As well known, INCOTERMS (INternational COmmercial TERMS) is a set of rules published by the International Chamber of Commerce (ICC) to explain the commercial terms frequently used in international trade. The purpose of INCOTERMS is to contribute to and facilitate the safe and fast conduct of global commerce and business relationship by establishing “commonly accepted definitions and rules” related to the delivery of goods between trading partners worldwide. This official set of rules for international and local contracts is frequently used worldwide for cross-border and domestic agreements relating to the carriage of goods. It regulates the responsibilities of buyers and sellers regarding costs/ freight and insurance and risks associated with the international transportation and delivery of goods.
INCOTERMS, which ICC first introduced in 1936, is periodically revised for reflecting changes and needs in international trade. Lastly, the rules are renewed for providing more certainty and clarity to global businesses and traders. INCOTERMS 2020, the last version launched by ICC, came into effect on 1st January 2020.
INCOTERMS 2020 consists of eleven separate terms, which are: EXW (Exworks); FCA (Free Carrier); FAS (Free Alongside Ship); FOB (Free on Board); CFR (Cost and Freight); CIF (Cost, Insurance and Freight); CPT (Cost Paid To); CIP (Carrier & Insurance Paid To); DPU (Delivered at Place Unloaded); DAP (Delivered At Place); DDP (Delivered Duty Paid). Also, the new terms include more detailed explanatory notes and some different nuances such as varying levels of insurance coverage in Cost Insurance and Freight (CIF) and Carriage and Insurance Paid To (CIP).
What is Different on INCOTERMS 2020?
INCOTERMS 2020 introduced arrangements for carriage with own means of transport in FCA, Delivered at Place (DAP), Delivered at Place Unloaded (DPU), and Delivered Duty Paid (DDP).
INCOTERM 2020 includes security-related requirements within carriage obligations and costs. It formally defines the “delivery point” in the transaction where “the risk of loss or damage to the goods passes from the seller to the buyer.” In contrast, previously in INCOTERMS 2010, the term had a more informal explanation.
The new rules of 2020 give priority to security by listing import and export requirements. Also, they help in distinguishing whether the buyer or seller is responsible for meeting each of those requirements.
The term FCA is significantly changed. INCOTERMS 2020’s version of FCA allows the buyer to instruct the carrier to issue a Bill of Lading with an “onboard notation” to the seller. By doing so, it satisfies the terms and conditions of a Letter of Credit. Now, the trading parties may agree that the buyer will instruct the ship to issue an onboard bill of lading to the seller once the goods are loaded. The seller will then share this document with the buyer. Previously, the ships would refuse the issuance of a bill of lading if the goods were received not directly from the seller but an intermediary. So, many exporters preferred to use FOB (Free on Board) to arrange payment under a Letter of Credit.
Another noticeable change is the introduction of DPU (Delivered at Place Unloaded) to replace DAT (Delivered at Terminal). Previously, the word ‘Terminal’ was confusing, and DPU broadly covered all delivery options.
The CIP (Carriage & Insurance Paid To) term changes the insurance coverage requirements. The seller, under Institute Cargo Clause A, must purchase a higher level of insurance. Incoterms 2020 provides different insurance cover levels under CIP (Carriage and Insurance Paid) and CIF (Carriage Insurance and Freight). The CIP rule now demands a higher level of insurance cover that is compliant with the Institute Cargo Clauses (A) or similar clauses. Under CIF, which is used in sea trade, Institute Cargo Clauses (C) remains the default level of coverage, but the parties involved can opt for a higher insurance cover.
Additionally, FCA (Free Carrier), DAP (Delivered at Place), DPU (Delivered at Place Unloaded), and DDP (Delivered Duty Paid) now take account of buyers and sellers arranging their own transport rather than using a third party. Incoterms 2010 assumed a third party carries out the transportation of goods between the buyer and seller. The revised rules consider the fact that the buyer and seller might use their own vehicles to transport the goods. Thus, Incoterms 2020 allows for the buyer’s own means of transport under the FCA rule and the seller’s own means of transportation under the DAP, DPU, and DDP rules.
Expense allocation between buyer and seller is now listed more precisely to help avoid confusion. In the 2010 Incoterms, costs sometimes became a big issue. Carriers could change their pricing structure by adding back-charges. As a consequence, sellers faced additional terminal handling expenses.
It has to be noted that the traders may still refer to and agree on the application of Incoterms 2010 (previous version) if they find it appropriate, while ICC recommends using the latest version of the rules.
However, it is worth underlining that the parties’ choice on the application of INCOTERMS does not mean that they have incorporated a choice of law provision according to Turkish Law’s conflict of law approach. As mentioned above, INCOTERMS only regulates the legal regime between buyers and sellers regarding costs (including freight and insurance) and risks associated with the international transportation and delivery of goods.