Incoterms® and Commercial Contracts

Differences between Incoterms® 2010 and 2020

The most important initiative behind the Incoterms® 2020 rules has been to focus on how the presentation could be enhanced to steer users towards the right Incoterms® rule for their sale contract. Thus:

a. a greater emphasis in this Introduction on making the right choice;
b. a clearer explanation of the demarcation and connection between the sale contract and its ancillary contracts;
c. upgraded Guidance Notes presented now as Explanatory Notes to each Incoterms® rule; and
d. a re-ordering within the Incoterms® rules giving delivery and risk more prominence.

All these changes, though cosmetic in appearance, are in reality substantial attempts on the part of ICC to assist the international trading community towards smoother export/import transactions.

Apart from these general changes, there are more substantive changes in the Incoterms® 2020 rules when compared with Incoterms® 2010. Before looking at those changes, mention must be made of a particular development in trade practice which occurred since 2010 and which ICC has decided should not lead to a change in the Incoterms® 2020 rules, namely Verified Gross Mass (VGM).

Note on Verified Gross Mass (VGM)—Since 1 July 2016, Regulation 2 under the International Convention for the Safety of Life at Sea (SOLAS) imposed on shippers in the case of the shipment of containers the obligation either to weigh the packed container using calibrated and certified equipment, or to weigh the contents of the container and add the weight of the container when empty. In either case, the VGM is to be recorded with the carrier. A failure to comply bears the sanction under the SOLAS Convention that the container "should not be loaded onto a ship": see paragraph 4.2, MSC1/Circ.1475, 9 June 2014.

These weighing operations obviously incur expense and failure may lead to delay in loading. As this happened after 2010, it is unsurprising that there was some pressure in the consultations leading to Incoterms® 2020 for a clear indication to be given as to who, as between seller and buyer, should bear such obligations.

It was felt by the Drafting Group that obligations and costs relating to VGM were too specific and complex to warrant explicit mention in the Incoterms® 2020 rules.

Returning to the changes made by ICC to the Incoterms® 2010 rules in the Incoterms® 2020 rules, these are:

a. Bills of lading with an on-board notation and the FCA Incoterms® rule
b. Costs, where they are listed
c. Different levels of insurance cover in CIF and CIP
d. Arranging for carriage with seller's or buyer's own means of transport in FCA, DAP, DPU and DDP
e. Change in the three-letter initials for DAT to DPU
f. Inclusion of security-related requirements within carriage obligations and costs
g. Explanatory Notes for Users


[a] Bills of lading with an on-board notation and the FCA Incoterms® rule

Where goods are sold FCA for carriage by sea, sellers or buyers (or more likely their banks where a letter of credit is in place) might want a bill of lading with an on-board notation.

However, delivery under the FCA rule is completed before the loading of the goods on board the vessel. It is by no means certain that the seller can obtain an on-board bill of lading from the carrier. That carrier is likely, under its contract of carriage, to be bound and entitled to issue an on-board bill of lading only once the goods are actually on board.

To cater for this situation, FCA A6/B6 of Incoterms® 2020 now provides for an additional option. The buyer and the seller can agree that the buyer will instruct its carrier to issue an on-board bill of lading to the seller after the loading of the goods, the seller then being obliged to tender that bill of lading to the buyer, typically through the banks. ICC recognises that, despite this somewhat unhappy union between an on-board bill of lading and FCA delivery, this caters for a demonstrated need in the marketplace. Finally, it should be emphasised that even where this optional mechanism is adopted, the seller is under no obligation to the buyer as to the terms of the contract of carriage.

Does it remain true to say that where containerised goods are delivered by seller to buyer by handing over to a carrier before loading onto a ship, the seller is well advised to sell on FCA terms rather than on FOB terms? The answer to that question is Yes. Where Incoterms® 2020 have made a difference, however, is that where such a seller still wants or needs a bill of lading with an on-board notation, the new additional option in the FCA term A6/B6 makes provision for such a document.

[b] Costs, where they are listed

In the new ordering of the articles within the Incoterms® 2020 rules, costs now appear at A9/B9 of each Incoterms® rule. Apart from that re-location, however, there is another change that will become obvious to users early on. The various costs which fall to be allocated by various articles within the Incoterms® rules have traditionally appeared in different parts of each Incoterms® rule. Thus, for example, costs related to the obtaining of a delivery document in FOB 2010 were mentioned in A8, the article under the heading "Delivery Document", but not in A6, the article under the heading "Allocation of Costs".

In the Incoterms® 2020 rules, however, the equivalent of A6/B6, namely A9/B9, now lists all the costs allocated by each particular Incoterms® rule. A9/B9 in the Incoterms® 2020 rules are consequently longer than A6/B6 in the Incoterms® 2020 rules.

