Incoterms, short for International Commercial Terms, were first introduced to global trade in 1936 to grease the wheels of commerce. They do so by stipulating where sellers hand over risk, responsibility and cost of fulfilling a shipment to their buyers.
Incoterms are revised every ten years and the ICC (International Chamber of Commerce) has recently published the 2020 version which comes into force on the 1st of January 2020.
How does this affect the average importer and exporter?
Not very much.
Firstly, using Incoterms in a sales contract is not required by law. Making use of these terms is optional but recommended as they do simplify where accountability lies in the case of a legal dispute. An Incoterm only becomes legally binding when it is written into a sales contract. Even so, adjustments to the relevant term’s definition can be predetermined and written into the agreement.
Secondly, the updates made with Incoterms 2020 are not of massive consequence, unlike the modifications that were published with the 2010 version. Like the 2010 edition, Incoterms 2020 consist of 11 terms with some minor alterations to be more applicable to current trends in international trade.
Thirdly, Incoterms 2010 and every version published prior to this are still completely valid, as long as the Incoterms referred in the contract are clearly defined.
The correct way to specify the Incoterm used is in the following format:
Rule – Point of transfer – Incoterms of relevance
E.g. EXW at 20 Example Street, Cape Town, South Africa as per Incoterms 2020
Incoterms 2020 updates to take note of
DAT is changed to DPU
Incoterms 2010 specifies DAT (Delivered at Terminal) to mean the goods are delivered once it is unloaded at the named terminal. This does not allow for goods to be delivered at a private or business address. DPU (Delivered at Place Unloaded) is more general and applies to any point of delivery specified.
DPU is also greatly beneficial to the buyer as risk remains on the seller until the goods are unloaded. Damage incurred during the unloading process is therefore the seller’s obligation to rectify.
Businesses who have become accustomed to using DAT need not fret. You can use the DPU incoterm and with the name of the terminal where you want the goods unloaded for the same end result.
Insurance in CIP/CIF is changed
The Incoterm CIP (Carriage and Insurance Paid) means that the seller delivers to the carrier, and is responsible for payment of the carriage and insurance to the named destination. CIF (Carriage Insurance and Freight) is the same except that it can only be used for maritime transport, which means delivery is onto a ship and the destination must be a port. In both cases the seller is responsible for supplying insurance cover, but the risk transfers to the buyer once the goods have been delivered to the carrier.
Under Incoterms 2010 the seller is obligated to provide insurance for the buyer that is equivalent to Clause C of the Institute of Cargo Clauses. This is a very basic level of insurance which is generally suitable for bulk commodity cargoes but may not be comprehensive enough to adequately cover manufactured goods.
Incoterms 2020 defines CIF as inclusive of the same insurance requirements, but the insurance requirement of CIP has increased to Clause A of the Institute of Cargo Clauses. The reasoning behind this is that CIF is more often used with bulk commodity trades and CIP, being a multimodal term, is more often used for manufactured goods.
Terms and costs are clarified
Incoterms 2020 has clarified any vagueness around allocation of costs, especially as it pertains to port or place of delivery. This is due to an increased number of disputes around this point. The broad principle is that the seller (exporter) assumes responsibility for transport costs incurred up to the predetermined point of delivery, and the buyer (importer) picks up the cheque from there.
Incoterms 2020 also makes provision for transport being provided by the seller or buyer (e.g. the seller’s own vehicle). For example, according to Incoterms 2020 FCA stipulates the buyer must “contract or arrange at its own cost for the carriage of the goods from the named place of delivery”.
To summarise, revisions included in Incoterms 2020 have been made for the sake of clarity. Explanations are more detailed and diagrams more user friendly.
How do I incorporate Incoterms 2020 in my business dealings?
If you are already using Incoterms in your sales agreements, find out how your preferred terms are affected by the 2020 revision and how this will impact your current dealings.
Generally speaking, every importer and exporter should review the definitions of Incoterms periodically to make sure they have a thorough understanding of what these terms include (and exclude), and to check whether they are still making use of the Incoterm best suited to their needs.
Once you are confident about the Incoterms 2020 you want to make use of, ensure all your standard contracts are updated and referenced correctly.
Click here for a user friendly summary of Incoterms 2020 and pitfalls to look out for when using them.
Need assistance with Incoterms, other import- and export-related matters, or booking transport for your goods? Contact our friendly consultants on 0861 0 TRADE (87233), or get in touch via our website.