Incoterms® 2020: what do the changes mean for your business?

Import and export offer great opportunities for a growing business. But they also involve risks. Incoterms® contain agreements regarding the delivery of goods across national borders. Using them helps you to control the risks. The new Incoterms® 2020 came into force on 1 January 2020.

As a business owner, you want reliable partners to expand your international market. A healthy, realistic attitude towards a new business partner and a screening by a specialist organisation or a representative organisation are no luxury. Export and import also involve plenty of customs formalities and other administrative work. The practical implications vary for every product and every business. You probably noticed that the involvement of specialists is often required to avoid getting lost.

Clear arrangements are obviously essential when it comes to international commerce. Many of the commercial arrangements concern the delivery of goods, liability and the allocation of costs. By using Incoterms®, you significantly reduce the risk of disputes.

sale of goods. There are eleven Incoterms®, four of them designed for sea and inland waterway transport. You can use the other seven Incoterms® for any mode of transport.

The first edition of Incoterms® was published in 1936. Since international commerce is continually changing, Incoterms® are constantly adapted to reflect the changing economic reality. Which version of Incoterms® is meant is indicated in documents by the year in which this version took effect. In most documents currently in circulation, you’ll see the version applying up to the end of 2019, or Incoterms® 2010.  

Incoterms® form part of a sales contract. They may be incorporated as a separate clause in a written contract, or equally set out in the general terms and conditions.

Each Incoterm® sets out the respective obligations of the seller and the buyer in a transaction. The costs and risks are also assigned.  

Based on the Incoterm®, parties know at what time and from which place the risk passes from one party to the other. The insurance cover can be aligned with this. The Incoterm® also clearly shows who is responsible for packing, who handles the customs formalities, who pays the import and/or export duties, who takes care of the transport and who is responsible for loading and unloading.  

In other words: the three letters of an Incoterm® have an extensive meaning.  

Although Incoterms® cover many aspects of an (international) sale, there are some aspects which have to be agreed upon separately.  

For instance, the moment at which the risk passes is often different from the time at which ownership passes. If the parties have agreed that delivery will take place “EXW seller’s warehouse located at ...”, the risk will pass to the buyer once the goods are made available on the seller’s premises and the buyer has been informed of this. However, the Incoterm® says nothing about transfer of ownership. Although the buyer assumes the risk early in the delivery process, the parties may agree that the buyer will not acquire ownership until the invoice is paid in full.

Payment terms and any warranties and liabilities regarding the function and conformity of the goods are also defined in other clauses of the agreement. Incoterms® also do not govern the relationship between buyer, seller and carrier.

The Incoterm® DAT (“Delivered At Terminal”) is replaced in Incoterms® 2020 by DPU (“Delivered at Place Unloaded”). Where DPU is used, the terminal can still be the place of destination, but there can be no misunderstanding that another destination point (for example a warehouse) can be agreed upon.

For four Incoterms® (FCA, DAP, DPU and DDP), it is now also possible for the buyer or seller to transport the goods using their own means of transport.

Levels of insurance cover are stipulated for the Incoterms® CIF and CIP.  

The new version of Incoterms® contains extra security requirements for the obligations relating to transport.

In each sale-purchase-relationship, a business makes agreements about the delivery of goods. These agreements are not necessarily the same for each transaction between two parties. As the seller you want to transfer the risk and obligations as early as possible, while as the buyer you would prefer the responsibility to pass as late as possible.

The new Incoterms® 2020 are an ideal opportunity to thoroughly review your existing agreements with suppliers and customers and see whether any adjustments are necessary or desirable. If you haven’t yet set out certain delivery arrangements with a business partner on paper via an Incoterm®, this may be the time to introduce Incoterms® 2020.

This may involve adapting clauses in contracts or amending general terms and conditions (of sale and/or purchase).

More information?

As a client of Baker TIlly, you can contact Ann Gobien, Legal Director, or your file manager.
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