By Raphael Brunner Oct 2019 / MME legal Tax Compliance
Incoterms® in international trade
The ICC’s Incoterms® Rules are the world’s most important trade terms for the sale of goods. Whether trading internationally with suppliers or customers, organizing the internal exchange of goods within a group of companies, placing an order, packaging and labelling a shipment for freight, creating a certificate of origin in a port, the Incoterms® rules accompany trading partners and service providers throughout the entire process of an international trade transaction. The rules define the obligations of the parties in the execution of the transaction, the transfer of risk relevant to the goods, the allocation of costs, the responsibility for customs declaration and payment as well as insurance. The Incoterms® rules offer legal certainty and legal clarity on a global level for parties and service providers who are involved daily in the import and export of goods within the framework of world trade.
On September 10, 2019, 10 years after the last version (Incoterms® 2010), the ICC published the Incoterms® 2020, a new set of rules that have been revised considering the change of various parameters of world trade over the last years.
Most important changes of Incoterms® 2020
The latest revision of the Incoterms® 2010 did not result in a fundamental change of the system or structure of terms. Even though the amendments and adjustments may be qualified as minor at first glance, these adjustments may have a substantial effect on trade transactions for which respective terms are used.
(1) ICC has retained the division into rules applicable to all modes of transport (EXW, FCA, CPT, CIP, DAP, DPU and DDP) and rules that should only be applied to maritime and inland waterway transport (FAS, FOB, CFR and CIF). However, it has adapted the order within these groups. The order is now mainly based on the time of delivery and the time of risk transfer. As a result, DPU (“Delivery at Place Unloaded”, previously DAT) is now classified after DAP (“Delivery at Place”), since in DAP delivery and transfer of risk take place before unloading, whereas in DPU delivery and transfer of risk take place after unloading at the place of destination.
(2) According to Incoterms® FCA („Free Carrier (named place)“), the goods delivered loaded on board of the means of transport requires a differentiated examination of the named place: (a) If the loading is arranged by the buyer, the place of delivery is generally the premise of the seller. (b) If the named place is a terminal or a port or any other hub, the goods are delivered to the buyer as soon as the goods are at the disposal of the buyer on the seller’s means of transport at the named place.
(3) Incoterms® FCA are frequently used for container shipments. If the buyer instructs the carrier to issue a transport document at FCA delivery (hence before the goods are loaded on the means of transport arranged for by the buyer), the seller is obliged to forward such transport document to the buyer. Such transport document is generally referred to as a Bill of Lading with on-bord-notation. This new approach solves the following problem of the previous Incoterms® FCA 2010: In cases where a sale transaction is financed or performed by means of a letter of credit, such letter of credit generally depends on the issuance of a Bill of Lading. A Bill of Lading is only issued once loading on the means of transport arranged for by the buyer is completed. Consequently, under Incoterms® FCA 2010 the Bill of Lading was only issued by the carrier after delivery according to Incoterms® took place and after the risk in the goods was transferred to the buyer. The risks of floss of the goods resulting from the gap between delivery according to Incoterms® FCA 2010 and payment by means of Letter of Credit based on a Bill of Lading was. Contrary to Incoterms® FCA factually the sole risk of the Seller. This issue is now solved by providing the buyer the possibility to instruct the carrier to issue a transport document such as a Bill of Lading before loading but already at the time of delivery according to Incoterms® FCA 2020.
(4) The allocation of all possible costs (transport costs, duties, security, insurance etc.) are now summarized in clauses A9/B9 of all rules improving transparency.
(5) Incoterms® CIF 2020, frequently used in commodity trading involving maritime transport, oblige the seller to obtain, at its own expense, cargo insurance complying with the minimum cover as provided by Institute Cargo Clauses (C), which cover explicitly listed risks. Incoterms® CIP 2020, to be used with all modalities, according to the new rules obliges the seller to obtain at his expense cargo insurance complying with the minimum cover as provided by Institute Cargo Clauses (A), which covers all risks.
(6) The Incoterms® 2020 FCA, DAP, DPU and DDP are now applicable both to transport carried out by a third party and new to transport carried out by sellers or buyers using their own means of transport.
Applicability of Incoterms® 2020
The Incoterms® 2020 are only applicable if the parties of an international trade transaction explicitly agree so. It is still possible to continue to agree on the previous Incoterms® 2010. In order to avoid any uncertainty about the applicable version of the Incoterms®, references to the Incoterms® in contracts should always include the year of the version of the applied Incoterms®.In case the year is not mentioned, the latest version, hence as of January 1, 2020 Incoterms® 2020 will apply.
Assessment and recommendations
The new rules are in line with current developments and increase legal clarity and certainty. The introduction of Incoterms® 2020 offers a good opportunity to review the trading rules used in commercial contracts, framework agreements and contracts with service providers throughout the supply and distribution chains and to critically asses the following questions:
1. Which version of the Incoterms© rules apply on ongoing contractual relationships as of January 1, 2020?
2. Does the used Incoterms® rule
a. (still) reflect current practice under the given circumstances?
b. correctly reflect the interfaces between risks and costs of the existing logistics organization?
c. correspond with the Incoterms® rules referred to in the agreements with logistics service providers (freight forwarders, carriers, warehouse keepers, customs agents, etc)?
d. make sense in relation to customs organization and procedures?
e. correspond with the used transport modality (e.g. no FOB or CIF for multi modal container transport or air carriage)?
2. Is the current insurance solution in line with the risk allocation according to the concluded trade agreements and service contracts (double insurance or insurance gaps)?
3. Can compliance with export control legislation and sanctions be ensured with the agreed Incoterms® rules? Who is responsible for licensing of dual-use goods?
MME Legal | Tax | Compliance assists its clients both in drafting, negotiating and reviewing international trade agreements and related Incoterms. We’re here to support with implementing such agreements in order to harmonize the contractual rights and obligations with the actual organization and execution of international trade transactions.