Click here to listen to the audio.

Building on David Lowe's earlier podcast on 'What are Incoterms?', here he explains more about the key changes in the new edition of Incoterms - Incoterms 2020 - and how you should deal with them.

Transcript

Thank you for joining Gowling WLG for this podcast. We are an international law firm working in major sectors including energy, life sciences, infrastructure, financial services, real estate and technology. Our episodes cover the latest developments relevant to you across different sectors and services. Make sure you subscribe to receive the latest episodes of this podcast. Visit our website, gowlingwlg.com for all of our latest insights.

David Lowe: Hi, welcome to this podcast about Incoterms. I am David Lowe, I lead Gowling WLG's Commercial Contracts team and I have a close interest in Incoterms. I am the global co-chair of the Incoterms 2020 drafting group. In other words, I have literally written Incoterms.

In this podcast, we are going to look at the new Incoterms 2020.

They were published in September 2019 and come into effect on 1 January 2020. They represent the once in a decade review of Incoterms. In this podcast, I am going to explain what those changes are and how you should deal with them.

So, Incoterms 2020 - a once in a decade review, carried out by the International Chamber of Commerce, reviewing Incoterms to make sure that they are reflecting international trade practice and amending them to reflect any changes during that decade in international trade.

Bear in mind that Incoterms might be used for bulk commodities, such as coal or iron ore, typically sold by the shipload, or they might be used for selling containers of manufactured goods which have been sent by ship, or maybe for selling pallets that have gone by road, or maybe containers that have gone by rail. So they deal with a vast range of goods across different forms of transport, domestic and international.

Therefore, those 11 Incoterms that make up Incoterms need to be capable of being used for all of those different trades. That is one of the reasons why Incoterms tends to be written in plain English, given a high-level position, applicable to any goods.

That is important because that is why Incoterms does not deal with the detail of any particular trade. If there is important detail in, say, the loading arrangements for goods, that is where the contract should be dealing with it. Incoterms cannot do everything.

The good news is that Incoterms 2020 do not represent a radical change from the previous set of Incoterms. That is important to mention because actually Incoterms 2010, the last edition, there were very big changes in those Incoterms. There were Incoterms that were abolished, new Incoterms were created and that therefore took a lot of system changes and training to understand what the new changes were for people to move over to Incoterms 2010. That has not happened in Incoterms 2020. The changes are much more in the detail. In the way that they are drafted and in particular issues and therefore, it should be easy for people to decide to move from Incoterms 2010 to Incoterms 2020 because there are no radical changes.

The first change I am going to deal with, is the change from DAT (Delivered At Terminal) to DPU (Delivered at Place, Unloaded). This is the only Incoterm change which has changed the acronym. So all those other acronyms, Ex-works, FOB, CIF, DDP - they all remain exactly the same. The only acronym that has changed, is changing DAT to DPU.

Now there is no change actually in the substance of that Incoterm. The effect of DPU - the new Incoterm is exactly the same as the old DAT Incoterm. There is no change in substance. Therefore, if you are a user of the Incoterm, DAT - simply change it to DPU. You do not need to think about it any further than that.

Now, you might ask - well why did we bother changing Incoterms to introduce DPU when there is no change in the substance? Why bother doing that? The reason for that is the feedback that the International Chamber of Commerce received during the drafting process was that users of Incoterms were finding DAT the reference to 'T', Terminal, was unhelpful because that gave the impression that goods could only be delivered at a freight terminal - at a warehouse, at a port or railhead. That is not the intention of DAT. Yes, it is mainly aimed at people delivering at a terminal but it does not have to be at a terminal, it could be delivered somewhere else. Therefore, the users of Incoterms DAT wanted to get rid of that 'T' to make it clearer it could be anywhere and that is why DAT has been changed to DPU, but with no change of substance.

The next key change is about CIF and CIP. CIF means Carriage Insurance Freight and can only be used with ships and CIP means Carriage Insurance Paid and can be used with any form of transport. In both of those Incoterms, there is an obligation on the seller to obtain insurance for the buyer. So if I am selling CIF Cape Town then I, as a seller, need to arrange for insurance to be in place for the buyer and therefore if the goods sink in the ocean, then I, as a seller, would give the insurance policy to the buyer and the buyer would then make a claim on that insurance policy.

Now in Incoterms 2010, the insurance that the seller has to provide is something called 'Clause C Institute of Cargo Clauses' or their equivalent. What does that mean?

Clause C is very basic insurance. If the ship sinks, it would probably cover that loss. But if the goods are just simply damaged in transit - perhaps they were not lashed down properly and they moved and banged into other goods and dented them - then that may not be covered by Clause C because Clause C is really basic insurance.