The purpose is to provide users with a one-stop list of costs, so that the seller or buyer can now find in one place all the costs for which it would be responsible under that particular Incoterms® rule. Items of cost are also mentioned in their home article: thus, for example, the costs involved in obtaining documents in FOB still also appear at A6/B6 as well as at A9/B9. The thinking here was that users interested in discovering the specific allocation of documentary costs might be more inclined to go to the specific article dealing with delivery documents rather than to the general article listing all the costs.

[c] Different levels of insurance cover in CIF and CIP

In the Incoterms® 2010 rules, A3 of both CIF and CIP imposed on the seller the obligation to "obtain at its own expense cargo insurance complying at least with the minimum cover as provided by Clauses (C) of the Institute Cargo Clauses (Lloyd's Market Association/International Underwriting Association 'LMA/IUA') or any similar clauses." Institute Cargo Clauses (C) provide cover for a number of listed risks, subject to itemised exclusions; Institute Cargo Clauses (A), on the other hand, cover "all risks", again subject to itemised exclusions. During the consultations leading to the Incoterms® 2020 rules, the case was made for moving from Institute Cargo Clauses (C) to Institute Cargo Clauses (A), thus increasing the cover obtained by the seller for the benefit of the buyer. This could, of course, also involve an additional cost in premium. The contrary case, namely to stay with Institute Cargo Clauses (C), was equally strongly put, particularly by those involved in the maritime trade of commodities. After considerable discussion within and beyond the Drafting Group, the decision was made to provide for different minimum cover in the CIF Incoterms® rule and in the CIP Incoterms® rule. In the first, which is much more likely to be used in the maritime commodity trades, the status quo has been retained, with Institute Cargo Clauses (C) as the default position, although it is, of course, open to the parties to agree to higher cover. In the second, namely the CIP Incoterms® rule, the seller must now obtain insurance cover complying with Institute Cargo Clauses (A), although it is, of course, again open to the parties to agree on a lower level of cover.

[d] Arranging for carriage with seller's or buyer's own means of transport in FCA, DAP, DPU and DDP

In the Incoterms® 2010 rules, it was assumed throughout that where the goods were to be carried from the seller to the buyer, they would be carried by a third-party carrier engaged for the purpose either by the seller or the buyer, depending on which Incoterms® rule was used.

It became clear in the deliberations leading to Incoterms® 2020, however, that there were some situations where, although the goods were to be carried from the seller to the buyer, they could be so carried without any third-party carrier being engaged at all. Thus, for example, there was nothing stopping a seller on a D rule from arranging for such carriage without outsourcing that function to a third party, namely by using its own means of transportation. Likewise, with an FCA purchase, there was nothing to stop the buyer from using its own vehicle for the collection of the goods and for their transport to the buyer's premises.

The rules appeared not to take account of these eventualities. The Incoterms® 2020 rules now do, by expressly allowing not only for the making of a contract of carriage, but also for simply arranging for the necessary carriage.

[e] Change in the three-letter initials for DAT to DPU

The only difference between DAT and DAP in the Incoterms® 2010 rules was that in DAT the seller delivered the goods once unloaded from the arriving means of transport into a "terminal"; whereas in DAP, the seller delivered the goods when the goods were placed at the disposal of the buyer on the arriving means of transport for unloading. It will also be recalled that the Guidance Note for DAT in Incoterms® 2010 defined the word "terminal" broadly to include "any place, whether covered or not…".

ICC decided to make two changes to DAT and DAP. First, the order in which the two Incoterms® 2020 rules are presented has been inverted, and DAP, where delivery happens before unloading, now appears before DAT. Secondly, the name of the rule DAT has been changed to DPU (Delivered at Place Unloaded), emphasising the reality that the place of destination could be any place and not only a "terminal". However, if that place is not in a terminal, the seller should make sure that the place where it intends to deliver the goods is a place where it is able to unload the goods.

[f] Inclusion of security-related requirements within carriage obligations and costs

It will be recalled that security-related requirements made a rather subdued entry into the Incoterms® 2010 rules, through A2/B2 and A10/B10 in each rule. The Incoterms® 2010 rules were the first revision of the Incoterms® rules to come into force after security-related concerns became so prevalent in the early part of this century. Those concerns, and the associated shipping practices which they have created in their wake, are now much more established. Connected as they are to carriage requirements, an express allocation of security-related obligations has now been added to A4 and A7 of each Incoterms® rule. The costs incurred by these requirements are also now given a more prominent position in the costs article, namely A9/B9.

[g] Explanatory Notes for Users

The Guidance Notes appearing at the start of each Incoterms® rule in the 2010 version now appear as "Explanatory Notes for Users". These Notes explain the fundamentals of each Incoterms® 2020 rule, such as when it should be used, when risk transfers and how costs are allocated between seller and buyer. The Explanatory Notes are intended (a) to help the user accurately and efficiently steer towards the appropriate Incoterms® rule for a particular transaction; and (b) to provide those deciding or advising on disputes or contracts governed by Incoterms® 2020 with guidance on matters which might require interpretation. For guidance on more fundamental issues that cut across the Incoterms® 2020 rules more generally, reference may, of course, also be made to the text of this Introduction.