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The Impact of Incoterms® 2020: Changes and What You Actually Need To Know

The Impact of Incoterms® 2020: Changes and What You Actually Need To Know

 

The Incoterms® 2020 came into effect on 1 January 2020. With the increasingly complex interlinkage between supply chains on a global level, including a growing focus on digital trade, modification to these rules is not surprising.

Incoterms® 2020 chart

 

In summary, the changes are:

  • Change to the Free Carrier (FCA) rule
  • Delivered at Terminal (DAT) changed to Delivered at Place Unloaded (DPU)
  • Changes to insurance requirements for CIP (Carriage and Insurance Paid to)
  • Inclusion of security requirements
  • Movement of goods by own transportation

Read on to find out everything you need to know about each change or download our summary sheet below. 

 

Change to Free Carrier (FCA) terms

What is the change?

FCA is the Incoterms® 2020 rule which requires the seller to carry out export formalities and delivery occurs either when the seller loads their goods on to the buyer’s carrier’s truck or when the seller’s truck arrives at the carrier’s premises or terminal ready for unloading by that carrier. This is the only rule which has two alternatives for delivery.  

The 2020 change now allows a buyer and seller to agree that the buyer will instruct their carrier to issue an on-board bill of lading to the seller after loading the goods. This is at the buyer’s own cost and risk. On the bill of lading, goods are stated to have been loaded on-board the vessel. It is important to note here that the seller has no obligation to the buyer in relation to the contract of carriage’s terms.

What do we think of the change?

It is at first glance a welcome change, as it seems to allow the seller to obtain an onboard bill of lading in a sale involving container transport. However, the seller and buyer have always been free to arrange this in their contract of sale.

Banks issuing letters of credit generally call for an onboard bill of lading. Many sellers who engage in international trade have been drawn to FCA as a term to use, as opposed to FOB which may leave them at a high risk of costs especially when their sale involves container shipments. This is because once the goods are packed into a container generally at their premises, the seller loses control of the goods but is still liable for costs and any loss or damage that occurs until the container is onboard the vessel. David Lowe, Global Co-Chair of the ICC UK Incoterms® 2020 Drafting Committee, noted that the Committee heard reports of sellers operating under FOB obtaining surprise invoices from port operators for loading and storage costs.

The term FCA minimises this risk, but sellers were traditionally reluctant to use it because the term did not allow them to secure their payment via a letter of credit (which often imposes a requirement to present an onboard bill of lading). The 2020 changes have now resolved this. Now, sellers operating under FCA will be able to access a secured payment via letter of credit whilst avoiding potential liability under FOB. Although, sellers should note that carriers do not have to comply with the request to issue an onboard bill of lading, and that they have no obligation to ensure that the container is indeed loaded onboard a vessel by any given date. A further potential problem for sellers is that if the goods are damaged or lost after the delivery but before they go on board, such as in the consolidator’s premises for an LCL then they will not receive an onboard bill of lading. Therefore, the seller will not be able to submit complying documents under the letter of credit even though the buyer is obliged to pay for the goods.

What should industry players do to adapt?

At ICE, we’ve dealt with many sellers and buyers that use the FCA rule in their international sale contracts. Although exporters can now further minimise their risk by securing payment via a letter of credit with the FCA, we should remember that:

  1. Carriers are not obligated to comply with the request to issue a bill of lading; and
  2. FCA is still a generally more buyer-friendly term, as the seller is responsible for all costs and risks associated with export formalities. The risk only shifts to the buyer when the goods have been delivered to the buyer’s nominated carrier.

The notes to Incoterms® 2020 suggest that, rather than making this onboard bill of lading amendment, a more appropriate long-term solution is for a bank issuing a letter of credit to call for a “received for shipment” bill of lading. This bill confirms that a carrier has ‘received’ containers at the port for loading but does not indicate that a container has been shipped. However, banks are generally very reluctant to agree as a “received for shipment” bill of lading is not evidence of export and could be problematic for their exchange control regulations, anti-money-laundering and anti-terrorism-financing protocols.