Now if you are selling iron ore or coal, then you only really want basic insurance - you know, coal is not going to damage other bits of coal in the cargo when the ship moves. You are only really worried about a total loss when the ship sinks.

But if you are buying manufactured goods, cars, clothing - all those other things that people buy for sale that are usually in containers, you probably do care a lot about the goods being damaged in transit, but the Clause C insurance does not help you.

So the feedback that the drafting group of Incoterms 2020 received was that users of these Incoterms CIF and CIP - some of them were saying, I want better insurance and the proposal was, that they wanted what is known as 'Clause A Institute of Cargo Clauses Insurance'. Clause A is called 'all-risks', so many of the things that could happen - the goods being dented - would be covered probably by Clause A insurance policy.

So, some people were saying, we want more insurance. The drafting group had to consider that. They also had to take account of the fact that people selling bulk commodities like coal and iron ore did not want the insurance changed. They did not want any more insurance in Clause C. So we have one big set of users - the commodity sellers and buyers who did not want to change the insurance provision - wanted to keep Clause C - and another big bunch of users buying manufactured goods who wanted Clause A.

Difficult of course to reconcile those two very different positions and so a compromise was reached. The compromise is that the insurance in CIF - the maritime term Carriage Insurance Freight is not changed. The insurance in CIF stays at Clause C.

However, the Incoterm CIP - Carriage Insurance Paid - the insurance arrangements in that have been changed to Clause A, the higher level of insurance which will also cost more money. So the thinking behind that is that if you are selling bulk commodities you are probably doing that using a maritime term and you will probably use CIF and the insurance has not changed - as that group of users wanted.

However, if you are using CIP - which can be used with any form of transport, it is more likely that you are using multi-modes of transport and it is more likely to be manufactured goods. It will be interesting to see what user take-up is; whether this causes confusion or alternatively provides an attractive alternative option. But certainly, if you use CIF or CIP, now is a really good time to review that Incoterm, check it is the right Incoterm and make sure that you understand and are comfortable with the insurance arrangements.

A more general issue in Incoterms that has been addressed has been the whole area of costs. In Incoterms 2010, of course the Incoterms told you who bore what costs but it was littered around the whole of the Incoterms. You had to read the entire Incoterms to understand where the costs were allocated, but costs are really important to everybody. Therefore in Incoterms 2020, costs have all been gathered together into one place so that you can just read one part of Incoterms to understand how the costs are allocated.

The general principle is that all of the costs, up to and including delivery, are with the seller and the costs after that point are with the buyer, but there are wrinkles in Incoterms to deal with some special circumstances - that is why it is always important to go and check the costs part of the Incoterms to make sure you understand the allocation of costs.

There have also been detailed changes around security. Over the last 20 years, security of international shipments has become more important. Twenty years ago, many cargos were not inspected, the containers were not opened - apart from perhaps, randomly or intelligent lead by customs checking for drug trafficking or misuse of customs declarations.

Now, in a world where there is much more terrorism, screening of containers and other security arrangements have become more important. So there is a whole load of security arrangements that have been developed, which are often attached as mandatory requirements on either export or import. For that sort of mandatory security requirements, the approach of Incoterms has been that whoever is responsible for import, is responsible for any mandatory security arrangement needed for import.

If you are in a country where it is a mandatory requirement that the container is X-rayed or screened before it arrives, then you, as the buyer, will have to ensure that takes place and will have to bear the cost of that.

The other form of security is cargo security. This is security requirements of the warehouse or the carrier that they may want the container to be weighed or lashed down in a certain way and Incoterms goes into more detail now as to who is responsible for the cargo security - who is responsible for the cost of it, who is responsible for it if it is not done properly.

A small change has been around transport. Incoterms have traditionally always assumed that the transport is provided by a third party carrier. And of course, if the goods are going by sea, that is often the case. Most buyers and sellers do not own their own ships and shipping lines and so the carrier is a third party and therefore Incoterms refers to contracting with the carrier.

However, some users have pointed out that, especially in road transport, it is more likely that the seller or the buyer owns or operates their own trucks and therefore people were questioning how you could contract with a carrier when the carrier was yourself. So there has been a small change in B4 of Incoterms to explain that the buyer must contract or arrange, at its own cost, for the carriage of the goods - that was an example from FCA. So those words, 'or arrange' have been put into Incoterms to emphasise that you do not have to contract with the carrier, you can merely arrange it if you are the carrier.

I now come to, what might be the most contentious issue and certainly it is probably the most difficult issue and I expect we will see further developments in this and it will be an area for discussion in the future editions of Incoterms. This is around the use of FCA and FOB.

