Incoterms – Two Years Later

By Bonnie Kersch, Senior Trade Advisor, Braumiller Consulting Group

In September 2019, the International Chamber of Commerce released Incoterms 2020, heralded as a groundbreaking version of Incoterms that would bring great change to the supply chain community.  Two years later, we look back on the changes that occurred and how they have affected us.

First, what changes were made after all?  Let’s take a look at the major ones:

FCA – The buyer and the seller can agree that the buyer will instruct its carrier to issue an on-board bill of lading to the seller after the loading of the goods, the seller then being obliged to tender that bill of lading to the buyer, typically through the banks.

Since that’s a little dense, let’s break it down.  Basically, if the buyer is using a letter of credit to buy something from the seller, the seller needs the on-board bill of lading to submit to the bank in order to get paid.  However, since it’s the buyer’s truck that is being sent in to pick up the goods, the seller doesn’t always get a copy of the bill of lading.  Now, using Incoterms 2020, the buyer will instruct its carrier to give the on-board bill of lading to the seller so that they can submit it to the bank and get paid.

The problem with this?  The language isn’t very strong at all.  Since the change merely says that the buyer will “instruct” its carrier give the bill of lading to the seller, what happens when the carrier doesn’t do that?  Nothing.  This change was good in theory, but I could see stronger language being used to address this in future versions of Incoterms.

CIP – CIP is one of only two Incoterms that requires the seller to obtain insurance.  The change to CIP involves the level of insurance required.  The seller must now obtain insurance coverage complying with Institute Cargo Clause A instead of C.  This is basically a “beefier” insurance policy.  Institute Cargo Clause C covers very limited risks, while Institute Cargo Clause A covers maximum risks and is also known as an All Risks cargo insurance policy.

DAT – DAT is now gone, thank God.  It was very confusing since it stood for “Delivered at Terminal” and a “terminal” can be so many places.  As a result, DAT was widely misused and misunderstood.  In its place, we have a new Incoterm – DPU.  DPU stands for Delivered at Place Unloaded and is the only Incoterm that requires the seller to unload at the buyer’s destination.  Although not widely used, this Incoterm has proven to come in handy for things like very hazardous shipments of chemicals and the like that the seller would like full control of all the way through unloading and for shipments of items that cannot be containerized or palletized like large pieces of sensitive equipment.

While the changes mentioned above are not all of the changes that were made to Incoterms 2020, they are arguably the most important ones.  I feel it is important to mention here that if your company hasn’t yet adopted Incoterms 2020 and are still using an older version, that’s okay.  As long as you state which version you’re using on your shipping documents, you’re good to go.  Feel free to switch over as soon as your contracts expire, or as soon as your company is ready.  Incoterms have changed every 10 years since 1980, so the next change shouldn’t happen for several more years.

Overall, the changes to Incoterms were arguably not major, but have proven to be helpful.  If your company still needs some help understanding Incoterms, please feel free to contact me at [email protected]   I’m Incoterms 2020 Certified by the ICC and am more than happy to help!