INCOTERMS are a set of rules introduced by the International Chamber of Commerce (ICC) to explain the commercial terms that are widely used in international trade. The purpose of the Incoterms rules is to contribute to and facilitate the safe and swift conduct of international trade. A reference to Incoterms by the parties in a sales contract will minimize the possibility of conflicts in the parties' interpretation of delivery terms through clearly identifying the parties' reciprocal rights and obligations.
The Incoterms were first created by the ICC in 1936, and have been developed and renewed many times since that time. Due to the continuous developments in global trade following the introduction of the Incoterms® 2010, the ICC felt the need to revise the Incoterms again, and launched the Incoterms® 2020 on 10 September 2019, with effect from 1 January 2020.
Scope of Incoterms
The Incoterms regulates certain aspects of contracts of sale and, in particular, the parties' rights and obligations in terms of delivery of the goods, transfer of risk and allocation of costs, as well as insurance and documentation requirements in 11 trade terms, each consisting of a set of ten articles, numbered A1/B1 to A10/B10.
It must be emphasized that the Incoterms rules are not in themselves contracts of sale or their substitutes; therefore, all aspects of a contract of sale are not regulated. The following subjects are not covered by the Incoterms: (i) whether a contract of sale exists; (ii) specifications of the goods sold; (iii) time, place, method or currency of payment of the price; (iv) remedies that may be sought for breach of the contract of sale; (v) consequences of delay and other breaches in the performance of the contractual obligations; (vi) effect of sanctions; (vii) imposition of tariffs; (viii) export or import prohibitions; (ix) force majeure or hardship; (x) intellectual property rights; (xi) applicable law or method and venue of dispute resolution; and (xii) transfer of property/title/ownership of the goods sold.
The Incoterms rules are not designed to reflect trade practices for a particular trade or particular goods. They may be used irrespective of the type or nature of the goods.
Main Revisions in Incoterms® 2020
Purpose of Revision
The main purpose behind the Incoterms® 2020 revision is to make the Rules more affordable, accessible, user-friendly, intuitive and practical. An emphasis has been given by the Drafting Group, which I am glad to be part of, as to how the presentation of the Rules could be enhanced to provide that the users choose the Incoterms rule that best suits their sales contract. For this purpose, the Incoterms® 2020 includes more graphics than before, and a clearer and more detailed general Introduction, as well Explanatory Notes for Users relating to each Incoterms rule. Aside from these structural changes, the Drafting Group put forth great efforts to take into consideration the latest developments in international trade, and obtained views from a broad spectrum of stakeholders and national associations, including those in commodities trading, banking, insurance, transport, customs, freight forwarding, logistics, import/export, compliance, etc.
- Re-ordering of Articles within each Rule: A re-ordering has been made among the Articles of each Rule, as a result of which delivery and transfer of risks have been given more significance. Delivery and transfer of risks now directly follow general obligations, and then comes the obligations concerning carriage, insurance and delivery/transport documents, followed by the export/import clearances, checking/packaging/marking, allocation of costs, and notices.
- Change in the three-letter initials from DAT to DPU: In the Incoterms® 2010, although DAT referred to 'Delivery at Terminal', the Guidance Note acknowledged that the term 'terminal' included any place, whether or not covered, such as a quay, warehouse, container yard or road, rail or air cargo terminal. To express that a terminal could be any place, the name of the Rule has been changed so as not to include such word. In addition, the fact that the DPU seller, unlike a DAP seller, delivers the goods once unloaded from the arriving means of transport has been emphasized, as the name now includes the word "unloaded".
- Placement of DAP before DPU: Incoterms® 2020 places DAP before DPU, as it burdens the seller with less obligations as compared to DPU, where the seller also carries the obligation to unload the goods from the arriving means of transport.
- Explanatory Notes for Users: The previous title of "Guidance Notes" has been replaced with the title "Explanatory Notes for Users" and, the content, as well, has been extended. The Notes now include more detailed explanations to alert the user of all significant issues relating to the relevant Rule, and give wide girth to the graphics that provide a visual explanation in terms of delivery, mode of transport, export/import clearance, etc.
- Horizontal presentation: The Incoterms rules traditionally appeared only in a vertical version, where each Rule listed all Articles from A1/B1 to A10/B10. Now, in addition to that, the Rules include a horizontal presentation, which lists all ten Articles of each Rule, successively, first for the seller, and then for the buyer. This new type of presentation will make it easier for the users to distinguish between different Rules in terms of the chosen subject, e.g. costs, export/import obligations, insurance, etc.
- Where costs are listed: Whereas the various costs to be allocated by the Articles have traditionally appeared in different parts of each Rule, in the Incoterms® 2020, A9/B9 now lists all of the costs allocated by each particular Incoterms rule. By virtue of this novelty, users will be able to see all of the costs that they will incur as the seller or the buyer in one place. Therefore, the Incoterms® 2020 provides a one-stop list for all of the costs. It is noteworthy to mention that costs also continue to be mentioned under the relevant Articles.
Changes in terms of Content
- Bills of lading with an on-board notation in the FCA: When the FCA rule is chosen for sea carriage, either sellers or buyers or their banks who have provided a letter of credit might wish to have a bill of lading with an on-board notation. To the contrary, delivery under the FCA rule is completed prior to loading the goods on board the vessel and, therefore, the carrier usually provides an on-board bill of lading only after the goods are actually on board, making it impossible for the seller to obtain an on-board bill of lading from the carrier. As a solution, FCA A6/B6 of the Incoterms® 2020 provides that if the parties have so agreed, the buyer must instruct its carrier to issue to the seller a transport document stating that the goods have been loaded, such as a bill of lading with an on-board notation thereon.
- Different levels of insurance coverage in CIF and CIP: Both Rules previously provided for insurance with minimum coverage as provided by Clauses (C) of the Institute Cargo Clauses (Lloyd's Market Association/International Underwriting Association 'LMA/IUA') or any similar clauses. Considering the need for higher coverages, but also taking into account those involved in the maritime trade of commodities, no change has been made to the CIF, which is more frequently used in the maritime commodity trades. On the other hand, in the CIP, coverages have been extended to Institute Cargo Clauses (A), which are known as "all risks," subject to certain exclusions, in the marketplaces. The parties are free to agree on higher or lower coverages under both Rules.
- Arranging for carriage with seller's or buyer's own means of transport in FCA, DAP, DPU and DDP: The previous wording of the Rules have always assumed that a third party would be engaged when the goods had to be carried from the seller to the buyer, as if it were not possible for the seller or the buyer to arrange for carriage through its own means. As this is not the case, the Incoterms® 2020 expressly provides for this opportunity through including in A4/B4 of the terms FCA, DAP, DPU and DDP that the buyer or the seller, as the case may be, must either contract or arrange for the carriage of the goods.
- Inclusion of security-related requirements within carriage obligations and costs: Security in the movement of goods has attracted more and more attention in international trade in recent years. Although the Incoterms® 2010 also included security-related requirements, the Incoterms® 2020 emphasizes such requirements and includes their allocation in A4 and A7 of each Rule, regarding carriage and export/import clearances, respectively.
The Incoterms® 2020, which will take effect as of 1 January 2020, offers a more simple and clearer presentation of all the Rules, enabling users to more easily choose the Incoterms Rule that best suits their sales contract. The horizontal presentation of the Rules, which is included for the first time in the Incoterms, will also assist users in choosing the best Incoterms rule for their commercial requirements, as they will be able to differentiate between each Rule more easily. Changes in terms of contents of the Rules are an outcome of the diligent and extensive work of the ICC and the Drafting Group, which are intended to accurately fit the current needs of traders.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.