On January 1, 2020, the International Chamber of Commerce (ICC) updated its Incoterms®. This widely used set of rules outlines buyers’ and sellers’ responsibilities for the transportation of goods. The 11 Incoterms® are defined and modernized for the update, and a few have new names. Some of the most noticeable features include increased specificity for terms, updated layout, improved usability, and glossary changes.
What are They?
The term Incoterms® is an abbreviation for ‘International Commercial Terms,’ an idea first conceived in 1921 by the ICC and made its way into practice by 1936. There have been several iterations of Incoterms® rules, with updates roughly every ten years. The rules outline the delivery of goods under contracts of sales for both the buyer and sellers. The Incoterms® act as only a part of an overall sales contract but can guide many of the provisions for handling, payment, documents, and other aspects of the sale itself.
There are three parts of moving goods: the seller to port, port to port, and port to the buyer. The terms define what happens in each of these legs. Who pays for what, who arranges each leg, and who has ownership of the goods if they are compromised. Below is a brief breakdown of the terms, their meanings, and which mode of transportation is applicable.
How are They Used?
Incoterms® are voluntary, but all major trading nations have implemented Incoterms® as a recognized standard set of rules for goods movement. Keep in mind, they are only part of the exporting contract.
The use of the terms can be integrated into purchasing contracts. Depending on the term used, a specific flow of goods and liability is made clear to each party. Four of the eleven terms, deal with only shipping by sea as the mode of transportation (as noted above). Be sure the term chosen is right for each sale, which may be different from sale to sale. The correct or incorrect term can impact many things from price of transportation, insurance, timing, and place of delivery. For some horror stories and advice on real-world examples, Roy Becker, an international banker and educator on exporting, offers many great resources and opportunities for companies to gain more knowledge on Incoterms® and many other exporting topics.
The ICC has a free wallchart available for download. It visually displays the ownership and process of goods transfers and is available in the resources below.
The official 2020 Incoterms® resources are located on the ICC’s website. The updating process has gone through a committee of international businesspeople from 13 different countries, all weighing in on the new text. The language itself has been written in Europe; American readers will find stylistic terms for a European audience. Frank Reynolds, who participated in crafting the 2020 updates, has also revised his book “Incoterms® Rules for Americans” as a companion text.
The 2020 differences include:
- DAT (Delivered at Terminal) is updated to DPU (Delivered at Place Unloaded)- Further clarification of the intent to deliver and unload the goods was added, which does not need to be a “terminal” specifically.
- FCA (Free Carrier) – The seller is responsible for ensuring the goods are on the buyer’s transportation. Updates allow buyers to instruct carriers to issue a bill of lading with on-board notations on behalf of the seller. The seller does not have to deliver goods to an ‘international’ carrier specifically, but the buyers’ carrier as agreed upon.
- CIP (Carriage and Insurance Paid to) – The seller is responsible for the insurance, but the updates now require insurance coverage to comply with Clauses (A) of institute cargo clauses. This clause has a higher level of insurance (110% of the goods’ value) than the CIF requirements of Clause (C).
- Overall term updates allow additional modes of transportation/carriers available for the movement of goods and recognize that a third-party carrier does not have to be used. Some sellers choose to transport the goods themselves, and the modernization of these terms allows for more flexibility in the method of transport.
- There are many updates to security requirements throughout for goods, cash, and documents.
- Customs Clearance – the language of responsibility (buyer or seller) for clearing customs is more specifically defined. This may impact liability and ownership as good pass through customs completely before ownership is transferred.
- The layout of the book is updated to be more user-friendly. The responsibility of the buyers and sellers are matched in a cohesive order. The glossary is also updated.
Tip and Considerations
When choosing and using Incoterms®, there are many other factors to keep in mind as you supply sales contracts, be sure to consider the following tips.
- Incoterms® will not outline prices, payment methods, or ownership of goods. They should be used in tandem with a larger purchasing agreement/contract.
- Make sure to outline the place and port specifically.
- Incoterms® do not override any mandatory laws.
- Be conscientious of what paperwork is needed for the sale and who controls those documents related to the shipping method. Try to keep as much control as necessary to obtain documents required for payment.
- While you can still use the 2010 terms, if you choose to do so, make sure that it is explicitly noted in the contracts which version of the Incoterms® is utilized.
With the new Incoterms® in practice since January 1, 2020, there is typically 1-2 years of acclimation and adoption of the updates. There are many opportunities to learn more. Keep an eye out for upcoming training the 2020 Incoterms® with the North Dakota Trade Office. We are happy to assist with exporting information, but the above details are not meant as legal advice.