On September 10th, 2019, the International Chamber of Commerce (ICC) published the latest version of the Incoterms® rules which will come into force on January 1st, 2020.
Incoterms® is an acronym for “International Commercial Terms” and a registered trademark of the ICC. It was created in 1936 with the purpose of establishing commonly accepted definitions and rules for international commercial transactions between traders all around the world. The primary objective of Incoterms® is to estipulate defined criteria on allocations of costs and risks between the buyer and seller in an international sales contract.
The main advantage of Incoterms® involves the simplification in 11 encoded denominations of a series of conditions to be complied with by the contracting parties.
By virtue of this normalization or standardization, the buyer and the seller can easily understand the allocation of rights, obligations, and responsibilities, according to the chosen Incoterm.
The Incoterms® only apply to international transactions of goods and they rule ten basic aspects:
a) general obligations;
b) delivery/reception of goods: delivery place/point, act of delivery, loading and unloading (delivery time is not ruled);
c) transfer of risks;
d) transport of goods;
e) insurance contract;
f) delivery/transport documents;
g) export clearance, transit and import;
h) checking, packaging, and labelling;
i) cost allocations, and
j) notices and disclosures.
It is an ordinary mistake among traders to consider these rules enough to govern the complete legal relationship binding the seller and the buyer. Therefore, it is necessary to point out that the Incoterms® are purely complementary rules, so they do not constitute a contract by themselves. The Incoterms® do not replace the law ruling the contract nor they define the price, the currency of the transactions, or the credit conditions. They do not determine how or when the transfer of property is effected either.
Main changes included in Incoterms®2020 regarding 2010 version
As a customary practice since its creation date in 1936, the International Chamber of Commerce has periodically issued revisions and amendments to the Incoterms® (1945, 1953, 1967, 1976, 1980, 1990, 2000, 2010, and 2020) with the purpose of adapting and upgrading these rules by adjusting their terms to the changing dynamics and requests of the international trade.
Even though in this last version changes are not structural, certain modifications have been introduced with respect to the last version. The following are the most relevant ones:
Under the Incoterm DAT (Delivered at Terminal) from 2010, the seller is considered to have fulfilled the contractual obligation of delivering as soon as the goods are placed at the disposal of the buyer at a named “terminal”, being this the moment at which the transfer of risk occurs and the buyer bears all risks.
However, the place of delivery may be other than a terminal; therefore, there are no specific and limiting references to the terminal in Incoterms® 2020, and the acronym DAT was replaced by DPU (Delivered at Place Unloaded). This new denomination not only extends the field of action of this Incoterm but it also reduces the possibilities of potential disputes in this regard, since it is specifically expressed that the location agreed for the delivery may be other than a terminal.
By virtue of the Incoterms CIP (Carriage and Insurance Paid to) and CIF (Cost, Insurance and Freight), included in the Incoterms® 2010, the seller must contract for insurance cover against the buyer’s risk of loss or damage to the goods during the carriage. This should be at least the minimum cover of the Institute Cargo Clauses (ICC ¨C¨), which is a basic level of insurance cover.
The Incoterms® 2020 include a change which creates a new difference between CIP and CIF. While CIF keeps the requirement of a minimum insurance cover (ICC ¨C¨), CIP has strengthened this demand and a minimum insurance cover equivalent to ICC ¨A¨ (all risks) shall be requested. This change is due to the fact that CIP is most frequently used in the trade of manufactured products, which require a higher level of insurance cover, in contrast to the trade of bulk products, where CIF is most commonly used.
The Incoterms®2020 determine in a more precise way the allocation of costs of operation, storage, and (import/export) customs clearance between the seller and the buyer. This was more extensively reflected and listed in a separated chapter with the purpose of mitigating the increasing incidence of disputes arising in that regard.
One of the most important changes is the incorporation of a general principle according to which the seller must bear the costs incurred until the point of delivery, and the buyer, the cost arising from that moment on, unless the parties agree otherwise.
As a consequence of the terrorist attacks worldwide, and, in particular, of the strike in the Twin Towers in New York City (USA, 2011), the security measures in every transport-related aspect have been toughened. Of course, the international cargo transport is not exempted from this situation.