If you are selling goods and they are being sold by container, the natural delivery point is when you arrive at the port with your container on the back of the truck, ready for unloading. That is the point after which, you lose control of the goods. Once the goods, the container, is lifted off the back of the truck, you lose sight of it, you will not be in contract with anyone at the port, you cannot really manage the risk of it during that port. And of course, in the port of export as the container is moved around and eventually loaded onto the ship, that is, of course, where many claims arise and also, many costs arise.

The International Chamber of Commerce has always said that people selling goods by sea, where there is a container involved, that sellers should try and use FCA Free Carrier. The International Chamber of Commerce has said, people should question whether FOB - Free On Board - is the right Incoterm where you are selling by containers. The reason why the ICC warns against using FOB for containers is that FOB means Free On Board - which means the seller is liable for all of the costs and risks until the goods are onboard the ship.

As I explained, usually the seller loses sight and control of their container at the port on arrival at the port. So under FOB the seller risks finding itself at risks and costs which he has no means of controlling and may not even know about them. Therefore there is a risk, for example, if you are an FOB seller that the port terminal might charge you for the storage time and loading costs onto the ship and you may not have expected that.

It also means that if something happens to the goods in the port and you are an FOB seller, then that becomes your problem as the seller. So, for example, remember the Tsunami in Japan which flooded one of the major container ports in Japan and many of the containers were damaged or floated away, if you were an FCA seller, that damage, those losses at the port are not your problem - you have fulfilled your job, you delivered it to the port and that is it.

If you are an FOB seller, the containers damaged at the port will be your problem, because you are liable until the goods are on board the ship and that often comes as a surprise to people.

So, if you are sending containers you should also try and use FCA unless there is a very good reason and you have thought about it. However, I know and I am sure you know that many contracts to buy manufactured goods delivered by container - especially from the Far East, are sold on FOB terms. We have had a lot of feedback from people concerned about this constant use of FOB, which is often an inappropriate Incoterm for container sales.

Now, some of that is due to ignorance - FOB has been around for a very, very long time, hundreds of years and so persuading people to move off FOB to a more modern Incoterm arrangement for containers is not easy and it will take time. It has already taken several decades to get where we are to encourage people using FCA. So, yes, that is a major issue but we have also heard from sophisticated users who said, "I know I should use FCA but, do you know what, there is something that is even more important than risks and costs and that is getting paid. I am selling my goods using a letter of credit, and the letter of credit says, I have to present an onboard bill of lading if I want to get paid. If I do not present to the bank an onboard bill of lading, I will not get paid".

Now, an onboard bill of lading is a document issued by a shipping line, to acknowledge receipt of the goods and onboard means it is being loaded onboard the ship. So it is very common in letters of credit - which are often used in international trade - for the bank to say, "I need an onboard bill of lading and if you do not, you will not get paid".

So, that puts the seller in a difficult place. If it sells FCA, it is nowhere near getting the goods onboard the ship - it has got no chance of obtaining an onboard bill of lading and therefore, they will not get paid.

However, if you are an FOB seller, you are responsible for getting the cargo onboard the ship. Therefore you are able to connect yourself to the ship - it is more likely that you can get hold of the onboard bill of lading, demonstrating that you put the goods onboard.

Therefore, the insistence by many banks and letters of credit on an onboard bill of lading means that people have to use FOB because they want to get paid. Now, the drafting group did explore the world of trade finance and whether this issue could be addressed - why, oh why, are onboard bills of lading used so often in letters of credit? Do they always need to be used? Could the banks not be encouraged, perhaps, to consider alternative documents that are more aligned with an FCA sale?

The drafting group recognised that it was not likely to be able to change the world of trade finance quickly, it could only control what was inside Incoterms. Therefore, the drafting group came up with an option so that people who do use FCA can, if they agree with the buyer, insist on being given an onboard bill of lading. This is in B6 of FCA where it says, "If the parties have so agreed, the buyer must instruct the carrier to issue to the seller a transport document stating the goods have been loaded, such as a bill of lading with an onboard notation".

Now there are some catches to this - if you are an FCA seller and you want the on-board bill of lading, then in your contract you will need to get the buyer to agree to arrange for you to get an onboard bill of lading. Many people will forget to do that and therefore this change is pointless, ultimately, because it only works if you have expressly agreed it with the buyer.

At least it gives an option to people and I see the real reason for including this is to start a debate about how we can move the world of trade finance on so that it does not so routinely and frequently require onboard bills of lading.

So that has been the main changes in substance of Incoterms 2020 but it does not stop there. The drafting group Incoterms 2020 cannot force anyone to buy the book nor to read the book, but we can help the book be as accessible as possible so somebody actually gets to the point of opening it. Therefore you will see in Incoterms 2020 expanded explanatory notes and introduction. Trying to give people an insight into the common issues that arise in Incoterms so they can be more informed.

