As per January 2020 a new set of Incoterms® will become active. This is a set of trade terms which describe:
- Obligations: Who does what in f.e. organizing the carriage, insurance of goods, obtaining shipping documents, arranging for export or import licenses;
- Risk: Where and when the seller delivers the goods, in other words where does the risk transfers;
- Costs: Which party is responsible for which costs
The Incoterms® cover these areas in a set of ten articles for each term, numbered A1/B1 etc. “A” terms for the Seller and “B” terms for the Buyer.
In this article I do not aim to discuss all the rules, but will focus on four main changes:
- Why a change from DAT to DPU?
- Why is the use own means of transport relevant for FCA, DAP, DPU and DDP?
- Why do we have different levels of insurance in CIP and CIF?
- Why is a “Bill-of-Lading On-board notation” added for FCA?
By reading this article you will get familiar with the differences between the previous version and gain more insight in the updated Incoterms® 2020 framework as well.
1. Why a change from DAT to DPU?
In Incoterms® 2010 the only difference between DAP and DAT was that in DAT the goods were delivered unloaded, 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. The main difference was therefore, loaded or unloaded.
In the 2020 version there are two changes made regarding the rule DAT:
- DAP appears now before DAT as the this reflect better the actual situation. In DAP still loaded and in DAT unloaded.
- The second change was the change of the acronym DAT into DPU, emphasizing the reality that a place could be any place and not only a terminal.
In case of DPU the seller is responsible for export, but not for any import formality including post-delivery transit through third countries. If the buyer fails in this case to take of the import formalities, he bears the risk of loss and damage and cost for holding the goods at the point of entry, because delivery hasn’t occurred yet. In those situations, you might consider DDP.
The main difference between DAP and DAT is the unloading. Remember that this might be crucial in the situation where there is a significant risk of damage during unloading the goods. Also, when special unloading equipment is needed, the difference between the two terms might be relevant.
2. Why is the use own means of transport relevant for FCA, DAP, DPU and DDP?
In Incoterms® 2010 it was assumed that the goods were to be carried by a third party engaged for the purpose. Who was responsible for arranging it, was dependent of the rule used.
There can be many reasons why we collect or bring the goods or arrange a transportation contract ourselves. Although it is common practice, Incoterms® 2010 didn’t foresee that situation. It did only mention ”to contract” which means there should be a transportation contract. This is – formally speaking – not the case with own means of transportation. In the new rules this is corrected by using the description “… the buyer/seller must contract or arrange at its own cost for the carriage of goods to the named place of destination or to the agreed point …”
3. Why do we have different levels of insurance in CIP and CIF?
Most of you will have the understanding that the delivery takes place and risk transfers with CIF and CIP rules at the moment of loading at the carrier. Next to that, the insurance will cover for damages and losses up until to moment of actual arriving at the place agreed. So, if something happens with the goods I am covered for the losses.
The reality however is that the insurance was only covering general average and salvage charges incurred to avoid loss from any cause except those excluded.
In practice this was a very minimal coverage, of which not all parties are aware. This is the so called “Clause C” insurance.
In preparation towards the revised Incoterms® it has been an option to move forward to a Clause A obligation, thus increasing the cover obtained by the seller to benefit the buyer. The “Clause A” coverage can be seen as “All Risk” (with exceptions).
|TYPE OF RISK||MARINE CARGO CLAUSES|
|01||Fire / Explosion||✓||✓||✓|
|02||Stranding / Sinking||✓||✓||✓|
|03||Barratry / Jettison||✓||✓||✓|
|05||General Average / Sacrifice||✓||✓||✓|
|07||Washing overboard / Entry of water into ship||✓||✓||X|
|08||Theft / Pilferage / Non-delivery||✓||X||X|
|11||Contamination / Heavy weather||✓||X||X|
|13||Spontaneous combustion (self-heating)||X||X||X|
|14||War / Strikes / Civil Instability||X||X||X|
|15||Terrorism / Piracy||X||X||X|
|© 2019 Mutatis Mutandis|
Nevertheless, it has been decided to provide for two minimum coverage options within CIP and CIF, either Clause A or Clause C.
- For the maritime rule CIF the default coverage is “Clause C”.
- Outside the maritime world the default coverage will be “Clause A”, reflected in the rule CIP.
To make life easier, in the sales contract a higher (CIF) or lower (CIP) levels of coverage can be agreed.
So, when using these rules, there is still a negotiation between the buyer and seller needed. In both situations the insurance shall cover, at a minimum, the price provided in the contract plus 10% (i.e. 110%) and shall be in the currency of the contract.
4. Why is a “Bill-of-Lading On-board notation” added for FCA?
When goods are sold FCA for carriage by sea, sellers or buyers – or more likely their banks – may require a Bill-of-Lading (B/L) with an on-board notation. However, delivery under the FCA rule is completed before the loading of the goods on board of the vessel. Under Incoterms® 2010 in case of FCA it is by no means certain that the seller can even obtain an on-board Bill-of-Lading from the carrier. This carrier is likely, under its contract of carriage, bounded and entitled to issue an on-board Bill-of-Lading only once the goods are actually on-board.
But what does the on-board B/L mean? It is a form of evidence that a clause of the Letter of credit (L/C) has been fulfilled.
For example, a L/C requires:
Full set of original Bill of Lading
Port of Loading: HOCHIMINH CITY, VIETNAM
Port of Discharge: MANILA SOUTH PORT, PHILIPINES
To provide the evidence the bill of lading will require, an on-board notation showing any vessel name, the port of loading “Hochiminh City, Vietnam” and the on-board date.
CLEAN SHIPPED ON BOARD ON CS TINAI V.1602 AT HOCHIMINH PORT, VIETNAM ON MAY 01, 2016. FREIGHT PREPAID
on the B/L in combination with the destination port
MANILA SOUTH PORT, PHILIPINES
gives the evidence that the goods are delivered correctly.
As especially for shipping containerized cargo it is advised to use the FCA term instead of the maritime FOB, Incoterms® 2020 now provides, for this demonstrated need in the marketplace, a somewhat optical solution. Under FCA the buyer and the seller can now agree that the buyer will instruct its carrier to issue an on-board B/L to the seller after the loading of the goods.
In this article an insight is given regarding the changes of Incoterms® 2020. Please refer to the official publication for the exact meaning and obligations related to the use of any of the Incoterms® 2020 rules.
About the author:
Paul Denneman MSc CLTD CPIM CSCP, is a supply chain expert and international master trainer in APICS Certification Programs like Certified in Logistics, Transportation and Distribution (CLTD). He is observing changes in supply chains for the past 25 years.