On 10 September 2019, the International Chamber of Commerce (ICC) issued a much anticipated set of revisions to the Incoterms – the international commercial terms published to clarify the obligations of buyers and sellers in trade contracts, which will come into force on 1 January 2020. In a further attempt to adapt to current commercial practices and provide innovative solutions, Incoterms 2020 have introduced a number of significant changes.

The most notable changes include:

• Incoterm FCA (Free Carrier) and the onboard bill of lading
  • Incoterms 2020 introduce an option for parties to agree to issue an onboard bill of lading to the Seller for FCA shipped goods.
• Incoterm DPU (Delivered at Place Unloaded) and DAP (Delivered at Place) replaces DAT (Delivered at Terminal)
  • Incoterms 2020 now reflect that the delivery of goods can take place at locations other than terminals.
• Increased insurance under CIP (Carriage and Insurance Paid to)
  • A higher level of insurance cover for CIP shipped goods is now required to comply with Clause A (Institute Cargo Clauses).
• Clarification of allocation of costs between the Buyer of goods and Commercial Sellers
  • Incoterms 2020 A9 and B9 generally provide that the Seller is responsible for costs up to delivery and the Buyer will be responsible for costs after delivery.
• Further information on the use of the Buyer and/or Seller’s own transport
  • The position of the Buyer and Seller using their own modes of transport is made clearer under Incoterms 2020.
• Improved Structure
  • Incoterms 2020 is expressed to be the clearest, most straightforward presentation of the commercial terms to date. General improvements include placing terms relevant to delivery at article A2 to make them more prominent, the inclusion of a tool to compare incoterm elements across other terms, and the continued separation of multi modal from maritime incoterms. The Guidance Notes have been replaced by Explanatory Notes for Users to assist parties in their choice of rules and to navigate disputes.

Incoterms 2020 and Trade Finance

Whilst all of the changes are significant, the bill of lading offering for FCA shipped goods is particularly interesting for the trade finance sector.

For trades financed by a letter of credit the presentation of the bill of lading is an essential part of the transaction. If the bill of lading is exchanged earlier under FCA (as delivery is deemed to occur at the point of delivery of the goods to port as opposed to the loading on the ship, as is the case under FOB (Free on Board), it will need to state that the goods have been placed on board and were received for carriage. This could raise two practical issues.

Firstly, the carrier may or may not issue the bill of lading at the point of delivery to port, as the carrier will only be bound to present a bill of lading once the goods are placed on board the ship.

Secondly, the dates of delivery and loading on board may be different, which could be challenging for the financial institution as the seller would have secured final payment (by presenting the bill of lading to the financial institution) but the shipment may not have necessarily occurred.

In practice it is unlikely that the financial institution will be willing to take on this additional risk, and may introduce additional requirements for the Buyer to satisfy, even if the bill of lading is directed to the Seller. It will be interesting to see if and how this change is implemented.