What are Incoterms?
Incoterms are a collection of internationally recognised standardised trade terms published by the ICC and widely used in domestic and international sales.
What do Incoterms cover?
Incoterms cover various practical elements of a sale contract such as the primary obligations of the seller and the buyer; the responsibilities of each; time of delivery and the transfer of risk. They also deal with insurance, export and import clearance and the division of other costs pertaining to the delivery of goods.
While a full set of terms are provided under each Incoterms rule, the parties to a sale contract do not have to adopt those terms in their entirety. Parties may incorporate specific provisions from the relevant Incoterms, although care is needed to avoid uncertainty.
What do Incoterms not cover?
Incoterms do not constitute a complete contract of sale. A number of important (and in some cases fundamental) issues are intentionally left out of Incoterms and should therefore be set out in the sale contract. These include transfer of title to the goods; pricing of the goods; detailed payment obligations and terms; vessel requirements; force majeure; termination; insolvency; compliance and trade restrictions; and applicable law and jurisdiction.
How are they used?
Incoterms are incorporated into contracts by express reference whether in special contract terms (for example, "DAP one safe berth Rotterdam, per Incoterms latest edition") or in standard contract terms (for example, BP Oil GTCs – “‘CFR’ and ‘CIF’ shall each have the meaning ascribed thereto in Incoterms”). Parties must expressly refer to Incoterms if they want them to apply to their contract, because they do not have any independent force of law. Having said that, Incoterms may, in appropriate circumstances, offer guidance as to accepted meanings of trade terms, such as FOB, CIF or CFR, even where Incoterms are not expressly incorporated.
Why are they changing?
The ICC’s revision of Incoterms aims to respond to changes in the market so that they continue to be relevant and useful to global trade. With this particular revision, the ICC aims to take account of:
- The growth of the global economy and greater access to markets worldwide
- Increasing attention to security in the transportation of goods
- The need for flexibility when considering insurance coverage, depending on type of goods and transport
- Calls from banks for an on-board bill of lading in some financed sales under the Free Carrier (FCA) rule
When are they changing?
The publication date for Incoterms 2020 was 10 September 2019, with the new rules coming into force on 1 January 2020.
What about contracts already entered into?
For existing contracts, Incoterms 2010 will continue to apply even if performance of the contract will take place in 2020 unless the contract says otherwise.
For contracts entered into between September 2019 and January 2020, it is prudent for the parties to state which set of Incoterms is to apply, especially if performance will take place after 1 January 2020.
After 1 January 2020, courts and arbitrators can be expected to assume that any reference to Incoterms in new contracts is intended to be a reference to Incoterms 2020, unless there is evidence to the contrary.
Are the changes introduced by Incoterms 2020 relevant?
The relevance of Incoterms 2020 depends on the contract terms used. For example, GAFTA, FOSFA and sugar (SAL and RSA) contracts do not incorporate Incoterms. Any parties trading only on those contract terms without amending them to incorporate Incoterms will obviously be unaffected by the changes in Incoterms 2020. Standard petroleum product contracts refer to Incoterms, as do many ethanol, coal and metals contracts. Parties dealing with such contracts will need to:
- Check their standard contract forms
- Consider the changes introduced by Incoterms 2020 and whether they wish their contracts to incorporate Incoterms 2020 or an earlier version of Incoterms (or none)
- Make any necessary consequential changes in the standard forms for new contracts (for example, changing ‘DAT’ (Delivered at Terminal) to ‘DPU’ (Delivered at Place Unloaded))
- Inform counterparties and trading/execution departments of the changes to Incoterms and any revisions to contract documentation
What are the main subjects of change in Incoterms 2020 that you should be aware of?
- Bills of lading with an on-board notation in FCA deliveries
- Different levels of insurance cover between Cost Insurance and Freight (CIF) and Carriage and Insurance Paid To (CIP)
- Acknowledging the use by parties of their own transportation in FCA, Delivered At Place (DAP), DPU and Delivered Duty Paid (DDP) deliveries
- The inclusion of security-related requirements within carriage obligations and costs
- Detailed Explanatory Notes for Users
- The arrangement of provisions relating to costs
- Change of ‘DAT’ to ‘DPU’
The table below sets out the substantive changes in more detail:
|| Amendments to Incoterms 2020
|1. Bills of lading with an on-board notation in FCA deliveries
In FCA deliveries, parties (or their financing banks) often require a bill of lading with on-board notation but, given that delivery on FCA terms is completed before goods are loaded onto the vessel, the seller may not always be able to obtain an on-board bill of lading from the carrier.
