On 1 January 2020, the latest International Commercial Terms set out by the International Chamber of Commerce came into effect. This recent edition of the International Commercial Terms aims to provide certainty and clarity to market operators by focusing on transport security and by significantly extending the Guidance Notes to make the terms easier to understand.
The objective of the International Commercial Terms (“Incoterms®”) is to establish a set of international rules aimed at interpreting any terms that are widely used in international commerce practices, ensuring the legal security of international sales (although they can also apply to national commercial transactions). Thus, the rights and obligations of both exporters and importers become properly defined.
In any event, even though it is widely used in practice, it is up to the purchaser and the seller to accept them. If they do, they should sign a sale and purchase agreement.
Unless there is an express reference in the sale and purchase agreement in relation to the application of a specific version of the Incoterms®, the new 2020 revision will be applied to any agreements signed as of 1 January 2020.
The Incoterms® 2020 introduce the following new features, and thus differ from the previous version (Incoterms® 2010):
Replacing the Incoterm® DAT for DPU
This is a renaming of the term more than a modification of the Incoterm®, since the obligations are practically the same. The Incoterm® DAT was considered too restrictive because it limited the place of destination / delivery of the goods to a “terminal”. The new Incoterm® DPU does not include this restriction, thus the goods can be unloaded anywhere in the country of destination, such as a factory or a warehouse, as long as it has the equipment to unload the goods from any mode of transport.
FCA (Free Career): Being aware of on-Board Bills of Lading
Under the Incoterms® 2010 rules, the delivery of any goods sold under the FCA and maritime transport was considered complete once the seller had provided the goods to the carrier, and the goods could be loaded onto the corresponding ship. As a result, the seller was often unable to obtain an on-board bill of lading, because the carrier could only issue it once the goods had been loaded.
The new version allows the purchaser, under their responsibility, to ask the carrier to provide the seller with the necessary transport documents to prove that the goods have been loaded onto the ship, and to expressly include the term “on-board”. This would allow the seller to comply with the requirements of a letter of credit as a payment method.
CIP: coverage of freight insurance
The new Incoterms® introduce some minor changes to the minimum level of coverage of the insurance policies of the goods and, although stricter, the parties are still able to negotiate them.
In this regard, and up until now, if the delivery of the goods was agreed under CIP terms (Carrier and Insurance Paid To) or CIF (Cost, Insurance and Freight), a minimum insurance cover would be requested and which corresponded to Clause “C” of the Institute Cargo Clauses of London (IUA/LMA).
Therefore, under this new revision of the terms, the minimum coverage of the risks related to deliveries under the Incoterm® CIP would change from a level “C” to a level “A”, that is, to an all risk insurance coverage.
Incorporation of security requirements related to transport obligations and costs
Regarding the security requirements and the outsourcing of transport services, the 2020 Incoterms® (a) detail the security obligations in transactions related to the transport requirements set out in each Incoterm® rule; and (b) recognize that the transport of goods may not be carried out by a third-party carrier, but by the parties, which will be able to arrange the transportation of the goods using their own means.
Likewise, in relation to the allocation of costs between the buyer and the seller, in the new Incoterms® the breakdown of any costs in relation to a specific Incoterm® is now detailed in a single list. This will allow the parties involved in a transaction to easily calculate all the costs associated with an Incoterm® without having to check every rule. However, in addition to the added presentation, the costs related to each concept (e.g. transport) will continue to appear in their respective articles, so that users may obtain the information in relation to a specific aspect of the transaction.
Finally, the new edition of the Incoterms® includes a series of notes explaining each Incoterm® rule. These notes replace the 2010 edition guidance notes. The notes are aimed at informing companies of when they should use the Incoterms®, when risk may affect a transaction, and how costs are distributed between the purchaser and the seller based on the Incoterm® they use.