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How Do the New Incoterms® 2020 Rules Impact the Supply Chain and Logistics Industry?

It has been difficult to escape reading that the International Chamber of Commerce (ICC) has now released the Incoterms® 2020 rules, the latest edition of the international trade terms. There are training workshops being conducted around the world in the coming months, as well as online through the ICC Academy.

As with previous versions, the Incoterms® 2020 are a set of rules designed to interpret eleven commonly-used three letter abbreviations, any one of which may well appear in a contract between a seller and a buyer, explaining their mutual obligations such as delivery, carriage, risk and security-related matters.

Before the latest release there was a lot of incorrect information circulating online, including that EXW and DDP would disappear, a new CNI would appear and so on. These predictions were proven entirely false and unfounded. The main changes in the 2020 rules over the 2010 rules are:

  • Use of plain language instead of legalistic language to make them more easily understood by users
  • Re-arrangement of the articles within each rule to better reflect the order in which things actually happen
  • A new requirement, if the parties agree, in FCA, of the buyer instructing its carrier to issue an on-board bill of lading to the seller who then must present all originals to the buyer
  • The default insurance for CIP is now Institute Cargo Clauses (A) instead of ICC (C) as previously
  • The DAT rule being renamed (DPU Delivered at Place Unloaded).

Do any of these changes impact on the supply chain and logistics industries? The answer is “yes, some do.”

Key considerations for logistics and supply chain professionals:

When to use FCA, CPT and CIP
We must remember that logistics service providers are not bound by what the seller and buyer agree between each other in their sale of goods contract, instead interaction with service providers is by way of an entirely separate contract. Service providers are often called upon to advise their clients about the Incoterms® rules so some informed knowledge is vital, at least by buying the book itself.
Service providers should be encouraging their clients to use the more appropriate rules, for example FCA, CPT and CIP for containerised (both FCL and LCL), air, road and rail shipments. FOB, CFR and CIF are for bulk and breakbulk waterway shipments and not containers, as they are port-to-port rules and all require the seller to load the goods on board the vessel.

However, with FCLs the seller ‘delivers’ when it hands over the goods to the carrier – whether already packed into the container or loose for packing – often at the seller’s premises. From that point on the seller has no physical control over the goods or knowledge of where they are or when they will be loaded on board the vessel.

With LCL shipments it is worse, not only does the seller often not know to which CFS the goods are going, but it doesn’t know which container they are being packed into, what vessel that container is going on and when, and if it might be deconsolidated at some intermediate port and reconsolidated into another container headed hopefully to the intended destination.

There is a gap in liabilities if the “on board” rules (FOB, CFR & CIF) are used for containers between delivery and loading on board, presenting a problem as to who bears the risk if loss or damage to the cargo occurs within that gap period.

This is all the more so with FOB because the seller believes that when it hands its goods to the buyer’s carrier it has done what it has to do (which aligns with FCA) yet the buyer thinks the seller bears the risk until the goods are on board and worse still thinks that the seller is at fault if the goods aren’t shipped on board within the delivery time stated in the contract.

Simply put, it is because the two parties have two different concepts of “delivery.”

New requirements for FCA
While on the topic of FCA, there is now a new requirement that the buyer, if agreed with the seller, instructs its carrier to give the seller an on-board bill of lading. This addresses some concerns about the seller being able to obtain an on-board bill of lading if payment is by letter of credit.

The DPU rule
The newly renamed DPU rule is the previous DAT (Delivered at Terminal) but extended to make it clearer that it can be delivered at any place not just a terminal.

EXW and DDP
The 2020 rules are clearer that EXW (Ex Works) and DDP (Delivered Duty Paid) are fraught with difficulties in cross-border trade, which are now laid out more clearly in the Explanatory Notes for these rules. In EXW the seller does not even load the buyer’s vehicle which is problematic with issues of health and safety, insurance etc when the buyer’s staff and equipment enter the seller’s premises.

An EXW sale is usually treated as a domestic sale and so VAT/GST may well apply with the overseas buyer unable to claim it back, and it is the overseas buyer, not the seller, who must complete any export formalities in their own name.

A logistics provider clearing the goods in the seller’s name without the seller’s knowledge or authority, just to “make things easier”, is clearly putting themselves at risk of legal action. DDP is problematic at the other end, as the seller is required to import clear the goods in their own name.

If the logistics provider clears the goods in the buyer’s name for ease but without the knowledge or authority of that buyer it has then put itself and the seller and buyer in a potentially dangerous situation as regards any shortfall of duty should the seller under-declare the value of the goods. The seller must pay VAT/GST in the importing country, and not being registered for tax purposes in that country, cannot then claim it back. In summary, supply chain and logistics service providers owe it to themselves and to their clients to be totally aware of these now current Incoterms® 2020 rules – by buying the book and taking the ICC’s online training – and do their best to encourage their clients to use the correct rules for the safety and benefit of all parties.

 

ABOUT THE AUTHOR

Bob Ronai

Bob Ronai was a contributor to the ICC’s book “The ICC Guide on Transport and the Incoterms® 2010 Rules” and because of that was the first Australian and second non-lawyer to be appointed by the International Chamber of Commerce to their Incoterms® 2020 Drafting Group.

Bob owns and manages the Incoterms group on LinkedIn with nearly twenty thousand members, and has self-published an Amazon e-book “A Commentary on the Incoterms® 2020 Rules.” He can be contacted at bobr@exports.com.au

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