The Incoterms 2020 update

by Christian Siviere

The International Chamber of Commerce (ICC) has released the long-awaited 2020 update of their international trade terms for the sale of goods, the Incoterms. The new version takes effect January 1, 2020, and the release was timed to coincide with the ICC’s 100th anniversary.

The Incoterms rules define the division of responsibilities between a seller and a buyer for the tasks, costs and risks involved in delivering merchandise. Although they are not laws, they have gained wide acceptance over the years. Used by traders all over the world, they constitute a sort of universal language for businesses, providing clarity and certainty everywhere. First introduced in 1936, they have been revised on a regular basis to reflect changes in international trade; since 1980 they’ve been updated every 10 years.

In the 2010 update the terms were made applicable to domestic sales. The other big change was that four terms were eliminated, DES, DEQ, DAF and DDU, and two new terms were created: DAT and DAP. DAT, for Delivered At Terminal, was indeed a completely new Incoterm and it more or less replaced DES, DEQ and DAF. But DAP, for Delivered At Place, was just name change for the old DDU, Delivered Duties Unpaid, with otherwise unchanged conditions. FOB, Free On Board was adjusted so that risks now shift after cargo is effectively loaded on board the vessel at the port of loading.

For 2020 11 Incoterms remain, four for maritime and inland waterways, and seven multimodal ones. The maritime terms haven’t changed much since 1936, except the infamous “passing over the ship’s rail” and should be used only for breakbulk and bulk shipments. For containerized goods shipped by ocean freight, we should use the multimodal terms, not the maritime ones.

What else is not changing? The “C” Incoterms, CFR, CIP, CPT and CIP remain counter-intuitive and potentially dangerous for untrained traders, as the division of risks doesn’t match the division of costs. FCA still has two different meanings: the seller’s premises or somewhere else, potentially thousands of kilometres away, though still in the exporting country. And, only two Incoterms, CIF and CIP, carry specific cargo insurance obligations, which is potentially tricky, as traders should always ask themselves: “Should I take cargo insurance to cover my risks?”, irrespective of what the Incoterm says.

The 2020 rules use easier language and are cheaper to purchase, by almost 50 percent. They use enhanced graphics and provide more detailed explanations, making them more user-friendly.

The only notable substantive change is that DAT, Delivered At Terminal, will be replaced by DPU for Delivery At Place Unloaded. DPU is now the exception, being the only Incoterm where the seller has the responsibilities and costs of unloading at final destination. But import Customs clearance and related costs remain for the account of the buyer. So DPU is basically a DAP, with unloading.

Other changes are more limited. The FCA term now permits the issuance of “on board” Ocean Bills of Lading (OBL), although the seller’s responsibilities end with delivery to the ocean carrier. The issuance of “on board” OBLs was done in practice anyway, as carriers are not usually very interested in Incoterms, but rather who pays the freight, i.e. freight prepaid or freight collect, and generally release the OBLs to the party who booked and arranged the shipment.

Security-related obligations are more clearly spelled out for 2020 and minimal insurance obligations under CIF and CIP are being upgraded from Institute Cargo Clauses C to ICC A, i.e. from total loss to all risks.

When it comes to terms of trade, Canadian businesses have a dilemma: our first trading partner, the United States, tends to use its own terms derived from the Uniform Commercial Code and almost everything there is “FOB Destination”. So we have to ride with them.

But the rest of the world uses the international Incoterms and although the 2020 changes are not huge, Canadian traders must stay informed of international practices in order to grow and diversify their exports and sources of supply. This is particularly true with the CETA and TPP Free Trade Agreements with European and Pacific countries: businesses there don’t know “FOB Destination”, so we need to be fully familiar with the Incoterms.