Under the new Incoterms, the buyer and the seller may agree that the buyer will instruct its carrier to issue an on-board bill of lading to the seller after the goods have been loaded. The seller will then be obliged to tender the bill of lading to the buyer.
The ICC emphasises that, where the above option is exercised, the seller does not take on an obligation to the buyer in respect of the terms of the contract of carriage.
|2. Different levels of insurance cover in CIF and CIP
Incoterms 2020 provide for different minimum insurance cover for CIF and CIP deliveries.
Previously, both CIF and CIP required minimum insurance cover at the level of Clause (C) of the Institute Cargo Clauses.
In the new revision, for CIF deliveries, the default position remains the same (that is, Clause (C) of the Institute Cargo Clauses). Parties may agree higher levels of cover if they wish.
However, for CIP deliveries, the seller is now obliged to obtain insurance cover at the level of Clause (A) of the Institute Cargo Clauses (that is, “all risks”). Minimum insurance cover for CIP deliveries has therefore been increased for the benefit of the buyer. Parties are free to agree to have lower levels of insurance cover if they wish.
|3. Acknowledging transportation by own transport in FCA, DAP, DPU and DDP deliveries
Incoterms 2010 were drafted on the assumption that, when goods are carried from the seller to the buyer, they would be carried by a third-party carrier engaged by the seller or the buyer. That did not account for situations, particularly in FCA, DAP, DPU and DDP deliveries, where a third-party carrier was not, in fact, required or contracted because the seller or the buyer would use its own transportation.
The new rules now cater for such situations by expressly providing for the arrangement of carriage as well as referring to the making of a contract of carriage.
|4. Inclusion of security-related requirements within carriage obligations and costs
Incoterms 2020 aims to establish stronger security-related requirements than its predecessors. Now that security-related concerns are more prevalent in trade, this revision expressly provides for security-related obligations at A4 and A7 of each rule. As mentioned above, costs for these obligations will feature under A9/B9 of each rule.
|5. Explanatory Notes for Users
The Guidance Notes that previously featured at the start of the individual Incoterms have now been amended to ‘Explanatory Notes for Users’. The Explanatory Notes set out the fundamentals of each of the relevant Incoterms, specifically:
- When it should be used
- When risk transfers
- How costs are allocated
The Explanatory Notes aim to help users choose the most appropriate Incoterms and provide guidance for interpretation if disputes arise.
|6. Arrangement of provisions relating to costs
Costs have been rearranged in the 2020 revision. All costs relating to the various aspects of the sale are now listed at A9/B9 under each of the Incoterms, as well as under the relevant article within the Incoterms to which they apply.
The intention behind this change is to provide users with a complete list of costs in one place, so that the seller and the buyer are more aware of the costs for which each will be responsible under particular Incoterms.
|7. Change from ‘DAT’ to ‘DPU’
There is a change to the order of the individual Incoterms in the new revision, so that DAP now appears before DAT to reflect the fact that delivery on DAP terms occurs before delivery on DAT terms.
The term ‘DAT’ has been changed to ‘DPU’, reflecting the fact that the destination for a DAT/DPU delivery could be at any place and not just a terminal. Of course, the place of delivery, if not a terminal, must be appropriate for the unloading of the goods.
As John W.H. Denton, General Secretary of the ICC, said when Incoterms 2020 were released: “Incoterms 2020 rules make business work for everyone by facilitating trillions of dollars in global trade annually. Because they help importers and exporters around the world to understand their responsibilities and avoid costly misunderstandings, the rules form the language of international sales transactions, and help build confidence in our valuable global trading system”.
The importance of Incoterms to trade is beyond doubt, even if many contracts do not incorporate them. To avoid uncertainty and disputes, trading companies should ensure they know the new Incoterms rules and make any amendments to their contracts and general terms and conditions that are necessary. It is important to ensure that the most appropriate Incoterms are selected for each contract and that they are fully understood before they are incorporated. These points are especially important now, as the changes take root.
Client Alert 2019-225