Incoterms 2020: An Improvement, But …
On its website, the International Chamber of Commerce (ICC) states that the International Commercial Terms (Incoterms) rules for domestic- and international-trade contracts “are often misunderstood.” That’s not an insignificant acknowledgement, considering the ICC developed the Incoterms and updates them every 10 years.
With that in mind, has Incoterms 2020 — released earlier this month, to great anticipation in the transportation and logistics industries — cleared up the confusion and made the rules more user-friendly? Yes and no, says T.J. Schaefer, Ph.D., vice president of carrier strategy and operations at Chicago-based project44, an advanced visibility platform for shippers and third-party logistics firms. “I think (the ICC) recognizes that many people don’t understand the rules and misuse them,” he says. “It’s intended to be very simplistic and easy to understand if (procurement and logistics professionals) put in the effort. That’s an improvement, but I think there could have been a lot more improvement and changes that could have been done.”
In conjunction with the Incoterms 2020 release, the ICC has developed an online training course designed to, according to its website, provide a “comprehensive working knowledge (of the rules) to reduce issues along the supply chain and ensure efficient practices.” The course is a welcome addition, Schaefer says, but there is still likely to be confusion among supply managers who are not well-versed in Incoterms.
“The majority of people are not buying the Incoterms book and keeping it at their desk at all times,” he says. “The (practitioners) who make the effort to go through the book and gain a greater understanding will be able to potentially use that to their advantage.”
The Incoterms Changes
The Incoterms 2020 rules take effect on January 1. While previous versions of Incoterms rules, including 2010, remain valid beyond that date, Schaefer recommends updating supply contracts to the latest version. He says, “This is why it is critical that the version of Incoterms is always stated after the named port, place or point.”
For Incoterms 2020, there are seven major amendments:
1) The change of delivered-at-terminal (DAT) term to delivered at place unloaded (DPU). The ICC honored requests that deliveries shouldn’t be limited to terminals, but Schaefer says it’s critical for users to adequately describe the place of delivery in the contract and ensure the location is suitable for delivery.
2) In deliveries under the free carrier (FCA) Incoterms rule, the buyer and seller can agree that an on-board bill of lading will be tendered after goods have been loaded onto a vessel.
3) Different minimum insurance levels have been established for cost insurance and freight (CIF) and carriage and insurance paid to (CIP) deliveries. CIF is generally used for bulk commodity trades and CIP for higher-value manufactured goods.
4) Parties can use their own transportation for FCA, DPU, delivered at place (DAP) and delivered duty paid (DDP) deliveries. “A manufacturer that delivered to, say, Target or Walmart can use its own carriage, whereas before it was assumed to be outsourced,” Schaefer says.
5) With such transport-security obligations as mandatory screening of containers becoming more common, those requirements are to be included in carriage costs.
6) Billing has been simplified, with costs to be listed under each relevant Incoterm and clearly assigned to the buyer or seller.
7) The guidance notes in previous Incoterms have been expanded to “explanatory notes for users,” on such matters as when an Incoterm should be used, when risk transfers and how costs are allocated. The notes are designed to provide guidance in a dispute.
Schaefer suggested that the Incoterms could have been more improved through a streamlining of its 11 rules. The continued inclusion of the free on board (FOB) rule is especially problematic, he says: “FOB pertains to the use of sea or inland waterway transportation only. In the U.S., another set of outdated terms (in the Uniform Commercial Code) also uses FOB. So, there's overlap between two sets of terms, and that will still be potentially confusing for people doing business in or with the U.S. I would expect to see people still misusing FOB.”
Drafting Group ‘Disconnect’
Since the previous Incoterms update in 2010, technology, terrorism and geopolitical turmoil have significantly changed the global-trade environment. The ICC’s Incoterms 2020 drafting group aimed to (1) update the rules to fit changes in laws and customs codes and (2) eliminate unnecessary wording that can cause cross-language confusion. In the latter goal, the drafting group fell short, Schaefer says.
In addition to the FOB issue, Schaefer provided another example — insufficient distinction between the FCA and ex works rules for delivery, risk transfer and export formalities, increasing the likelihood of mistakes or misuse. “Perhaps in the overall Incoterms guide, things are clearer, but in the actual three-character terms, that was not addressed,” he says.
The Incoterms drafting group received more than 3,000 rules comments and recommendations from the ICC’s national committees. However, Schaefer says the drafting group’s “disconnect” from day-to-day operations adds to the Incoterms’ complexity.
“If you look at the summary of the drafting group, I see a lot of academics and lawyers. I don't see a lot of practitioners,” Schaefer says. “A lot of the (issues) come about because the rules makers aren't living this day in and day out. They see case law and recommendations, but they're not involved in daily transactions between companies that are buying and selling. As a result, they miss out on what are, in my mind, simple changes that would be astronomical improvements.”