Incoterms: the latest version
Every 10 years, the Incoterms (International Commercial Terms) are updated. The latest version becomes effective on 1 January 2020, although they can be adopted earlier. Incoterms are not mandatory laws and companies do not have to apply them, but they function as a guide to users. The latest version took two and a half years to draft and involved five lawyers and three business people. There are 11 recognised Incoterms in the latest version. Incoterms are effectively all about delivery, when the risks and rewards pass and who is responsible for costs. They detail the position in respect of carriage, costs and risks between the seller and the buyer.
The latest version does not represent a wholesale change, but a revision and clarification to the detail. Based on previous revisions, the new terms are not likely to have been fully taken up until one to two years after the effective date. As noted, they are not mandatory so you can still apply the old terms as long as it is clear in your contracts which terms you are applying.
Once you decide to move to the new Incoterms, you will need to incorporate them into your contracts, choosing the right rule for your business and individual requirements. It is very important that the contract specifies the place of delivery precisely (i.e. you give the exact address, not just a country or even a port).
There is an app available from the International Chamber of Commerce (ICC) which summarises the new terms. Although free, it is not very detailed. The full guide can be purchased from the ICC website for £45, while an electronic version is available for £40.
The main changes in the latest version are:
Delivery to Terminal (DAT) will now be Delivery at Place Unloaded (DPU). This represents the fact that delivery is not always to a port, and the place of delivery could be anywhere from a warehouse to a field.
Under the new rules, CIF will imply Class C insurance is required, while CIP indicates Class A insurance is required. Class A is more comprehensive and is therefore usually more expensive than Class C, the latter might be more applicable to basic commodities. As noted above, Incoterms are guides rather than law and you can alter the terms within your sale contract. This means that the contract could still use CIF but specify Class A insurance, or CIP could accept Class C insurance. However, in the absence of specific wording in the contract, the standard 2020 Incoterms will imply the class of insurance noted above.
More detail has been provided on costs and these have been collated under Schedule A9. The key principals are that cost to delivery are the sellers and costs after delivery are the buyers.
The 2020 terms allow for the use of own transport – FCA B4 “The buyer must contact or arrange at its own cost for carriage of goods.” The “or arrange” wording is a subtle but important change.
FCA (dockside and ready for loading), FOB (on board ship) and Bills of lading - changes in the new terms try to address the gap between being FCA and FOB and the requirement for a bill of lading. FCA is usually a preferable term for sellers using containers as they will lose control of the container once it has been unloaded from the lorry at the port. Letters of credit often need a bill of lading which is at odds with FCA terms and could prevent payment under the letter of credit. Therefore, if a LOC is in place, FOB terms are often used even though this increases the seller’s risk. Bills of lading are preferred over other forms of documentation as they provide some protection in the event of insolvency and are seen as harder to fake. As providers of finance are unlikely to move away from bills of lading, the new terms address this by allowing the buyer to direct the carrier to issue the on board bill of lading to the seller. This requires agreement in contract by the two parties and is unfortunately a bit of practical fudge to get around the issue.
The use of Incoterms in contracts is important to ensure the security of products and the cost of providing them. There is a lot of detailed guidance and the differences between terms can appear quite subtle but have significant consequences, especially if something goes wrong. Now is a good time to review your contracts due to the updated rules and, of course, Brexit, to see whether the terms you are using in your contracts are correct and fit for purpose. Given the importance of this to your business, it is strongly suggested that you seek specialist advice. If you have an in-house expert, it is recommended that they are properly trained. The ICC is accredited to train on the 2020 incoterms and it is worth investing the time on an appropriate training course or seeking third party advice, failure to do so could lead to significant costs and losses to the company.
The different terms also have different tax consequences which Crowe UK can help with. We have written some guidance on this which can be found on our international trade page.
