Incoterms 2020 in international trade Published : Monday, 6 December, 2021 at 12:00 AM

https://www.observerbd.com/news.php?id=343051

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M S Siddiqui

Incoterms 2020 in

international trade

There is a change in

Incoterms rules for

international trade. These

rules are all about the

delivery such as Free on

Board (FOB), Cost and

Freight (C&F) etc.

International Commercial

Terms, also known as

Incoterms issued by The

International Chamber of

Commerce (ICC), are a

series of terms of sale that

apply worldwide. Incoterms

determine the allocation of

costs and obligations of the

seller and the buyer.

Incoterms rules define the

responsibilities of buyers

and sellers for the delivery

of goods under sales contracts. They are the authoritative rules for determining

how costs and risks are allocated to the parties.

Buyers and sellers using the right Incoterms rules are often set up well, therefore

it's essential for businesses to fully understand the risks and delivery associated

with each incoterms rule. The problems that normally arise are due to the wrong

use of an Incoterms rule. These rules are reviewed and updated by every ten

years. The previous edition was published in 2010. It responds to concerns

raised by users of Incoterms and to changes in the market to ensure the terms

are relevant and suitable to both domestic and global trade. The changes made

to address, amongst other things, increased security requirements, improved

clarity on cost allocation as well as tackling insurance concerns.

The substance of Incoterms 2020 rules from earlier 2010 rules have not changed

considerably, but the small subtle changes are absolutely crucial for trade

specialists. The differences between Incoterms 2010 and Incoterms 2020 are not

as huge as it was with the changes introduced to Incoterms 2010. But the small

subtle changes are absolutely crucial for trade specialists. One of the most

significant differences is the change of the name DAT (Delivered at Terminal)

to DPU (Delivered at Place Unloaded) due to the misinterpretation of the word

"terminal." Another change is the increase of the level of cover in the CIP rule

unless stated otherwise in the agreement.

Incoterms 2020 assists the seller when the Free Carrier (FCA) rule applies in

conjunction with a letter of credit. The buyer may require the carrier to provide

the seller with a document confirming the loading of the goods. Banks issuing

letters of credit require a bill of lading. In the term of agreement for FCA is the

seller is responsible for export clearance at port of destination and delivery of

goods to the carrier at the named place of delivery. The special consignment

such as high tech equipment supply, installation and transfer to technology is

part of the contract. These new rules emphasize that the carrier does not have to

comply with such a request.

A better solution is for the bank to request a "received for shipment" bill of

lading instead of a document proving that the cargo was loaded. In general, the

rules have been somewhat simplified to reduce the probability of misuse. The

new version specifies safety requirements as part of the obligations and

transport costs.

There is a trend in global trade that buyers also arrange own transport vessels.

Some Bangladeshi bid companies purchase bulk materials now have their own

ship to bring consignments from other countries. Incoterms 2020 includes

arrangements for carriage by own means of transport in the rules: FCA, DAP,

DPU, and DDP. The Incoterms 2020 rules now cover the situation where either

the buyer or the seller transports the goods using their own vehicles, without

engaging the services of a third party.

Incoterms 2020 set to assist the seller when the FCA rule is used in conjunction

with a letter of credit. The parties can agree that the buyer should instruct the

carrier to issue the seller with a document such as an on-board bill of lading -

something that banks often require under a letter of credit. This is clearly a

"stopgap" solution to banks' insistence on asking for on-board bills of lading for

containers. It also does little to mitigate the underlying risk when allowing a

buyer to arrange transport.

Another change to use the term Free Carrier (FCA) instead of Free on Board

(FOB) to avoid some avoid responsibility of uncertain cost beyond control. This

is because a seller usually loses control of the container once the container

arrives at the port of export before the container is loaded. However, FOB

means the seller takes all the risk and cost of the export, port terminal handling

charges and loading costs/risks. Sellers should then use FCA (Free Carrier). As

under FOB the seller is responsible for loading, they have a higher chance of

getting an on-board bill of lading. Although, many sellers still use FOB because

the letter of credit from the bank often requires an on-board bill of lading for the

seller to get paid.

In new Incoterms rule, Carriage and Insurance Paid To (CIP) means that the

seller is only responsible for delivery of the goods to the carrier but pays for the

carriage and insurance of the goods to the named destination. It may be for both

land and sea transportation. CIF is the same, except that it can only be used for

maritime transport means delivery is onto a ship and the destination needs to be

a port.

In Incoterms 2020, CIF keeps the same insurance requirements as in Incoterms

2010, but CIP has increased the level of insurance required to be obtained by the

seller. This is due to the fact that CIF is more often used with bulk commodity

trades, and CIP is more often used for manufactured goods, and manufactured

goods tend to require a higher level of insurance. Although CIF and CIP require

the seller to obtain insurance, it is recommended that parties consider whether

additional insurance coverage is required to reflect the potential risk of damage

to the goods during transport.

In Incoterms 2010, DAT means the goods are delivered once unloaded at the

named terminal. As DAT limits the place of delivery to a terminal, in Incoterms

2020, the reference to terminal has been removed to make it more general. DPU

means delivered at place unloaded, which can now be used for all modes of

transportation.

In recent years, transport security requirements have become more prevalent in

international trade, and Incoterms 2020 reflects such a change by detailing

security requirements for each Incoterms rule. Currently electronic lock and

other measures has been introduced and the forwarder are taking over the

responsibility of carrying the containers from warehouse of exporter to port of

shipment and even beyond the transportation of container from port of delivery.

Carriage Paid To (CPT) includes a specific requirement that the seller must

comply with any security-related requirements for transport to the destination.

These security requirements bring cost and risk delay if not fulfilled by the

parties.

Costs were a big issue in the 2010 Incoterms. Very often, Carriers often

changed their pricing structure to deal with add some costs and sellers were

often surprised by being back charged terminal handling charges. There are

many costs of different service charges and penalties imposed by port and

customs authorities involved in port of shipment and port of delivery. All costs

are now listed in the 'Allocation of Costs' sections for who will pay and which

cost, to avoid confusions.

The clarity of risk and responsibility of buyer and sellers, sharing of additional

and incidental costs will facilitate international trade. The government

departments, customs, port authority and the international traders may be

updated of the new incoterms 2020 in order to facilitate both of international

trade to avoid conflict and confusion.

M S Siddiqui is Legal Economist