Is your business ready for Incoterms® 2020?
Who is this article for? All businesses trading goods internationally.
Executive Summary
In September 2019, the International Chamber of Commerce (ICC) will launch its Incoterms® 2020 which will come into force on 1 January 2020. This article sets out the likely changes to the 2010 version, and alerts business to plan for the transition and adoption in their contracts of sale.
The ICC updates Incoterms® every ten years, the prevailing ones being Incoterms® 2010. The 2020 revision, the centenary edition, will update the terms to reflect developments in international trade over the last decade, including the disruptive innovation of digital systems & processes, and cyber fraud, in international trade.
Businesses seeking to implement Incoterms® 2020 will need to understand the new terms in detail, and to make the right amendments to their commercial policies and contracts of sale. There is no requirement to transition on 1 January 2020, but businesses must state in their contracts of sale which version of Incoterms® they are using. The incentive to adopt Incoterms® 2020 is they should be more robust than past versions and therefore, minimise business risk in today’s global trading environment.
What are Incoterms®?
Incoterms® define the precise points at which responsibility for carriage, duties & taxes, port fees, local handling fees and insurance for internationally traded goods passes from buyer to seller. The transfer of liability from buyer to seller for each of these aspects need not take place at the same place; this depends in the Incoterm chosen (so-called C, F, E, D terms and their derivatives as appropriate to the desired situation and modes of transport involved from end-to-end).
Generally, the more end -to-end risk the seller assumes, which may please the buyer, the less certainty the seller may have in control of costs and timely delivery of goods. Local handling costs in the destination country and navigating the act of getting goods released from the destination port, can be very difficult for a seller to control, whereas the buyer often has staff experienced in expediting these procedures and avoiding port storage costs.
Starting with Incoterms® 2010 the terms can also be used for domestic contracts of sale, enabling buyer and seller risks to be clearly specified and mitigated to avoid disputes should goods be damaged, lost or delayed in transit. Incoterms® 2010 FCA and Incoterms® 2010 DAP are most commonly used for domestic contracts of sale.
Why Incoterms® Matter for Your Business
All businesses trading goods internationally should use Incoterms® in their contracts of sale, and of purchase. If your business does no do this, it should. Sales Nova has found that many SMEs fail to use Incoterms® in their contracts of sale, exposing them to risks due to lack of clarity of buyer and seller responsibilities and when they transfer, creating risk of buyer non-payment and irrecoverable loss for missing or damaged goods.
Incoterms® are an internationally recognised set of standard definitions, designed to ensure risks are clearly defined for seller and buyer, avoiding costs and insurance being unintentionally omitted or being paid for twice. Incoterms® usually a requirement for Letters of Credit and export credit guarantees. A range of ICC publications and training courses offered by chambers of commerce, and private firms such as Strong & Herd, can quickly inform commercial and financial staff and senior management.
Business governance should set out policies setting out which Incoterms® the business is willing to trade under, and the delegation of authority to make the decision on the terms for a particular contract of sale. Contracts of sale should refer to the particular version of Incoterms® being adopted for that sale, for example “Incoterms® 2010 FCA The Loading Bay, XXX Limited, YYY Street, ZZZ City, AAA Country” or “Incoterms® 2000 CIF The Quayside, Port of Mumbai”.
What are the likely changes in Incoterms® 2020?
Once the ICC publishes Incoterms® 2020, Sales Nova will be providing guidance for businesses on the changes from the 2010 version. The indications so far as follows:
- Enhancement of the FCA term to move away from the misunderstandings and assumptions often made by using EXW, with EXW possibly being removed. There may be one FCA term for maritime transport and one for other modes of transport. Most businesses who think they ship EXW are in fact shipping FCA as they load the goods into the container / onto the carrier’s vehicle on their premises;
- DDP and FAS may be removed, with DDP being replaced by DTP (Delivered at Terminal Paid) and DPP (Delivered at Place Paid), in which the seller is responsible for all transport costs and duties to a terminal or non-terminal location respectively.
- FOB, CIP and CIF terms being improved to clarify responsibility for insurance; to account for destination handling charges; and controls and penalties to avoid both manipulation of the supplier and suppliers profiting from carriage charges.
- A new CNI term covering cost and insurance to the departure port. This incoterm would be between FCA and the CFR/CIF terms. “C” Incoterms® are important because they set out clear buyer & seller responsibilities for the insurance of goods in transit from end-to-end.
- Guidance on cyber security of shipment documentation to prevent fraud.
- China and Australia are likely to have an input for the first time, significantly improving global recognition and adoption of Incoterms®.
Further views on the forthcoming changes may be seen at:
https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-2020/
https://www.tradefinanceglobal.com/freight-forwarding/incoterms-2020/
http://www.strongandherd.co.uk/incoterms-2020/
https://www.icontainers.com/us/2018/09/11/what-changes-to-expect-incoterms-2020/
https://www.globalnegotiator.com/blog_en/incoterms-2020-main-changes/
https://www.lexology.com/library/detail.aspx?g=af925870-ec57-4a3d-9073-f27f6439a2a9