There are still other Incoterms® rules more appropriate for an exporter. Bob Ronai, the only Australian member of the Incoterms® 2020 Drafting Group, commented that the buyer has more control in an FCA transaction, and directs transport and costs through their own carrier. CPT and CIP by contrast, are probably more appropriate for an exporter, especially since they allow a seller control over shipping costs all the way until freight reaches the destination terminal or airport.

Delivered At Terminal (DAT) changed to Delivered at Place Unloaded (DPU)

What is the change?

The DAT rule contained in Incoterms® 2010 has now changed to DPU. In both, the seller’s obligation is to arrange for the goods to be unloaded. In DAT that was taken to be into the container yard or freight station or airport terminal. In DPU the obligation now extends to any place even after import clearance by the buyer.

DAT to DPU incoterm 2020

What do we think of the change?

This is another positive change because it allows greater flexibility to choose the location where deliveries can be dropped off to a buyer.

There were two main reasons behind the change to DPU. The first is that there was confusion amongst importers, exporters, freight forwarders, insurers and other parties as to the difference between DAT and DAP (‘Delivered at Place’). The main difference was that under DAT, a delivery took place when goods were unloaded from a vessel, container, aircraft or truck into a ‘terminal’ (hence the phrase ‘Delivered At Terminal’). But under DAP, delivery occurred typically at the buyer’s premises, after the buyer had import cleared them, but not unloaded. DAT’s renaming to DPU clarifies this difference.

The second reason was to allow for flexibility in deciding where delivery occurs. No longer is this limited to a ‘terminal’. In everyday trade, not all modes of transport will involve dropping goods off at a terminal. Delivery can now occur at any ‘place’, so delivery will occur when goods have been unloaded at a ‘place’ for the buyer to access.

What should industry players do to adapt?

If you are currently operating under the DAT term from Incoterms 2010, we suggest you make the switch to DPU under Incoterms 2020. This move will allow for some further flexibility in making deliveries.

This is especially the case if you are using multimodal methods of transporting freight.

However, you should be careful to articulate the relevant ‘place’ clearly in a sale contract to avoid disputes over the location of delivery. Transport hubs can be large, and confusion can arise as to exact delivery points. A common mistake when using any of the Incoterms® rules is a failure to be specific – using broad terms such as “CPT Chicago” does not specify the place of delivery for instance.

In terms of the new obligation for unload, we recommend that if the new DPU term is chosen, the seller should ensure equipment is available to not only unload the vehicle (this may mean delivering with a side loader or allowing for a crane on site) but also to unload the goods from the container. The container is only a means of transporting the goods. There may also be issues with the buyer’s insurances and health/safety requirements when operating outside equipment and labour unknown to the buyer in their premises or yard.

Changes to insurance requirements for CIP (Carriage and Insurance Paid to)

What is the change?

Insurers – take note. This change has increased insurance requirements for the Incoterm CIP (Carriage and Insurance Paid to) to Clauses (A) of the Institute Cargo Clauses. CIP simply means that a vendor delivers to a carrier and pays for the carriage and insurance to the relevant destination.

Under the former Incoterms® 2010 the vendor was only obligated to provide insurance equivalent to ICC(C) (which was more restrictive in coverage than ICC(A)). CIF remains at ICC(C).

What exactly are Institute Cargo Clauses (A), (B) and (C)?

For our importers and exporters not familiar with these types of clauses (although our insurer friends would know them all too well), these are the standard clauses off which most freight insurance policies in Australia are based.

Clauses (A) – the least restrictive kind of insurance policy. It covers all risk of loss or damage to the insured freight with certain specific exceptions. You’ll likely pay the most expensive premium here because of the wide amount of coverage.

Clauses (B) – this provides more restrictive coverage for only listed risks, so you’d likely pay a moderate premium.

Clauses (C) – this is the most restrictive coverage you can get for a small number of listed risks, so it’s the cheapest. Unfortunately, your cargo coverage will be much less using this clause and it is mostly suited to bulk cargoes of commodities.

