The ICC launches the new Incoterms® 2020

The ICC launches the new Incoterms® 2020

As it celebrates its 100th anniversary, the ICC launches the new Incoterms® 2020

On 10 September 2019, the International Chambers of Commerce (ICC) released the new Incoterms® 2020. The ICC first launched the Incoterms® in 1936 to create commonly used standard terms and interpretations for the international sale of goods. Since then, the Incoterms® have become a globally recognized and accepted standard, and plays an essential role in international trade. The new Incoterms® 2020 will enter into force on 1 January 2020.

One of the main motivations behind the revision is addressing one of the most common issues, namely the use of the wrong term in contracts. In light of this, most changes to the new Incoterms® 2020 aim at enhancing usability and tackling practical issues experienced by traders.

More accessible and easier to use

An important change is that the order of the articles within each term has been re-ordered to give more prominence to certain articles, such as delivery and transfer of risk. Further, all eleven Incoterms® are now presented in two formats. There is the traditional list with each term and its related articles, as well as a one-stop list at the very end, with each article and their particular application under the terms. The new format seeks to enable easier use and comparison between the different terms. Moreover, the new Incoterms® 2020 have replaced the previous “Guidance Notes” placed before each term with more elaborate “Explanatory Notes”. There are also enhanced illustrations to ensure clarity.

Aside from the more presentational changes, the new Incoterms® 2020 also introduce more substantial changes in response to practical issues faced by users.

Substantive changes in the new Incoterms® 2020

The use of FCA and bills of ladings with on-board notation

It has commonly been recommended to use FCA instead of FOB for the sale of containerized goods. However, since delivery occurs prior to the moment when goods are loaded on board the vessel under FCA, a practical issue has been obtaining a bill of lading with an on-board notation. Such notation may be required for payment purposes, for example when payment is carried out with a letter of credit. Now, a new option allows parties to include in their contract that the buyer shall instruct the carrier to issue a bill of lading with an on-board notation to the seller, at buyers cost and risk. The seller shall then transfer the bill of lading to the buyer in order to take delivery of the goods. The recommendation to use FCA still stands, and with this new option, the Incoterms® 2020 seek to resolve this practical issue.

Market demands of insurance cover under CIP and CIF

Both the CIF and CIP terms require an insurance cover complying with at minimum the cover provided for by Clauses (C) of the Institute Cargo Clauses. While there was a market demand for a higher cover, there was equally strong opposition to increasing the required insurance cover, mainly from those involved in overseas trade. The compromise in the new Incoterms® 2020 is therefore that the insurance required under CIF remains the same, since this term is most commonly used in overseas trade. Sale under CIP, however, now requires an insurance cover complying with at least Clauses (A). Parties can nevertheless still agree to increase or lower the insurance cover.

Terms regarding arrangement of transportation with own means

The current Incoterms® 2010 presume that transport is carried out by a third-party carrier. Since this is not always the case, particularly for sale under D terms, the new Incoterms® 2020 now take into account instances where parties perform transportation using their own means.

Other relevant changes

Other changes include the express allocation of transport security-related obligations and costs, and clearer allocation of costs in general. Finally, the DAT term has been changed to DPU (Delivered at Place Unloaded) to better reflect the reality of that term. The former name implied that delivery should take place at a terminal, even though the term was intended to be interpreted broadly and include any place.

Final remarks

Overall it seems the Incoterms® 2020 do not introduce drastic changes compared to its predecessor. However, a number of changes do indeed tackle common practical issues experienced by traders, and overall attempts to respond to market demands in light of the past decade’s international trade developments. The focus on usability and the prominence given to the most important articles within the terms are welcome change for users.

It should nevertheless be noted that the Incoterms® 2020 do not address the obligations and costs related to the VGM (Verified Gross Mass) requirements of Regulation 2 under the International Convention for the Safety of Life at Sea (SOLAS). Since 2016, it has been required that shippers, in the case of shipment of containers, record the weight of the packed container with the carrier. Failure to comply with these rules can lead to the containers not being loaded on board the ship as well as costs due to delays. Although considered by the Drafting Group, the VGM requirements were thought too complex to merit mention in the Incoterms® 2020. It is therefore left for parties to determine the obligations, risks and costs related to the VGM requirements.

The new Incoterms® 2020 will be effective as of 1 January 2020. They can nevertheless be applied prior to this date by express incorporation in contracts.

Kneppelhout & Korthals can assist your company with identifying which terms are suitable for your particular business, and assessing the impact of the new Incoterms® 2020 for your business.