Incoterms 2020 – a useful guide for logistics service providers

Incoterms can be very useful for transport operators and logistics companies. But what are they, exactly? PETER LAMB sheds some light.

It is important to note is that Incoterms do not constitute law: they are merely contractual terms – abbreviated as an “Incoterm” – that contracting parties involved in domestic or international trade may choose to incorporate into their contracts of sale. Incoterms were drafted by the International Chambers of Commerce (ICC) to facilitate trade across the globe. Both parties need to understand their application:  they are there to help and not to hinder.

The ICC released the new Incoterms – referred to as Incoterms 2020 – on September 10, 2019. Although some changes will not substantially affect traders, there have been significant changes to the insurance provisions that they will have to familiarise themselves with.

All 11 Incoterms of the previous edition, Incoterms 2010, have remained. The only difference is the change in the three-letter initials for DAT (Delivered at Terminal) to DPU (Delivered at Place Unloaded). In summary, there are four “wet” Incoterms for use if the mode of transport is not multi-modal and involves only transport by sea. The “wet” incoterms are FAS (Free Alongside Ship); FOB (Free On Board); CFR (Cost and Freight); and CIF (Cost Insurance and Freight).

There are seven “multi-modal” Incoterms: EXW (Ex Works), FCA (Free Carrier), CPT (Carriage Paid To), CIP (Carriage and Insurance Paid To), DAP (Delivered at Place), DPU (Delivered at Place Unloaded), and DDP (Delivered Duty Paid). The “multi-modal” Incoterms deal with the transportation of goods across different modes of transport (rail, air and/ or sea).

The main differences, in my view, that are likely to impact the local market are the different levels of insurance cover that the seller must obtain in CIP Incoterm. Incoterms 2020 now permit the default position for minimum insurance cover to be Institute Cargo Clause (A) as opposed to Institute Cargo Clause (C) for the CIP Incoterm. Institute Cargo Clauses (C) provide limited cover, while Institute Cargo Clauses (A) provide “all risk” subject to itemised exclusions. Provision is, however, made for the parties to agree on a lower level of insurance cover when using CIP Incoterm. The insurance cover under the CIF Incoterm has remained unchanged and is Institute Cargo Clauses (C), although there is now an express provision in the Incoterm for the parties to agree that the seller can obtain a higher level of insurance cover, Institute Cargo Clause (A).

A logistics service provider may not be directly concerned with the Incoterm under which the cargo is transported. However, for purposes of the Incoterms, the actual movement of the cargo does determine when risk in the cargo passes between the seller and the buyer. For example, delivery (the transfer of risk) takes place under Incoterm FCA (Free Carrier) when the named place of business is at the seller’s premises and when the cargo is actually loaded onto the seller’s means of transport.

On the other end of the spectrum, under Incoterm DDP (Delivered Duty Paid), delivery takes place only when the cargo is placed at the disposal of the buyer on the arriving means of transport, ready for unloading at the named place of destination. It is helpful to all parties if the logistics service provider provides detailed transportation documentation that accurately reflects the physical loading, movement and discharge of the cargo concerned. This helps the seller and buyer comply with their respective obligations under the Incoterms.