There is also Institute Cargo Clauses (Air) for air cargo shipments, roughly equivalent to ICC(Air).

What do we think of the move to Clause A?

Although insurance under ICC(A) is more expensive for exporters and importers, we understand why the change was made. CIF was popular with transactions involving commodities, where a more restrictive level of cover was widely accepted. By contrast, ICC(C) coverage was inappropriate for transactions involving manufactured goods.

The change to ICC(A) is therefore suitable. Whilst it may be inconvenient in terms of paying higher premiums, CIP is not simply maritime (unlike CIF). It is multimodal and ICC(C) coverage simply may not be enough to cover all the risks that might arise. Parties may, however, agree to a lower level of coverage.

What should industry players do to adapt?

Consider which cargo insurance policy is more appropriate for your business goals.

Is it worth increasing costs with higher premiums for wider coverage? Or is better to expose your cargo to further risk at a more affordable premium? Note that ICC(A) still excludes coverage in a range of circumstances, such as war and strikes which comes under additional cover but is almost always included when taking out ICC(A). Further, all cargo insurance generally excludes coverage for consequential loss (flow-on effects such as loss of profit or loss of opportunity as a result of lost or damaged goods, for example).

Importers and exporters should also consider whether they need to take out excess marine insurance if carrying valuable goods. Bill Cole, Partner of International Trade at BDO Australia, commented that Institute Cargo Clauses (A) is not enough to cover particular goods given that there are still a swathe of exclusions under the clause, as noted above. Importers should not be misled by the change because there are many ways claims can still be excluded.

Exporters and importers need to understand the risks associated with the cargo and the selected voyage when it comes to insurance. As freight insurance expert Alexander Robertson said, this will involve more than just knowing ports, but understanding climate conditions, political situations or whether the voyage will involve the risk of piracy.

It may very well be that ICC(C) is still an appropriate and cost-effective insurance for your transaction. It will just depend on the nature of the freight, the voyage and individual circumstances.

Inclusion of security requirements

What is the change?

Incoterms® 2020 have placed great significance on security requirements. One of the new requirements includes the compulsory screening of containers in certain circumstances.

What do we think?

Any measure to increase security in the international sale of goods should be viewed as a positive change.

In the past decade, we’ve come to know only too well the security risks that come with the global transport of freight. Theft alone has substantial impacts on carriers, storage facilities, ports, depots, insurance companies, freight forwarders, logistics companies and every party involved in an international transaction. Businesses in the United Kingdom for instance, lose around $76 million a year due to freight theft (according to BSI Supply Chain Services and Solutions).

 cargo theft stats

In North and South America, the most common form of theft was hijacking, compared to other nations where ‘slash and grab’ was more common.

But it is not just cargo theft that these security requirements aim to address. With the growth of e-commerce, cyber-attacks, data breaches and information theft are becoming much more prevalent. 

It’s appropriate that the Incoterms 2020 are recognising the sheer impact that security breaches in global supply chains have on the industry.

What should industry players do to adapt?

Everyone involved in the industry should review the security protocols throughout their supply chain, both in the physical and digital spheres. Ensure that your procedures adequately protect your freight and minimise the threat of security risks.

New provisions in Incoterms® 2020 distribute security responsibilities between seller and buyer, so it is critical to review where each party is responsible and what measures must be introduced.

Movement of goods by own transportation

What is the change?

Incoterms® 2020 now enable that parties to use their own transport for carrying goods, rather than outsourcing transport to a third-party carrier (which had been assumed in Incoterms® 2010). The FCA, DAP, DPU and DDP have been updated to reflect this clarification.

What do we think?

It is a welcome change because, in many circumstances, a third-party carrier was not required or contracted for various transactions, especially land transport in Europe.

What should industry players do to adapt?

Consider whether it is worth utilising your own transport or outsourcing to a third-party service.

Each option has its own benefits. Owning a private fleet allows parties to have complete control over the transportation component of their transaction. This usually comes with some elements of control and visibility across the entire journey.

