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Published since 1936, the International Chamber of Commerce (ICC) has published
a set of three-letter trading terms for the use in sale and purchase
contracts. These ‘Incoterms' deal withthe obligations of the buyer
and seller and consists of 11 three- letter trading terms grouped as follows:
-
C rules: governs
where the seller arranges and pays for carried to a named place and indicates
the destination of the goods; -
D rules: governs
where the seller arranges and pays for carriage to a named place, and indicates
the destination of the goods and place of delivery; -
F rules: governs
where the buyer pays for and usually arranges carriage; -
EXW (ex-works):
governs where the seller delivers to the buyer from the seller's premises.
In the D, E and F rules, deal with the passing of risk between parties
and at a named place, and such rules deals which include but not limited to delivery
of goods, transfer of risks, arranging and paying for carriage, insurance
obligations, procuring of transport documents, proof of delivery, arranging
export/import clearance, goods checking operations and giving of notices.
Recent changes made to Incoterms 2020 provides an update to 2010
edition and primarily clarifies several sections making it easier to
understand, and providing less room for error, and the main changes are:
1. FCA, FOB, and Bills of lading
There is a chance for the FCA (free carrier) term. The 2020 FCA Incoterm now contains an option
under which the buyer agrees to instruct the carrier to issue the bill of
lading to the seller. In the past, the
seller usually delivers the goods to the buyer before they are loaded onto a
ship and may not necessarily receive a bill of lading from the carrier, so the
new Incoterms 2020 makes it clearer for both parties involved.
In the past, the seller of a containerized shipment
under Freight
on Board (FOB) terms lost control of the goods on their arrival at the export
container port but remained liable until the container was loaded onto the
ship. So previous provisions exposed the
seller to potential cost and risk, whilst Incoterms 2020 provides more
certainty and comfort for the parties.
2, Insurance clarified in CIP/CIF
Under Incoterms
2020, a CIP (carriage and insurance paid to) seller must purchase insurance on
Institute Cargo Clauses (A), which is an "all risks" policy with some
exclusions, which broadens the scope of insurance than under Incoterms 2010
which would have been covering provided for a limited number of risks.
Both CIF (Cost Insurance Freight) and CIP (Carriage and Insurance Paid
to) require the seller to provide a basic level of insurance for the buyers
equivalent to Clause C (Institute of Cargo Clauses).
The Incoterms 2020 sought to clarify the distinction between these two
terms which usually applies to different classes of goods which call for
different levels of insurance coverage.
3. Renaming
of DAT to DPU
DAT (Delivered at Terminal) will be replaced by Delivered at Place
Unloaded (DPU) and is seen as simply a change of name with obligations and
functions of both terms being almost the same.
The ICC states this change was made primarily to eliminate confusion
between DAT and Delivered at Place (DAP) in terms of where and how delivery
takes place.
DPU is now the only Incoterm in which the goods are delivered unloaded
at the place of destination. Costs such
as import customs clearance and other costs, however, remain the buyer's
responsibility.
4. Customs clearance
Under Incoterms 2020 wording is more precisely
explained which party, seller or buyer is responsible for carrying out customs
formalities and clearance. Furthermore,
the release of goods in transit is included for the first time and liability is
assigned to whoever assumes the risk of transport to the place to delivery. For example, in the past the terms EXW, FCA,
FAS, FOB, CPT, CFR, and CIP where the risk of transport is transferred at the origin
and usually the country of the seller, the liability in customs transit
clearance is assumed by the buyer; whilst in contrast in Incoterms DAP, DPU and
DDP the risk is passed on at the destination, the seller bears the liability. Such
change could have a significant impact on sales where goods must pass through
customs prior to arriving at the customs of the importing country.
5. Security in relation to transport is now clearly
detailed
Under Incoterms 2020, liability is addressed more
specifically under two instances: in relation to transport from the country of
origin to that of the destination and customs clearance formalities and
procedures.
Liability is assumed by the party who executes the
goods contract, i.e. for sellers (CPT, CFR, CIP, CIF, DAP, DPU, and DDP) or
buyer (EXW, FCA, FAS and FOB). In
relation to customs clearances, the safety liability lies with the party which
must undertake such clearance. In
summary, The ICC has expanded security-related requirements in Incoterms 2020
with provisions to allocate responsibility for these between seller and buyer.
Other additional changes to incoterms include:
6. Simpler language and less legal content
7. More detailed content providing greater clarity to the text;
8. Further clarity on the breakdown of cost allocation
9. Relationship between incoterms and
international commercial contracts
10. Comparison to obligations between
the 11 Incoterms.
In summary, the new Incoterms2020 aims to provide greater clarity for
the parties, on costs,insurance and greater efficiency for international
trade.
Author: Helen Tung, Senior Associate