2020 Incoterms Fall Short of Industry Expectations, May Require Updated Contracts, Lawyers Say
Although the International Chamber of Commerce’s 2020 incoterms did not make the significant revisions that industries expected, it did introduce several changes that may require updated contacts between importers and exporters.
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The 2020 changes were in stark contrast to the 2010 version, which introduced a host of consequential revisions for international traders, said Damian Honey, a Holman Fenwick Willan (HFW) lawyer who specializes in dispute resolution in freight-related matters. “The current version of incoterms don’t contain those significant changes,” Honey said, speaking during an Oct. 17 webinar with two other HFW trade lawyers. “There are some changes, but in terms of the re-papering exercises, it’s unlikely that the same re-papering exercise is going to have to be undertaken.”
Although the changes are minor compared to 2010, the new incoterms introduce a significantly revised presentation to create a more user-friendly experience and make important changes to insurance requirements responsibilities, the lawyers said.
Under the 2010 incoterms, both CIF (Cost, Insurance and Freight) and CIP (Carriage and Insurance Paid) required the seller to provide “basic” insurance coverage, said Martina Kelly, a lawyer specializing in trading contracts. That basic insurance coverage was adequate for bulk cargo that was difficult to damage, such as coal and iron ore, Kelly said, but drew criticism from sellers of expensive manufactured goods that wanted a more “comprehensive” coverage. Under the 2020 incoterms, the International Chamber of Commerce (ICC) decided to keep the basic insurance requirement under CIF (an incoterm that is only used for maritime deliveries) but changed the insurance coverage to a higher standard under CIP (an incoterm that can be used for any mode of transport).
As a result, the default level of insurance under CIP will provide “a higher standard of insurance” but be “more costly,” Kelly said, which may present issues to importers. “Parties using the CIP incoterm need to be aware that an increased insurance coverage will therefore be required, and the increased costs are likely to be factored into the costs of the goods,” Kelly said. “And that will be passed on to the buyer.”
Traders and companies should review their contracts for the CIP incoterm to avoid unknowingly paying higher costs. “You should consider whether you’re happy with the increased insurance requirements,” Kelly said. “If not, make provisions for alternative insurance terms in your contract.” She noted that buyers and sellers are free to change the specific insurance provisions in their contract if they come to an agreement.
While the new insurance provisions represent a significant change to the 2020 incoterms, minor changes include the introduction of DPU (Delivered at Place Unloaded) to replace DAT (Delivered at Terminal). Traders criticized the need to use DAT even when goods weren’t being delivered at a terminal, Kelly said. To address this, the ICC simply changed the name with no changes to the “substance” of the rule, she said. Even so, companies may need to search their contracts for the term. “If your contacts are currently using the incoterm DAT,” Kelly said, “you should consider changing this to DPU.”
Notable changes to the 2020 incoterms also include a revamped presentation, which features a new “horizontal view” in the back of the book. The view “enables the user to … compare and contrast all of the incoterm rules in one place,” said Alice Marques, a lawyer specializing in issues under charterparties and contracts of affreightment.
The new incoterms also gather all the cost responsibilities for each incoterm into one section, making it easier for buyers and sellers to determine responsibilities. Under the 2010 incoterms, “parties were not necessarily familiar with which costs they were responsible for before entering into a contract that incorporated a particular incoterm,” Marques said. “This latest edition now gathers all of those cost components together in one article. If a party has a question on costs, that party can go straight to one place and find out whether they are responsible.”
Kelly said it was “notable” that the 2020 incoterms were “not as far-reaching as expected.” Specifically, the ICC kept DDP (Delivered Duty Paid) and EXW (Ex Works), two incoterms that have been highly criticized by industries “for being more applicable to domestic trade” and “inconsistent with elements of the European Union customs code,” Kelly said.
The ICC may have held back on making large changes after the backlash it received from its 2010 changes, which “were not universally popular,” Kelly said.
“Essentially it seems the ICC has refrained from making any of these significant changes to incoterms largely in the interest of certainty and continuity for the international transport community,” Kelly said. “The ICC has now erred on the side of caution by keeping changes to a minimum and focusing on a better presentation of incoterms to improve the market’s understanding.”