A follow up to our posting on October 22, 2019, ‘Do You Know Your Incoterms? Incoterms 2020 Is Coming’, Incoterms 2020 will be effective January 1, 2020. Please continue reading to understand why Incoterms are important and what has changed.

It’s important to keep the following in mind when preparing to use Incoterms:

Choose the right rule;
- Note: Despite an ‘effective’ date of the 1st January 2020, Incoterms 2020 can be used now. However, there is still no obligation to use Incoterms 2020. If you haven’t made it clear in your contract which Incoterms version to refer to or have a flexible contract which states that when the contract is effective, the latest rules will apply.
Specify the place / port precisely
Incorporate them into the contract as well as the LC and invoice

Incoterms beginning with an E: are Departure Incoterms, i.e. the buyer takes care of everything while the seller simply makes the goods available. For example: EXW.
Incoterms beginning with an F: are Incoterms whose main transport is not paid for by the seller, it is the buyer who must pay for them. For example: FOB, FCA or FAS.
Incoterms beginning with a C: are Incoterms whose main transport is paid by the seller. For example: CIF, CIP, etc.
Incoterms beginning with a D: are said to be Incoming Incoterms, i.e. the buyer takes care of nothing, everything is managed and paid for by the seller. For example: DAP, DDP, etc.

Now that you have that in your toolbox, here are the anticipated changes for Incoterms 2020:

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

Under Incoterms CIP, the seller is under the obligation to take out under contract transport insurance in favor 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).

Under 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, it’s 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

Under 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.

Be sure to order yourself a copy and review the full details about Incoterms 2020 here: International Chamber of Commerce

If you have any questions regarding this posting or any other logistics matter, please contact your South East World Wide, Ltd. Sales Representative.