Letters to Ship By: ABCs of The 2020 Incoterms
Businesses that regularly ship goods within the United States are no doubt acquainted with basic domestic freight terms such as FOB, or Free on Board. One might see FOB in an international contract and expect it to have the same meaning as in domestic parlance. After all, FOB is FOB, is it not? Unfortunately, the answer is "No." FOB in an international shipping contract is likely a reference to an entirely different shorthand: the so-called "Incoterms" published by the International Chamber of Commerce (ICC). The Incoterms FOB rule has a completely different meaning than the domestic FOB rule (exporters who want to use the Incoterm equivalent of FOB should instead opt for the FCA rule, or Free Carrier At). Failure to understand the differences between domestic terms and Incoterms could result in operational and legal complications for your overseas shipments.
First published in 1936 and intended to standardize international shipping contracts, Incoterms are a globally recognized set of three letter abbreviations that the ICC updates approximately every 10 years. There are currently 11 Incoterms, each designed to help clarify the allocation of shipment risks and responsibilities. International buyers and sellers must understand not only the Incoterms incorporated in their agreements, but also which versions of the Incoterms apply. Updated Incoterms do not automatically replace older versions, and thus contracts executed prior to the most recent January 2020 update remain subject to the version of Incoterms specified in the contract. In fact, parties may elect to use an older version of Incoterms despite the 2020 update, provided the version used is not so outdated that it results in a violation of other applicable shipping laws.
If the parties agree to use the 2020 Incoterms, there are some minor but important differences from the 2010 version. One noteworthy rule change affects the CIF and CIP rules. When shipping under the 2020 CIP rule (Carriage and Insurance Paid To), a seller now must purchase a higher level of insurance, i.e., ICC Clause A insurance or the equivalent, whereas the CIF rule (Cost, Insurance, and Freight) still permits a lower level of coverage under ICC Clause C. Why the difference? Clause A insurance provides more comprehensive coverage for manufactured goods, while the lower level of coverage under Clause C is more appropriate for commodities. As a seller, noncompliance with the correct Incoterm-required insurance could result in inadequate coverage for your shipment.
Another notable change is the DPU rule. DPU (Delivered at Place Unloaded) is not a new rule, but rather a renaming of the 2010 DAT (Delivered at Terminal) rule. The new name underscores the fact that a DPU destination can be any location, not just a facility that one might describe as a "terminal." The 2020 Incoterms also highlight the disparity between DPU and the DAP (Delivered at Place) rule. For example, under DPU, the seller is responsible for loading, shipping and unloading the cargo. Under DAP, however, the seller is responsible for loading and shipping but the buyer must unload. Overlooking this subtle difference could potentially lead to an embarrassing situation or logistics delay or worse, a claim for breach of contract.
Incoterms can be instrumental in simplifying your international shipments. Moreover, they can help you get on the same page with your overseas trade partners, especially when linguistic or cultural barriers exist. Becoming familiar with rules like CFR, EXW and FAS will go a long way toward ensuring your international shipments do not go MIA.
For more information, contact Bill Speros at 814/870-7764 or wsperos@mijb.com.
Article featured in the Manufacturer and Business Associations' September 2020 Business Magazine.
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