Incoterms 2020: Key changes

Where do the Incoterms come from?

International trade can only work when the rights and duties of the involved parties are clearly defined. It was with this objective that the “International Commercial Terms” were first issued in 1953 by the International Chamber of Commerce (ICC) in Paris. The intention was to create an industry standard which, beside the transfer of goods, was to define factors such as transfer of risk, transport costs and transport risks. The Incoterms were well received and, since the release of the first edition, have been renewed approximately every ten years. The currently valid version was published in 2010; now it’s time for the next overhaul.

When will the Incoterms 2020 enter into force?

The Incoterms 2020 will become effective as of January 1, 2020, which means that they will be the default for every contact entered into after this date. Companies can start using the Incoterms 2020 before January 1, as long as this is explicitly stated in the contract. Likewise, the Incoterms 2010 can be used after January 1 as long as this is clearly defined in the agreement.

What was the basis for the new Incoterms?

For the newest version of the Incoterms, the ICC gathered comprehensive feedback from representative stakeholders in international trade and evaluated a total of over 3,000 relevant comments. The goal was to find a compromise which serves 200 states worldwide. The result is the highly current and practice-oriented new version of the Incoterms – the Incoterms 2020.

What’s going to change?

The Incoterms 2020 bring a range of changes for exporters, importers and logistics providers. Here’s what you should know:

• DAT becomes DPU
• Increased insurance coverage for CIP
• Bill of Lading for FCA
• Carriage with own means of transport
• Clearer distribution of security obligations

DAT becomes DPU

In the previous version of the Incoterms from the year 2010, DAT (Delivered at Terminal) meant that goods are considered to be delivered as soon as they have been unloaded at the agreed-upon terminal. In the feedback gathered by ICC, users requested an Incoterm which includes delivery to a different place, e.g. a factory site. This is why DAT has now been replaced with the more general wording DPU (Delivered at Place Unloaded).  

Increased insurance coverage for CIP

CIP (Carriage and Insurance Paid to) means that the seller delivers the goods to the carrier, but pays for transport including insurance up to the destination. The same rules apply for CIF (Carriage Insurance and Freight), however, this Incoterm can only be used in seafreight.

According to the Incoterms 2010, the seller was obliged in both cases to provide a minimum insurance coverage corresponding to Clause C (Institute of Cargo Clauses). This is a basic form of insurance which only covers clearly defined damages.

With the new edition of 2020, the minimum insurance cover for CIP is raised to Clause A, which is the highest level of insurance covering all risks. The reasoning behind this is that CIF is often used for bulk commodities, while CIP is more frequently used for manufactured goods.

Bill of Lading for FCA

If seller and buyer have agreed upon the Incoterm FCA (Free Carrier), the seller delivers the goods to a place and person defined by the buyer. At this point, the risks and costs pass over to the buyer.

This option is often chosen by buyers who want to avoid bearing the risks for possible damages to their goods after they have been delivered to the terminal. The downside until recently was that the seller could not receive a bill of lading and therefore no letter of credit to assure payment of the goods.

The Incoterms 2020 have introduced a pragmatic solution to this problem. If the parties have agreed that the seller delivers the goods to the container terminal according to FCA, the buyer can instruct the carrier to issue an on-board bill of lading to the seller upon unloading. This way, sellers are better protected against risks, e.g. during unloading.

Carriage with own means of transport

The Incoterms 2020 assumed that the transport of goods between seller and buyer is conducted by a third party when the Incoterms FCA, DAP, DPU or DDP are applied. In the new edition of the Incoterms which enter into effect as of January 1, 2020, this definition has been extended to include carriage with the seller’s or buyer’s own means of transport.

Clearer distribution of security obligations

Finally, the Incoterms also come with a more precisely defined allocation of the relevant security requirements between buyer and seller, including the associated costs. On the one hand, this step can be seen as a reaction to the heightened security regulations in international trade. On the other hand, it is intended to prevent disputes about costs that may arise, especially at the port or point of delivery.

For more information, visit the ICC (International Chamber of Commerce): Incoterms 2020