There are also much improved pictures. Pictures after all, a tale of a thousand words; so much easier, so much more accessible. Those pictures have therefore been expanded, a bit more colour, to hopefully be more useful to users so if they only get so far as looking at the pictures, hopefully they will choose the right Incoterm.

Each of the Incoterms has been reordered within itself. There used to be written in the order that perhaps a lawyer might write them? That has been changed so that they are written in the order that a user of Incoterms would expect so that delivery and delivery point is now at A2, B2 - right at the beginning of Incoterms because that is the most important point and around which the rest of Incoterms would revolve.

For expert users of Incoterms, they will find a useful new resource at the back of the book. There is what we know as the horizontal section - so that tells you for each part of Incoterm, what they are in each one. So you can see next to each other, the A1's for each Incoterm, so you can read through and go, do I prefer Ex Works or FCA or FOB and I can contrast the different positions that they take in A1's against each other.

The average user will never look at that, but expert users should find that very useful. I mentioned in the other podcast about an overview of Incoterms about the maritime terms and how it is safe to avoid using the maritime terms and use the multi-modal terms instead, such as FCA because then there is a lower chance of making a mistake. To try and ensure that people are discouraged from using the maritime terms, unless they properly understand them, the maritime terms continue to be at the back of the book, in the hope that people who are exploring which Incoterm to use, will find the multi-modal terms first and use those first.

So, in summary - the changes to Incoterms. Firstly, no fundamental change. The Incoterms substantially are very similar to 2010 and if you are using Incoterms 2010, it should be straightforward for you to move over to Incoterms 2020.

DAT, Delivered At Terminal, has been changed to DPU, Delivered at Place Unloaded, but remember I said the change is only in the acronym - we just got rid of that terminal word because it was causing confusion. There is no change in substance. If you use DAT, just change it to DPU.

The insurance arrangements in CIP have changed and therefore it is really important that if you use CIF, Carriage Insurance Freight, or CIP, Carriage Insurance Paid, that you review that and see if that is appropriate. The CIP insurance has been increased but the CIF insurance has stayed at very basic insurance.

There has been that change to FCA, to allow where it is agreed for the seller to get an on-board bill of lading, but as I mentioned I see that as probably the beginning of a long debate about how we can better encourage use of Incoterms, especially when combined with letters of credit.

Of course, I have touched on how the presentation, the look and feel of Incoterms has changed and actually, the drafting group has been through every word in Incoterms, updating and trying to make the wording clearer and easier to use throughout.

So, that is how Incoterms have changed - what about when? When should you change over?

Well, firstly you do not have to change over at all. They are just a set of standard terms. If you want to, you can just carry on using Incoterms 2010 for as long as you want and as long as you can persuade the other party to just use Incoterms 2010.

I still see contracts that refer to old sets of Incoterms - like Incoterms 2000 or Incoterms 1990 and that is perfectly legally possible.

The catch is, of course, the older the set of Incoterms, the harder it is to get hold of them - if you have a question about Incoterms 1980, have you actually got a copy of it that you can read and check?

The other problem is that it is likely that the other party to the transaction will want to use a more up-to-date version of Incoterms and therefore you will probably find that using old editions of Incoterms will be challenged by the other person.

So, that is a key reason to change over to Incoterms 2020. You can change over to Incoterms whenever you want. You could change over to Incoterms in December 2019 before 2020 if you want. It is not a law that only comes into force on 2020. It is just a set of standard terms. You can change over whenever you want, over to 2020.

The experience from 2010 was that most regular users of Incoterms had changed over to the new set of Incoterms within a year or two of publication. There is no urgency - you do not have to change over to Incoterms in January 2020, you can wait and see if the other people you are dealing with want to change over and change over sometime during 2020 or even later.

On the ICC's website, it states that Incoterms 2020 are effective as of 1 January 2020. Why does it say that?

After all, I have explained that you can use them now but also you do not have to use them, you do not have to change over. The reason for that is, if you were say selling the goods FCA London the edition of Incoterms in force at the date of the contract. That it is clear then which edition of Incoterms would apply.

So a contract like that, if it was entered into on 31 December 2019, then Incoterms 2010 would apply. If, however, the same contract was entered into on 1 January 2020, then Incoterms 2020 would apply and therefore this effective date is just really there to allow the smooth transition of contracts that are drafted in that way.

My recommendation is to keep it simple. Just state in your contract which edition of Incoterms you are using - whether that be Incoterms 2010 or Incoterms 2020.

Thank you.

Thank you for listening to this Gowling WLG podcast. If you like this episode, please be sure to check out our website Gowlingwlg.com for more useful podcasts and articles or please leave us a review on iTunes. Make sure you subscribe to the podcast to join us for our next episode.