What are Incoterms® and what are their advantages?
- 11 international trade clauses for use in contracts; developed by the International Chamber of Commerce (ICC) and first drawn up in 1936; Incoterms® 2020 were published on 10 September 2019 (8th update) and are effective as of 1 January 2020.
- Incoterms® regulate, in particular, the way in which goods are delivered; the choice of a certain standardized and internationally recognized Incoterms® clause is intended to create legal certainty, facilitate the drafting of contracts and avoid misunderstandings.
- By choosing a specific Incoterms® clause, the contracting parties regulate several contractual points simultaneously (place of delivery, transport, costs, customs duties, passing of risk, acceptance, marking of the goods, etc.).
- Please note: As a rule, the Incoterms® clause should not be simply included somewhere in the contract (often under provisions for delivery). The parties should consider the effects of each clause in the contract as a whole. If, for example, the seller and the buyer have agreed "ex works", it should not be stipulated elsewhere in the contract that the seller would (partially) bear transport costs.
- To simplify matters, the Incoterms® clauses can be divided into 4 groups:
- E-clause → Buyer picks up
- F-clause → Transport buyer
- C-clause → Transport seller
- D-clause → Seller brings
What will change in the Incoterms® 2020?
Contrary to what was originally thought, the new Incoterms® 2020 do not include the expected changes such as the elimination of the ex works, DDP and FAS clauses, the division of the FCA clause or the inclusion of the new CNI (Cost and Insurance) clause. Instead of the elimination of existing clauses and the introduction of new clauses, the changes to the Incoterms® 2020 are made in the existing clauses. The changes presented are as follows:
Amendment of the DAT clause to DPU
According to the DAT clause (Delivered at Terminal) to date, the seller delivers to a terminal (by land, by sea or by air) and makes the goods available there unloaded. In practice, it has been criticised that delivery to only one terminal is too restrictive for certain products. The new designation DPU (Delivered at Place Unloaded) underlines the fact that the destination may be any place and not necessarily a terminal. In this context, the ICC also points out that if the place is outside a terminal, the seller should ensure that the goods can be unloaded there (according to the seller's obligation).
Bill of lading with an on-board notice under the Incoterms® clause FCA
In the case of sea transport, the seller and buyer regularly require the freight carrier to issue a bill of lading (transport document for the transport of commercial goods by ship) with a note stating that the commercial goods are on board the ship. Since the FCA clause (Free Carrier = the seller hands over goods to the carrier or makes the goods available to the carrier unloaded at the agreed place of delivery) stipulates that the seller's delivery is considered completed before the goods are loaded on board the ship, it is not certain whether the seller can actually receive a ship's bill of lading from its carrier. In order to rectify this situation, the new FCA clause provides for the option that, if the parties so agree, the buyer must instruct its carrier to issue the seller, at the buyer's expense and risk, with a transport document stating that the goods have been loaded on board the vessel.
Different coverage levels of insurance in CIF and CIP
If the CIF or CIP clause is agreed, the seller shall take out transport insurance at its own expense in addition to the transport of the goods. According to Incoterms® 2010, the minimum protection of such transport insurance for both CIF and CIP was based on the (C) clauses of the Institute Cargo Clauses issued by the International Underwriting Association of London (IUA). The (C) clauses, however, only offer minimum insurance protection against certain loss events, such as general average, fire, stranding, seaquake, etc. The (C) clauses do not provide any insurance coverage against other loss events. The wish to offer further insurance protection by means of an Incoterms® clause as standard has now been met by a different minimum protection in the CIF and CIP clauses. In the CIF clause applicable to shipping, the minimum protection of the (C) clauses of the Institute Cargo Clauses remains the same. In the CIP clause, which applies to all modes of transport but is otherwise identical in content, the seller must now provide insurance coverage in accordance with the (A) clauses of the Institute Cargo Clauses, which cover not only certain damage events but all risks.
Organisation of transport by the seller's or the buyer's own means of transport
The Incoterms® 2010 had not previously provided for transport to be carried out by the seller or the buyer itself. The Incoterms® 2020 now make it clear that transport does not necessarily have to be provided by a third party (carrier), but can also be organised by the seller/buyer using its own means of transport. For example, in the explanations on the FCA clause, it is now stated that "the buyer must conclude a contract at its own expense for the transport of the goods from the named place of delivery or organise the transport of the goods..."
Inclusion of safety-related requirements under transport obligations
Under each Incoterms® clause - more prominent than in the Incoterms® 2010 - there is now an allocation of the safety-related obligations associated with the transport requirements to the buyer and the seller. Such safety requirements, such as mandatory "container scanning", are becoming more and more important in practice and therefore require a clear classification.
In addition, the ICC has made the new Incoterms® 2020 more user-friendly, in particular through explanatory comments for users and a more compact presentation of the cost distribution under each Incoterms® clause.
Even if the changes under the Incoterms® 2020 do not have the expected scope, it is still worth taking a look at whether the Incoterms® 2010 clauses agreed in existing contracts still correspond to the expectations of the contracting parties or whether there is indeed a need for action.
