A new version of the ICC’s Incoterms – standard trading terms for domestic and international trade (Incoterms 2020) took effect on 1 January 2020.
Incoterms have been around as a global standard for the sale and purchase of any goods since 1936 but are still misunderstood and misused. In this article we summarise what the Incoterms are, what they do (and don’t do) and what’s changed.
What are Incoterms
Incoterms (aka “International Commercial Terms”) are a set of eleven three-letter trade terms. Published by the International Chamber of Commerce (ICC), they outline the responsibilities of sellers and buyers for the delivery of goods under sale contracts.
Why they are important
The main benefit of Incoterms is the reduction of risk. As contracting parties may operate in different countries, there is a real risk that language and cultural differences may result in ambiguous contractual terms. Incoterms, allay this risk by providing a globally accepted standard. Used correctly, Incoterms can eliminate any potential inconsistency or ambiguity in the language used, thereby minimising the possibility of disputes and litigation over the meaning of a contractual term.
Sale and supply contracts need to clearly and accurately describe who is responsible for what up to an agreed point in the supply chain. Where, for example, does the buyer hand over responsibility for the goods to the seller? Who pays for carriage and insurance? Who arranges and pays for customs clearance? Incoterms clarify and set the rules to answer such questions.
What they do?
Incoterms clearly define and allocate roles and duties between the seller and buyer.
They specifically cover:
- Obligations: The Rules define which of the seller or the buyer is responsible for certain specific tasks to get the goods from the seller to the buyer: carriage, insurance, transport documents, export and import clearance, checking, packing and marking.
- Risk: What constitutes delivery of the goods to the buyer? The risk of loss or damage to the goods passes from the seller to the buyer at the point of delivery. Crucially, in the “C” terms, the delivery point where risk passes is not the same as the destination point (i.e. responsibility for costs passes at a later point than delivery and risk).
- Costs: Which party is responsible for which costs. Including transport, packaging, loading or unloading costs, insurance, duties, taxes and customs clearance, and checking or security-related costs.
- Notification obligations: What does the seller have to tell the buyer and vice versa in respect of the delivery/dispatch etc. of goods.
What they DON’T do
Incoterms are not a contract in and of themselves. While they regulate specific, important obligations, they are by no means a comprehensive set of rules for a supply contract.
For instance, Incoterms do not deal with:
- Transfer of property, title or ownership of the goods sold. This is a key point and widely misunderstood.
- A description of the goods, including any specifications or quality/quantity requirements.
- Price and payment.
- Timing – of ordering, manufacturing, delivery, etc.
- Performance standards, including warranties and support, training and maintenance
Each of these matters should be the subject of a specific provision(s) within the contract.
Further detail often needs to be bolted on to Incoterms to best fit the circumstances (and/or the parties’ respective bargaining position). We recommend using the Incoterm which is the best fit, and then adding or subtracting from the standard Incoterm position to fit the commercial terms you want to achieve. For example, you might require the seller to deliver the goods to the named delivery place, by the target delivery date on a DDP (delivered duty paid) basis but go on to state that risk of loss or damage does not pass to the buyer until the issue of an acceptance certificate by the buyer following inspection and testing (rather than merely when the goods arrive on a truck at the destination ready for unloading, as DDP provides).
When using Incoterms, make sure that you use the right one and don’t unintentionally contradict what your selected Incoterm provides. We often see outdated terms (like DES (delivered ex ship)) or terms that don’t exist at all (like “FIS”) used. Similarly, watch that you only use the maritime Incoterms (FAS, FOB, CFR and CIF) where appropriate – i.e. where the seller is obliged to load the goods on-board (or alongside) a vessel at a port. If the goods are to be handed over to, or delivered by, a carrier – use one of the other rules designed for any mode of transport (EXW, FCA, CPT, CIP, DAP, DPU and DDP).
Types of Incoterms
The eleven incoterms are categorised into four ‘groups’ (listed below in order of most seller favourable to most buyer favourable):
- Group E: The buyer is responsible for collecting the goods at the seller’s warehouse and bears all associated risk and cost.
- Group F: The seller is responsible for bringing the goods to the buyer’s predefined transport method, the buyer then accepts cost and risk responsibility from that point onwards.
- Group C: The seller bears all costs to the destination port, however risk will transfer once the goods are loaded on the means of transport.
- Group D: The seller bears all risks and costs necessary to bring the goods to the destination country.
How best to incorporate the incoterms rules
If parties to a contract wish the Incoterms to apply, parties must do so via clear contractual language. Issues can be avoided by being as specific as possible in naming the port, place or point. An example phrasing may be:
[chosen Incoterm rule][named port, place or point] Incoterms 2020
In all Incoterms except the C rules, the named place is the place of delivery (and where risk transfers). In the C rules (CPT, CIP, CFR and CIF), the named place is the destination where the seller must arrange carriage but delivery occurs and risk passes when the goods are handed over to the carrier. If the named place is important (e.g. the port of shipment) it should be clearly specified.
What’s changed for Incoterms 2020?
Incoterms are revised every 10 years to reflect contemporary commercial practice. Incoterms 2020 are effective as of 1 January 2020 and supersede Incoterms 2010 (unless the parties agree otherwise).
There are few substantive changes. The primary purpose behind the revision has been to enhance the presentation of the rules to promote the selection of the most appropriate Incoterms rule for a particular sale contract.
The differences between Incoterms 2010 and Incoterms 2020 include the following:
- Bills of lading with an on-board notation and the FCA Incoterms rule: In the FCA (Free Carrier) rule, the buyer and the seller can now agree that the buyer will instruct its carrier to issue an on-board bill of lading to the seller after the loading of the goods, with the seller then being obliged to tender that bill of lading to the buyer.
- Different levels of insurance cover in CIF (Cost, Insurance and Freight – for sea and inland waterway transport) and CIP (Carriage and Insurance Paid To – for any mode of transport). Both terms require the seller to arrange insurance cover against the buyer’s risk of loss of or damage to the goods from the point of delivery (or port of shipment for CIF) to at least the point of destination (or port of destination for CIF).
However, Incoterms 2020 raise the level of cover required in the case of CIP only, unless the parties agree otherwise. The more extensive Institute Cargo Clauses (A) (or similar) is required for CIP, rather than the more limited cover under Institute Cargo Clauses (C), which continues to apply for CIF.
Sounds technical, and it is, so the short point to takeaway is that if you ship on CIP terms the insurance requirement has changed so check with your broker about the level of cover required against what is appropriate for the relevant goods.
- DAT (Delivered at Terminal) has been renamed DPU (Delivered at Place Unloaded), emphasising that the place of destination could be any place (as long as the goods can be unloaded by the seller at that place), not just a terminal. This is the only rule that requires the seller to unload the goods at their destination.
For more information on the meaning and use of Incoterms and advice on domestic and international supply contracts more generally, please contact us.
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