DISECTING VARIANCES BETWEEN THE TERMS
Introduction
Now that incoterms have been defined on our previous blog titled "Global Trade," it is important to remember these terms may slightly vary from decade to decade, hence the cruciality of explicitly specifying on your contract of sale, which year of incoterms the parties are contracting under.
Remember, for contracts to be valid, there needs to be the meeting of the minds, meaning the terms and the responsibilities of each party must be clear and understood by both parties to mean the same. Simply put: both contracting parties must be on the same page.
Furthermore, it is worth mentioning that, all versions of incoterms are valid, if agreed to by both parties and are fully enforceable if clearly specified in the contract. Failure to mention the year version of incoterms for your contract and mentioning the incoterm only, will result in the current revision of Incoterms rules in force during the time the contract was concluded, to be applied in the event of a dispute.
Now, let’s delve into the difference between incoterms 2010 & incoterms 2020.
Incoterms 2020 came into effect from the 1st of January 2020 and came with few substantive changes to the scope of obligations under the rules. The international Chamber of commerce reviews the incoterms every 10 years, to ensure the terms are relevant to current market demands, as well as cater to global trade parties’ needs.
The 2020 incoterms modified existing terms, and rearranged the liability and cost implications between the parties, to facilitate clearer communication in international trades and ensure that parties select the Incoterms that best suit them.
It is therefore, essential for all parties involved in international trade to understand the transformation of the terms, as the changes can significantly impact the trade strategies and overall contracts agreed on.
So what exactly changed
from incoterms 2010 to 2020?
Firstly:
DPU replaced the 2010 Incoterm called DAT - (Delivered At Terminal), whereby the consignor was said to have delivered the consignment, once unloaded from the arriving means of transport and placed at the consignee’s disposal at named terminal of the named port or place of destination.
The terminal in this case included places like, air cargo terminal, a quay, warehouse, container yard, road or rail. With the new revision - DPU (Delivered at Place Unloaded) however, the delivery of goods is not restricted to a terminal but can happen anywhere.
The International Chamber of Commerce deemed it necessary to clarify that goods need to be customs cleared before they can be delivered at a final named destination.
Second:
The Seller’s Freight insurance coverage obligation under CIP (carriage and insurance paid to) has changed from a minimum insurance coverage requirement provisioned by Institute Cargo Clauses (C), formally required under incoterms 2010, and now under incoterm 2020, the seller has to arrange the maximum insurance coverage, provided by Institute Cargo Clauses (A).
For CIF (carriage and insurance paid to) on the other hand, the seller’s insurance level requirement has not changed from the minimum level cover being Institute Cargo Clauses (C), in 2020 version of the terms.
The reason for no change here is that CIF is often used with bulk commodity trade, where minimum level coverage is widely accepted, while CIP on the other hand, is popularly used for manufactured goods, and such require a higher insurance cover. Also, under CIP term, the cargo can be shipped by multiple modes of transportation, which exposes the cargo to greater risks, hence more insurance coverage is necessary.
Thirdly:
Regarding security requirements, while incoterms 2010 were mute on the security measures from the seller’s end, the 2020 incoterms publication expressly outlines the security requirements for each Incoterms and which party is liable from transport in the country of origin and up to customs clearance at the country of destination.
For example: under CPT, CFR, CIP, CIF, DAP, DPU, and DDP, the seller is now liable for fulfilling all security requirements, for transporting cargo out of the country of origin, to destination, while the importer’s liability comes into effect under EXW, FCA, FAS, and FOB.
Conclusion
More changes have been made, relating to allocation of costs; the recognition that seller and importer can use their own transport, as well as the FCA rule now being used together with the letter of credit, etc. We recommend parties to research further or access the ICC incoterms book and ensure that rules for incoterms used in their contract are aligned with their requirements. Remember, if not specified, the version of incoterms recognizable in the event of disputes, is the current version in force, during the year within which the contract was concluded.