A contracted fleet, by contrast, allows you to benefit from a flexible transportation service by working with several third-party providers without the overheads. Note, however, that if a party in Australia engages owner-drivers (individual drivers who own their own vehicles), they may be subject to regulations in the Transport Industry – General Carriers Contract Determination (for NSW) and the Owner Drivers and Forestry Contractors Act 2005 (for Victoria).

Changing the wording of the Incoterms document

What is the change?

There have been a few changes made to the structure and wording of the Incoterms® 2020 rules, including:

  1. Creating Explanatory Notes outlining the fundamental nature of each of the Incoterms; and
  2. Rearranging how costs were presented, creating a list of costs all in one place.

What do we think?

Bob Ronai, in an interview with Trade Finance Global, spoke of the Incoterms® Drafting Group’s approach to rewording the 2020 terms:

“[T]he first step we did was to look at the 2010 rules and try and determine how relevant the wording was. Could we reword it or reformat it to make it more relevant and more easily understood?”

I commend the efforts to make the document more readily understandable and accessible. In our experience, some of the most common mistakes in the industry stem from a lack of understanding of the costs and risks associated with each Incoterm. This can be easily addressed by explaining the terms in an easy-to-understand document created by the ICC itself.

By adding a list of each Incoterms® rule’s costs, parties will be able to readily compare what the cost of each rule will be for their business. The result is that they will be able to make an informed decision about their transaction.

What should industry players do to adapt?

Purchase a copy of the Incoterms 2020 document and read the Explanatory Notes as well as the rearranged list of costs.

Incoterms® 2020 book

Always engage an expert prior to making any important decisions to ensure your international transaction flows smoothly.

What next?

The changes in Incoterms® 2020, whilst subtle, should still be reviewed. For a seamless transition, industry players are encouraged to adapt to them prior to 1 January 2020.

It’s really important that both importers and exporters pay close attention to their contract of sale. Bill Cole emphasised that the chosen rule used needs to align with all the other terms used in the contract which deal with things like transportation and finance. If one of the terms are mischaracterised and are inconsistent with the rule selected, the potential for misunderstandings and disputes can escalate.

As stated by Nathan Stanton, Customs Broker at International Cargo Express, “buyers and sellers need to do more research on Incoterms to make sure that they’re not taken advantage of”. Indeed, the vast majority of traders use an Incoterms® rule that is not suitable for their business goals. Bob Ronai commented that 90 to 95% of international contracts around the world fail to correctly use the Incoterms rules, and that’s not surprising.

Businesses involved in the international sale of goods should review their contracts and documentation to ensure they’re using the right Incoterms® rule and are complying with its requirements. Regardless of the changes, it is strongly recommended engaging an industry expert, such as a professional freight forwarder, to assist in the process. Official ICC Incoterms® 2020 Workshops facilitated by Bob Ronai and Bill Cole above mentioned are also available.

If you have questions or you’d like to discuss anything related to Incoterms® rules leave a comment below or get in touch through .

 

 

This article was written by George Kyriakides, ICE Director and Sydney Branch Manager. 

 

 

 

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Attracting overseas investors.✅
Reducing import costs.✅
Tapping into overseas markets.✅
These are some of the benefits of Free Trade Agreements. Find out more about Australia's FTAs here: www.icecargo.com.au/free-trade-agreements-australia/
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Attracting overseas investors.✅
Reducing import costs.✅
Tapping into overseas markets.✅
These are some of the benefits of Free Trade Agreements. Find out more about Australias FTAs here: https://www.icecargo.com.au/free-trade-agreements-australia/

Buyer’s consolidation is a method of shipping freight from a point of origin to an end destination by grouping your shipments together into one larger shipment. By consolidating a number of shipments, you may be able to save on shipping costs and reduce the risk of damage to your freight.
Find out more: bit.ly/39HW00c
... See MoreSee Less

Buyer’s consolidation is a method of shipping freight from a point of origin to an end destination by grouping your shipments together into one larger shipment. By consolidating a number of shipments, you may be able to save on shipping costs and reduce the risk of damage to your freight.
Find out more: http://bit.ly/39HW00c

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