Whether importing commodities from Asia or exporting finished product to Europe, as with all things legal: terms matter. This reality is no less the case when selecting International Commercial Terms. Better known as “Incoterms” today, Incoterms are invaluable to domestic or international transactions in the modern era. Each year, they facilitate trillions of dollars of trade, helping to allocate risk, delivery duties, and other responsibilities between commercial buyers and sellers of goods. But as with all things legal, Incoterms are evolving. They have been since their introduction decades ago.

The International Chamber of Commerce (ICC) updates Incoterms approximately once every ten years and did so most recently by releasing Incoterms® 2020. This new generation of terms are designed to make life easier for importers and exporters, aligning terms with the practical realities of international transactions. Incoterms® 2020 introduce a number of key changes:

1. Free Carrier Alongside and Bills of Lading. Sellers now have the ability to receive onboard bills of lading when shipping goods Free Carrier Alongside (FCA). Bills of lading are usually necessary when a seller is securing payment from a letter of credit. Historically, sellers chose Free on Board (FOB) when shipping by sea to receive bills of lading. This was not without problems, however. Most sellers lose control of goods when they arrive at a shipping terminal, and FOB’s risk of loss generally remains with the seller until the goods cross a ship’s railing. To avoid this undesirable period of lost control while simultaneously holding the risk of loss, Incoterms® 2020 now allows sellers to receive a bill of lading under FCA.
2. Delivery at Terminal Changes to Delivery at Place Unloaded. Delivery at Terminal (DAT) from Incoterms 2010® is changed in name only to Delivery at Place Unloaded (DPU). Eliminating the word “terminal” is meant to reflect DPU’s broad applicability to many delivery locations, not just terminals.
3. Carriage and Insurance Paid Increases its Insurance Requirements. The insurance requirements for Carriage and Insurance Paid (CIP ) is increased under Incoterms® Compared with Cost, Insurance, and Freight (CIF) which is generally used for commodities, CIP’s increase in insurance requirements is meant to reflect the fact that sellers shipping CIP are generally sending more expensive, manufactured goods.

Incoterms® 2020 includes many other smaller improvements as well. They clarify who is responsible for customs clearance into the destination country and whether parties may provide their own transportation. They also reduce jargon. Still, failing to specify which generation of Incoterms controls your deal or misapplying these terms can make a large difference not immediately apparent when conducting international transactions.

If you are in the process of organizing an international transaction or have commercial contracts that involve Incoterms, we highly recommend you check such term reflects your intentions. Risk and duty allocations are an invaluable component of any transaction, especially when dealing with parties across international borders. If your contracts do not specify Incoterms or you believe they are being misapplied, you should consider asking your Miller Johnson attorney to help review and revise them to better protect your business.