Incoterms® 2020 - Practical Overview

Summary

On 10 September 2019, the International Chamber of Commerce (ICC) globally released the new Incoterms® 2020, which will take effect on 1 January 2020. The Incoterms® globally set standards for delivery terms and are included in around 90% of all international sales contracts.

The Incoterms® 2020 aim to reduce misunderstandings and prevent legal disputes. They include a wealth of structural and substantive changes. A better overview of individual rights and obligations is also intended to reduce misjudgments. This article provides an overview of the changes and solutions for greater legal security.

Introduction

International trade between exporters and importers can only run smoothly if the exports and imports provide standardized and generally accepted trade clauses in their delivery and payment terms that regulate the transfer of risk, transport costs, and transport risk. They must clarify whether the exporter or importer alone or both jointly participate in this.

The Incoterms®, the official ICC rules for the interpretation of national and international trade clauses, have facilitated the processing of global trade since their first publication in 1936. When the parties agree on an Incoterms® clause, it is not necessary to extensively regulate the cost and risk allocation, as these aspects are interpreted uniformly worldwide.

On 10 September 2019, the ICC released the new Incoterms® 2020 globally. These were developed by 500 experts (including 20 from Germany) from more than 40 countries. Over 3,000 comments from trade practice were evaluated and incorporated according to their relevance. The main results are presented below.

Incoterms® 2020 – What's New?

The Incoterms® 2020 include a wealth of structural and substantive changes, which are detailed below.

Introduction Notes

The ICC explains in a comprehensive and readable introduction the essential foundations of the Incoterms® 2020, their best inclusion in contracts, the best procedure for selecting the Incoterms® clause appropriate for each case, and the main differences between the Incoterms® 2010 and Incoterms® 2020. In connection with this, it is presented what the Incoterms® achieve and - just as important for problem awareness - what the Incoterms® do not achieve.

Arrangement and Formulation of the Interpretation Rule

The ten A-/B interpretation rules for each Incoterms® clause have been newly formulated and rearranged. The sequence is now:

• A1/B1 General Obligations

• A2/B2 Delivery/Receipt

• A3/B3 Transfer of Risk

• A4/B4 Transport

• A5/B5 Insurance

• A6/B6 Delivery/Transport Document

• A7/B7 Export/Import Clearance

• A8/B8 Inspection/Packaging/Marking

• A9/B9 Cost Allocation

• A10/B10 Notifications

Comments on Individual Clauses

Furthermore, the application notes introduced in 2010 have been revised and reformulated and supplemented in the form of comments. These comments explain the essential content of each individual Incoterms® clause, e.g., when a particular clause should be used, when the transfer of risk occurs, and how costs are shared between buyer and seller.

In practice, the comments are a useful aid because they guide the user precisely and quickly to the Incoterms® clause suitable for each case and offer orientation for interpretative matters in case of disputes.

Horizontal Presentation of the Interpretation Rule

Finally, the Incoterms® 2020 include for the first time a user-friendly, horizontal presentation in which all interpretation rules are arranged side-by-side, allowing the user to easily understand the different treatment of specific issues in the Incoterms® clauses.

More Transparent Presentation of Costs within the Rulebook

The interpretation rule A9/B9 of the individual Incoterms® 2020 clauses includes a compact, continuous listing of the various cost elements to provide the contracting parties with a better overview of cost distribution. However, individual cost elements are still mentioned in the individual interpretation rules.

Additional Option for Bills of Lading with an On-Board Notation and the Incoterms® Clause FCA

The interpretation rule A6/B6 of the FCA Incoterms® clause now has an additional option: Buyer and seller can agree that the buyer should instruct their carrier to issue a bill of lading to the seller after loading the goods, upon which the seller is obliged to present this bill of lading to the buyer - usually via banks. This also applies if the goods are not loaded on a ship but on another means of transport (e.g., truck).

Change of Clause DAT to DPU

The previous clause DAT (Delivered at Terminal) is changed to DPU (Delivered at Place Unloaded) to emphasize that the destination can be any location and does not have to be a "terminal." However, if this location is not a terminal, the seller should ensure that the goods can also be unloaded at the location they wish to deliver to.

Inclusion of Security-Related Requirements with Transport Responsibilities and Costs

The Incoterms® 2020 now contain clear rules on the distribution of security requirements during the transport of goods and the associated costs.

Examples of security requirements include: International Ship and Port Facility Security Codes (ISPS Code), U.S. Importer Security Filing (ISF), Container Security Initiative (CSI), Transported Asset Protection Association (TAPA), EU regulations for civil aviation security. The security-related obligations are included in the interpretation rules A4 (Transport) and A7 (Export/Import Clearance) of each Incoterms® clause.

The costs caused by this are now also more clearly highlighted in the interpretation rule A9/B9 (Cost Allocation).

