In September 2019, the International Chamber of Commerce, a body regulating traffic across countries, finally announced Incoterms 2020. The reason behind the introduction of a new set of rules is likely to be the minimisation of disputes, which might more often arise from the changes in trade practices and regulations — for instance, Brexit. Well-known trade operators may be already well versed with the new rules. Other users not, though. Some inexperienced traders or small businesses may not even know what Incoterms are, regardless of the edition, and how these terms are integrated into their commercial contracts!
This article provides an overview of Incoterms 2010 and spells out what actions (if any) you should consider taking to reflect some new changes in Incoterms 2020.
Why are Incoterms So important?
Since 1936, Incoterms are used to identify the responsibilities of buyers and sellers for the delivery of goods in international trade. And to assess when and how the risk for those goods passes from the seller to the buyer. Choosing the right Incoterm enables commercial players to minimise trade disputes and litigations whilst clearly outlining responsibilities and charges in both the buyer and the seller’s best interest.
Incoterms UK 2019 – Can You Use Incoterms In The UK?
The United Kingdom is not a ratifier of the INCOTERMS; hence trade is regulated by the Uniform Laws of the Sale of Goods Act 1979 and case laws. Neverthless trade agreements can be agreed upon by both parties before the trade. This meaning, the trading contract will serve the buyer and seller’s best interests when drafting the contract either following the ICC guidelines or the Sale of Goods Act 1979’s enactments.
Incoterms 2010 explained simply
Incoterms 2010 are subdivided into two categories under models of transport: one applied to any mode of transportation and the other being terms that apply to sea and inland trade.
Within the first group:
- EXW Ex Works
The buyer assumes all the risks and costs. The seller has only the duty to make the goods available for pick up at his location.
- CPT Carriage Paid To
Seller is responsible for origin costs included export clearance and freight costs. The seller pays for the carriage of the goods up to the location of the destination. The risk is transferred to the buyer when the products are handles to the first or primary carrier. However, if the buyer requires the seller to obtain insurance, CIP below should be considered.
- CIP Carriage and Insurance Paid To
It is similar to CPT with the exception that the seller is required to obtain insurance while in transit for 110% of the contract value with at least the minimum cover (Institute Cargo Clauses (C)). The policy should be released in the same currency to facilitate buyers and sellers in case of a claim. It can be used for all modes of transport.
- DAT Incoterms Delivered at Terminal
The seller delivers the goods to the terminal, and he assumes all the risks in case of damaged goods, plus the transportation costs up to the unloading of the goods.
DAP Delivered at Place
The risk goes from the seller to the buyer at the point of destination, as mentioned in the contract. The seller delivers the goods when these are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the location of destination safely.
DDP Delivered Duty Paid
The seller assumes all the risks and transportation costs (must pay export and import duties). The seller also needs to clear the goods for export at the shipping port and import at the destination.
FCA Free Carrier
The seller delivers the goods, cleared for export at a named place to a carrier appointed by the buyer or another party. However, the area of delivery affects the obligations of loading and unloading the goods, according to the place. The buyer is responsible for both unloading the goods and loading in their carrier if they arrive at a location other than the seller’s premises.
FAS Free Alongside Ship
The buyer is responsible for costs and risks of loss from the moment the goods are placed alongside the seller’s vessel at the port of shipment. If the parties wish the buyer to clear the goods for export, that should be mentioned explicitly in the contract. These terms should only be used in cases where the contract involves non-containerised freight and inland waterway means of transport.
CFR Cost and Freight
The seller pays for the carriage up to the named port. The risk transfers to the buyer when the goods have been loaded on board in the country of export. In this case, the shipper is responsible for freight costs and export clearance, but not for insurance costs and delivery at the final destination. However, CFR shall only be used for non-containerised sea freight and inland waterway transport.
CIF Cost, Insurance, and Freight
It is similar to CFR, with the exception that the seller has to acquire insurance for the goods whilst in transit for 110% of the contract value with at least the minimum cover (Institute Cargo Clauses (C)). The contract of sale should include the invoice, the insurance policy and the billing of lading. The seller’s obligation ends the moment the documents are passed onto the buyer. These terms should only be used in cases where the contract involves non-containerised freight and inland waterway means of transport.
FOB Free on Board
The seller affords all the costs and risks up to when the goods reach the vessel. It is also the seller’s responsibility to deliver the goods on board on the buyer’s ship. The buyer pays costs of marine freight transportation, bill of lading fees, transportation costs and insurance. FOB is designed to be used for non-containerised freight and inland waterway means of transport.
“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.
(ICC Secretary General John W.H. Denton AO)”
5 Key Changes in Incoterms 2020
Incoterms 2020 doesn’t differ much from the previous publication in 2010, and only a few substantive changes were carried out:
1. DAT Becomes DPU
The DAT (Delivered at Terminal) has been renamed DPU (Delivered at Place Unloaded). This new term allows goods to be delivered anywhere, not necessary at a specific “Terminal” location.
2. Different levels of insurance coverage
For CIP (Carriage and Insurance Paid to), the level of insurance required is a higher level of cover that the one mentioned in Incoterms 2010, it being Institute Cargo Clauses (A) replacing Institute Cargo Clauses (C). This, however, does not apply to CIF as this is mainly concerned with commodities transactions.
3. FCA Incoterms 2020
When FCA is applied attached to a letter of credit, the buyer can agree to instruct the carrier to issue the seller with a document to facilitate the transaction and avoid disputes and extensive procedures when dealing with ‘on-board bills’ (Clean On-Board Bill is commonly mentioned under a contract of Letter of Credit between buyer and seller in terms of Sea Transport Document under shipment of sale carries).
4. Delivery of Goods
Buyers and/or Sellers are also covered now under Incoterms 2020 in the event transport of goods involves using their own vehicle, without interference from a third party.
5. Security-related Obligations
There is more detail on allocation of costs arising from security-related obligations.
Implication for commercial practices & What You Should Do
Incoterms 2020 came into force on the 1st of January 2020.
Trading partners are not obligated to switch over to Incoterms 2020. They can carry on using Incoterms 2010 if they prefer to, especially if such version is being used to regulate complex commercial agreements. However, it should be always specified the incoterms edition used in a contract in order to avoid possible misunderstanding among the different editions. If the purpose of the different categories is not properly understood and applied, the result will be only limiting the scope of their use.
Euro-Asian Oil SA v. Abilo (UK) Ltd proves that there is often insufficient thought given to which incoterm to select. In this case the court found an oil trader and a bank liable for the non-delivery of a diesel cargo. In examining the transactions, the court found an inaccuracy in quoting the contract of sales. The claimant accepted that the contracts started as a CIF “in spirit” and subsequently the terms updated so that the Cost, Insurance and Freight terms did not apply anymore. Similarly, in R. (on the application of Teleos Plc) v. The Commissioners of HM Customs and Excise these terms were interpreted as contracts of carriage rather than forming part of a contract of sale.
If you would like to learn more about Incoterms, we would love to hear from you. Please free to contact us, and we will be glad to be of assistance.
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