Incoterms completely and spell out who is responsible for what directly in their sales contract, that is within their rights.” 4

END NOTES

  1. ICC website blog
  2. See Incoterms rules, ICC full article [Note: “While Incoterms® 2020is the most current version of the trade terms, Incoterms® 2010 is still in effect today and can be accessed under our resources for business.”
  3. See Global Negotiator Blog full article
  4. See  Shipping Solutions, International Trade Blog authored by David Noah, Oct 9 2019, IMPORT BASICS, EXPORT BASICS, INCOTERMS

Subscribe to the IACCM  Contracting Excellence Newsletter

About Globality

Globality’s stated mission is to “give all companies an opportunity to compete and win based on the merits of proven performance, expertise, and passion.”

Topics from this blog:
icoterms
> Back to all posts
    Download our
    Ten Pitfalls Report

    Download the Pitfalls Report

    See the February Edition of the Contracting Excellence Newsletter
    See the December Edition  of our Contracting  Excellence Newsletter

    Posts by Topic

    see all

    Recent Posts

    IACCM Membership Types & Pricing

    Take a look at the various membership types, or take a better look by becoming a FREE Trial Member

    Membership Types & Pricing