If you’re buying and selling goods, you’ve likely come in contact with the international commercial terms, also known as the Incoterms® rules. This set of rules, established by the International Chamber of Commerce (ICC) helps buyers and sellers quickly, clearly and easily establish who’s responsible for which costs in their transactions. 

The ICC recently published an updated set of rules—Incoterms 2020—which offers six key changes to the Incoterms 2010 rules. These rules went into effect as of January 1, 2020. To help you stay current, we’ll run you through what’s new in Incoterms 2020 so you can continue to negotiate with buyers or sellers like a pro. 

But before we dive in, one note: While Incoterms 2020 will go into effect as the official set of rules on January 1, 2020 it’s possible that you may encounter some parties who are using the old rules. Double-check your contract to verify the Incoterms rules it indicates to avoid any confusion or misunderstandings. For example, the contract language may look something like this, which verifies that the contract will operate under the Incoterms 2020 rules: 

{Incoterms rule}, {named port or place}, Incoterms 2020 

DDP, 14777 Don Julian Rd, City of Industry, CA, Incoterms 2020 

Now, let’s dive into what’s new in the Incoterms 2020 rules. (And if you want to purchase your own copy of the complete rules for your reference, you can get yours on the ICC website.) 

Change #1: Incoterms® 2020 replaces DAT with DPU

One of the biggest changes in the Incoterms 2020 rules is that the Delivered at Terminal (DAT) Incoterm has been replaced by Delivered at Place Unloaded (DPU). By amending this Incoterm, the ICC’s intention was to offer the buyer more flexibility in terms of the delivery location, instead of restricting it to a terminal. You’ll likely see this Incoterm used most often with consolidated shipments. 

Change #2: New Instructions with FCA for Incoterms® 2020

The ICC made another significant change to the FCA (Free Carrier) Incoterm. The FCA Incoterm requires the seller to deliver goods to a named location, often a terminal or port. The buyer is then responsible for arranging all transportation from that point forward to the final destination. 

There were some unexpected problems with this Incoterm when a letter of credit was used as the payment method. Many banks require the seller to produce a bill of lading (BOL) with a “shipped on board” notation before issuing payment. However, if the seller wasn’t loading the shipment directly onto the international carrier’s vessel, the shipping line wouldn’t issue the documentation.  

As a result, many buyers and sellers were using the FOB (Free on Board) Incoterm instead, which made the issuing of this documentation more straightforward. However, this put sellers at significant risk: Under the FOB Incoterm, the seller was responsible for the shipment until it was loaded onboard the vessel. However, as soon as the seller delivered the shipment to the port, he or she would lose control over it. If, for example, the steamship line damaged the shipment before it got on board, the seller would still be liable. 

The Incoterms 2020 rules aim to solve both of these problems. They state that, under the FCA Incoterm, if both parties agree, the buyer should request that the carrier issue a transport document stating that the goods have been loaded. This allows the seller to get paid by the bank, and it eliminates the potential for risk on the seller’s part under the FOB Incoterm. 

Change #3: Increased Levels of Insurance Coverage for CIP  

Two Incoterms—CIF (Cost, Insurance and Freight) and CIP (Carriage and Insurance Paid To)—specifically discuss the issue of insurance coverage. Both put the obligation on the seller. In all other Incoterms, the decision is left to the buyer and seller to purchase coverage, if they wish. 

The Incoterms 2020 rules have changed the insurance requirements under the CIP Incoterm:  

  • Under the 2010 rules, the seller was only obligated to obtain minimum coverage, as defined by Clause C of the Institute Cargo Clauses.
  • Under the Incoterms 2020 rules, the seller must purchase more complete coverage as defined by Clause A of the Institute Cargo Clauses. 

The bottom line? CIP mandates higher levels of insurance coverage to provide greater protection for the buyer, which will come at a cost to the seller. 

The insurance requirements for CIF have not changed. 

Change #4: Broader Language Surrounding Deliveries 

The new Incoterms rules also reflect the changing face of the marketplace. The language of previous versions of the rules implied that sellers would hire third-party delivery services during their transactions. Today, though, many sellers are simply using their own transportation to move goods.  

The 2020 updates to the Incoterms rules reflect this change explicitly by stating that sellers may hire a third party or simply arrange for transport of goods. By defining this possibility outright, the ICC has made it easier for sellers to make the delivery arrangements that best suit their businesses. 

Change #5: Clarification of Security Fees and Charges in Incoterms® 2020

The Incoterms rules have also been updated to reflect another part of the changing landscape: security requirements, which have resulted in extra fees and charges. The new Incoterms 2020 rules define whether the buyer or seller is responsible for these fees, making responsibility even more clear-cut than in previous versions.  

As you choose your Incoterms going forward, check sections A4/B4 and in A7/B7 so you can understand your responsibilities under these new rules. 

Change #6: Organizational Changes & More Comprehensive Explanations 

If you purchase an official copy of the Incoterms 2020 rules, you’ll discover that the ICC has reorganized them in order to make it easier for buyers and sellers to understand their obligations.  

The ICC has also added significant notes for clarity, which you may find especially useful if you’re new to the world of logistics and freight. After all, the terms of your contract are critical for keeping your business profitable.  

Understanding Incoterms Rules Can Protect Your Bottom Line 

One of the biggest mistakes we see new importers make is not understanding the Incoterms they’ve agreed to. Before you sign any contract, make sure you recognize the costs you’re responsible for so you accurately estimate your total cost of goods. By staying up to date with the newest Incoterms 2020 rules, you’ll prevent surprise charges, ones that might end up blowing your budget. 

 

 

Need some advice on your Incoterms? Looking for assistance with arranging transportation under the Incoterms you’ve agreed to? We can help! Just reach out to us, and we’ll put you in touch with an expert who can help you with the logistics solutions that make sense for your business—and your budget.

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