Transportation with Seller's or Buyer's Own Transport Means

The Incoterms® 2020 take into account the increasing business practice that the seller or buyer organizes the transport of goods with their own transportation means in the clauses FCA (Free Carrier), DAP (Delivered at Place), DPU (Delivered at Place Unloaded), and DDP (Delivered Duty Paid). In addition to the previously provided conclusion of a transportation contract with a third party, there is now the option to self-organize the transportation of goods.

Coverage Levels of Insurance in CIF and CIP

The Incoterms® adapt the insurance coverage in the Incoterms® clauses CIF (Cost, Insurance and Freight) and CIP (Carriage and Insurance Paid To) to current business practices.

For CIF, the previous regulation with the standard position of the Institute Cargo Clauses (C) is maintained, although it is of course up to the parties to agree on higher coverage amounts if necessary.

For CIP, the seller must now provide extensive insurance coverage according to the Institute Cargo Clauses (A), although the parties also have the option to agree on a lower minimum level of insurance coverage. For CIF, for maritime transport, the usual minimum insurance remains, while this was found to be insufficient for CIP, especially in multimodal transport practice, particularly with containers.

Solutions for Greater Legal Security

Numerous contracts contain inappropriate Incoterms® clauses, which can lead to significant economic disadvantages and legal risks for the parties involved.

The frequently used clauses EXW (Ex Works) or DDP (Delivered Duty Paid) are, for example, - unlike often assumed - only in exceptional cases the best solution.

The agreement of DDP often leads to difficulties in customs and tax matters. This is especially true for the handling of cross-border purchase contracts, where export and import handling is required. DDP is often agreed upon without the parties being aware of the difficulties this entails due to customs and tax law requirements or restrictions. This is because, under DDP, the seller is responsible for customs clearance, but for customs reasons, the seller is not always authorized to actually perform customs clearance in the buyer's country.

The ICC has also pointed out for years that the clauses FAS, FOB, CFR, and CIF are exclusively suitable for sea and inland waterway transport. Similarly, these clauses do not fit with container shipping.

Incoterms do not regulate cargo securing. This is rather based on the transport law statutory provisions. Under German law (§ 412 Abs. 1 S. 1 HGB), the consignor is basically responsible for loading that is safe for transport. The consignor in the sense of transport law (§ 407 Abs. 2 HGB) is only the principal of the carrier. This is not necessarily the seller and/or loader. For example, if the buyer instructs the carrier to pick up a shipment from the seller, the buyer is simultaneously the consignor. In these cases, the seller is not responsible for cargo securing.

Also not regulated in the Incoterms® are the obligations and costs related to determining and recording the verified gross mass for freight containers (VGM – Verified Gross Mass). The international drafting committee considered this topic too specific and complex. This should be agreed between the parties.

Another issue is that companies frequently amend Incoterms® clauses (e.g. "EXW with loading"). Amendments are generally possible. However, to avoid unnecessary discussions in the event of a dispute, the contracting parties should carefully consider the legal and practical consequences of the desired amendments and clearly indicate the intended effect of such an amendment in their contract. This is particularly true for the question of whether the transfer of risk from the seller to the buyer is shifted as a result.

Caution is also advised when something different is "lived" than is contractually agreed. In these cases, a court may assume in the event of a dispute that the contracting parties have implicitly agreed on a different clause.

The contracting parties must also address what the Incoterms® do not provide.

These include, for example, specifications of the sold goods, warranty, time, place, method or currency of payment, transfer of ownership including retention of title, liability or reduction of liability, legal consequences of delays, breaches and consequences, effects of sanctions, imposition of customs duties, export or import bans, force majeure, intellectual property rights, choice of law especially UN Sales Law (CISG), and domestic mandatory law (safety, health, environmental protection etc.), rules of evidence, form of dispute resolution, jurisdiction or arbitration clause. These important aspects must be regulated by the parties in the purchase contract.

Unclear, contradictory or missing regulations can lead to unnecessary discussions and legal disputes between the parties. Omissions regarding the choice of law and jurisdiction are particularly critical. Many companies are unaware that judgments from ordinary courts in Germany are not enforceable in many countries.

Incoterms® do not replace legal advice from lawyers specialized in international business law.

Finally, responsible employees regularly report inadequate coordination between individual departments. This also applies to communication with external parties (freight forwarders, carriers, banks, insurance companies, lawyers, tax advisors, customs and tax authorities, etc.). Incoterms® represent an important interface between important topics (purchase contract, export and import control, taxes, customs law, transport contract, insurance contract, and financing). A smooth execution of international trade will only succeed if all parties coordinate and the individual contracts are in harmony. For this purpose, for example, in-house training, involving all departments, is beneficial.

Conclusion

The new Incoterms® 2020 bring more legal security when applying the appropriate clause in connection with professionally designed international sales contracts. This requires awareness of problems and a critical engagement with this topic.

(Article first published in FOREIGN TRADE 4/2019)