What is Incoterms? What the Incoterms rules do and not do? and How best to incorporate it? These questions will be answered below with a short introduction of latest version (Incoterms 2020) of it.
What is Incoterms?
The Incoterms or International Commercial Terms, are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) relating to international commercial law. They are widely used in international commercial transaction or procurement processes and their use is encouraged by trade councils, courts and international lawyers. A series of three-letter trade terms related to common contractual sales practices, the Incoterms rules are intended primarily to clearly communicate the tasks, costs, and risks associated with the global or international transportation and delivery of goods. Incoterms inform sales contracts defining respective obligations, costs, and risks involved in the delivery of goods from the seller to the buyer, but they do not themselves conclude a contract, determine the price payable, currency or credit terms, govern contract law, or define where title to goods transfers will occur.
The Incoterms rules are accepted by governments, legal authorities, and practitioners worldwide for the interpretation of most commonly used terms in international trade. They are intended to reduce or remove altogether uncertainties arising from differing interpretations of the rules in different countries. As such, they are regularly incorporated into sales contracts worldwide.
The latest version of Incoterms – Incoterms 2020
What the Incoterms rules do
The Incoterms rules explain a set of eleven of the most commonly used three-letter trade terms, e.g., CIF, DAP, etc., reflecting business-to-business practice in contracts for the sale and purchase of goods.
The Incoterms rules describe:
- Obligations: Who does what as between seller and buyer, e.g., who organizes carriage or insurance of the goods or who obtains shipping documents and export or import licenses;
- Risk: Where and when the seller “delivers” the goods; in other words, where risk transfers from seller to buyer;
- Costs: Which party is responsible for which cost, for example, transport, packaging, loading or unloading costs, and checking or security-related costs.
What the Incoterms rules do not do
The Incoterms rules are not in themselves – and are therefore no substitute for – a contract of sale. They are devised to reflect trade practice for no particular type of goods – and for any. They can be used as much for the trading of a bulk cargo of iron or as for five containers of electronic equipment or ten pallets of airfreighted fresh flowers.
The Incoterms rules do not deal with the following matters:
- Whether there is a contract of sale at all;
- The specifications of the goods sold;
- The time, place, method, or currency of payment of the price;
- The remedies which can be sought for breach of the contract of sale;
- Most consequences of delay and other breaches in the performance of contractual obligations;
- The effect of sanctions;
- The imposition of tariffs;
- Export of import prohibitions;
- Force majeure or hardship;
- Intellectual property rights;
- The method, venue, or law of dispute resolution in case of such breach.
Most importantly, it must be stressed that the Incoterms rules do not deal with the transfer of property/title/ownership of the goods sold.
These are matters for which the parties need to make specific provisions in their contract of sale. Failure to do so is likely to cause problems later if disputes arise about performance and breach. In essence, the Incoterms 2020 rules are not themselves a contract of sale: they only become part of that contract when they are incorporated into a contract which already exists. Neither do the Incoterms rules provide the law applicable to the contract. There may be legal regimes which apply to the contract, whether international, like the Convention on the International Sale of Goods (CISG); or domestic mandatory law relating, for example, to health and safety or the environment.
How best to incorporate the Incoterms rules
If parties want the Incoterms 2020 rules to apply to their contract, the safest way to ensure this is to make that intention clear in their contract, through words such as:
“[the chosen Incoterms rules] [named port, place or point] Incoterms 2020”
CIF Shanghai Incoterms 2020
DAP No 123, ABC Street, Importland Incoterms 2020.
Leaving the year out could cause problems that may be difficult to resolve. The parties, a judge, or an arbitrator need to be able to determine which version of the Incoterms rules applies to the contract.
The place named next to the chosen Incoterms rule is even more important:
- In all Incoterms rules except the C rules, the named place indicates where the goods are “delivered”, i.e., where risk transfers from seller to buyer;
- In the D rules, the named place is the place of delivery and also the place of destination and the seller must organize carriage to that point;
- In the C rules, the named place indicates the destination to which the seller must organize and pay for the carriage of the goods, which is not, however, the place or port of of delivery.
Thus, an FOB sale raising doubt about the port of shipment leaves both parties uncertain as to where the buyer must present the ship to the seller for the shipment and the transport of the goods – and as to where the seller must deliver the goods on board so as to transfer risk in the goods from seller to buyer. Again, a CPT contract with an unclearly named destination will leave both parties in doubt as to the point to which the seller must contract and pay for the transport of the goods.
It is best to avoid these types of issues by being as geographically specific as possible in naming the port, place, or point, as the case may be, in the chosen Incoterms rule.
Differences between Incoterms 2010 and Incoterms 2020
The most important initiative behind the Incoterms 2020 rules has been focus on how the presentation could be enhanced to steer users towards the right Incoterms rule for their sale contract. Thus:
- A greater emphasis in the Introduction on making the right choice;
- A clearer explanation of the demarcation and connection between the sale contract and its ancillary contracts;
- Upgraded Guidance Notes presented now as Explanatory Notes to each Incoterms rule;
- A re-ordering within the Incoterms rules giving delivery and risk more prominence.
All these changes, though cosmetic in appearance, are in reality substantial attempts on the part of ICC to assist the international trading community towards smoother export/import transactions.
Apart from these general changes, there are more substantive changes in the Incoterms 2020 rules when compared with Incoterms 2010. Before looking at those changes, mention must be made of a particular development in trade practice which has occurred since 2010 and which ICC has decided should not lead to a change in the Incoterms 2020 rules, namely Verified Gross Mass (VGM).
The significant differences between Incoterms 2010 and Incoterms 2020 include primarily:
- Bills of lading with an on-board notation and the FCA Incoterms rule;
- Costs, where they are listed;
- Different levels of insurance coverage in CIF and CIP;
- Arranging for carriage with seller’s or buyer’s own means of transport in FCA, DAP, DPU, and DDP;
- Change in the three-letter initials for DAT do DPU;
- Inclusion of security-related requirements within carriage obligations and costs;
- Explanatory Notes for users;
Division of Incoterms
Incoterms 2020 are divided into four groups (C, D, E, F). The rules are classified according to the fees, risk, responsibility for formalities, as well as issues related to import and export.
In group C (Main Carriage Paid), the seller concludes a transport contract with the forwarder and takes the costs. In this case, the seller is responsible for conducting export clearance. The risk is transferred at the time of posting the goods to the buyer. All matters arising after loading costs related to transporting and other events are the buyer’s responsibility. Group C includes the following Incoterms rules: CFR, CIF, CPT, and CIP.
Group D (Arrival) assumes that the seller is obliged to deliver the goods to a specific place or the port of destination. This group includes such Incoterms as DAP, DPU, and DDP.
In group E (Departure), the seller makes the goods available to the buyer at the delivery point indicated by the seller. The seller is not obliged either to customs or export clearance and does not bear the risk and costs of loading. In group E, there is only Incoterms EXW.
Group F (Main Carriage Unpaid) obliges the seller to perform export customs clearance. The seller does not pay transport and insurance costs. FCA, FAS, and FOB belong to this group.
When analyzing the Incoterms 2020 rules described above, it may seem that the changes that have occurred are minimal. Nevertheless, Incoterms 2020 will be easier for exporters and importers to understand than Incoterms 2010. The Commission setting new rules wanted to avoid misinterpreting the Incoterms rules.
Incoterms 2020 rules have been established by the International Chamber of Commerce (ICC). This year, representatives of countries such as France, Great Britain, Germany, Turkey, the United States, Australia, and China took part in the meeting during which changes were made to the rules.
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