Even though the Incoterms® 2010 regulated obligations in connection with security requirements and standards demanded by ports all around the world —such as compulsory inspections of containers, etc.— and the costs involved in the fulfilment of such requirements, it was done in a very generic way, giving rise to many commercial disputes.
Therefore, in this new version of Incoterms® 2020, references regarding this issue are more precise and it is clearly stated that those obligations inherent to the compliance of the security requirements and measures shall be assumed by the party executing the transport contracts: the seller (CPT, CFR, CIP, CIF, DAP, DPU, or DDP) or the buyer (EXW, FCA, FAS, or FOB).
Regarding the security requirements in Customs, the obligation of complying with them and bearing the corresponding costs is imposed on the party responsible for carrying out the customs clearance under the contracted mode. Therefore, the obligation rests with the seller; both in origin and in destination, under the DDP mode; and only in origin under the modes CPT, CFR, CIP, CIF, DAP, DPU, FCA, FAS o FOB; or in the buyer, both in origin and in destination, under the EXW mode; and only in destination under the modes CPT, CFR, CIP, CIF, DAP, DPU, FCA, FAS o FOB.
In both cases, goods transport and customs clearance, the party which is not responsible for the security-related obligations must provide the other party —when requested and at its expense— with any necessary information to comply with them.
The Incoterms® 2010 only deals with scenarios in which transport is in charge of third parties; therefore, there are no provisions ruling those cases in which sellers or buyers have their own means of transport. This is solved in the Incoterms® 2020 by specific regulations on this regard.
The change in the FCA under the Incoterms® 2020 needs particular attention when the cargo is carried by water, since this change is meant to minimize the conflict which has been frequently present in practice when the seller, even after fulfilling his contractual obligation of delivering the goods at the placed named by the buyer (for example, at a terminal, a warehouse, etc.), had to wait until the cargo was actually on board to get the bill of lading (B/L) with the notation “Shipped On Board,” which allowed him to receive the payment guaranteed by a letter of credit.
This issue would only be solved as long as the financial institutions accepted receiving a document different from the “Shipped on board” B/L for releasing the payment.
With the aim of mitigating this problem, the dispositions of the FCA mode in the Incoterms® 2020 include now a possibility which, by virtue of an agreement between the parties, would allow the seller —at his own risk and expense— instruct the carrier to issue a document with the notation “Shipped on board” although the goods are not actually loaded on the ship. This would enable the seller receive the payment, without any further delay, once his contractual obligation is fulfilled
We doubt shipping companies will accept this “solution” -without conditions-, given the fact that they are third parties to the international contract of sale, and they are not bound to the Incoterms®.
Besides, it is important to highlight that to issue a “Shipped on board” B/L when the cargo is not actually on board may affect the shipping companies’ P&I cover.
The observation of the behavior of the industry players, once this change is in force, will be essential to provide a precise analysis in relation to the success or failure of this “solution”.
This new version of Incoterms® includes more detailed explanatory notes, with better illustrations, and the order of the text is carefully arranged.
In spite of the ICC’s efforts to improve this and future versions of the Incoterms®, these will only be completely exploited as long as they are duly used, according to the operation under which they were conceived. This is the reason why a careful and solid analysis should be carried out before choosing the appropriate Incoterm. For this purpose, we share these concluding considerations:
– FAS, FOB, CFR, and CIF: only appropriate for water transport, and non-containerised cargo.
– FCA, CPT, CIP, DAP, and DPU: appropriate for international transport with containers.
– EXW and DDP: not appropriate for international trade.
– FAS, FOB, CFR, and CIF: perform a thorough analysis.
– Although assessing costs is important, this should not be decisive at the moment of choosing the appropriate Incoterm.
– The decision in relation to the correct term to be applied should be determined by more relevant factors, such as the place of delivery and reception of the cargo, the transfer of risks inherent to the operation, and the obligation to contract the transport service and afford the corresponding costs.
This article is meant to provide the reader with basic information on general interest issues. It is not supposed to offer comprehensive details nor legal advice. If you need assistance regarding particular events or legal matters, contact your legal counsel.
