Incoterms® 2020 - Practical Overview

Summary

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

The Incoterms® 2020 aim to help reduce misunderstandings and prevent legal disputes. They include numerous structural and substantive changes. Better clarity on individual rights and obligations is intended to reduce misjudgments. This article provides an overview of the changes and solutions for increased legal certainty.

Introduction

International trade between exporters and importers can only function smoothly if exports and imports are based on standardized and widely recognized trade clauses in their delivery and payment conditions, regulating the transfer of risk, transport costs, and transport risks. They must clarify whether the exporter or importer, or both, are involved in these aspects.

The Incoterms®, the ICC's official rulebook for interpreting national and international trade clauses, have facilitated global trade since their first publication in 1936. When parties agree on an Incoterms® clause, there is no need to thoroughly regulate cost and risk distribution, as these aspects are uniformly interpreted worldwide.

On September 10, 2019, the ICC released the new Incoterms® 2020 worldwide. These were developed by 500 experts (including 20 from Germany) from over 40 countries. More than 3,000 comments from trade practices were evaluated and incorporated depending on their relevance. The key results are presented below.

Incoterms® 2020 – What's New?

The Incoterms® 2020 include numerous structural and substantive changes, which are detailed below.

Introduction Notes

The ICC elaborates in a comprehensive and insightful introduction on the essential foundations of the Incoterms® 2020, their optimal inclusion in contracts, the best practices for selecting the appropriate Incoterms® clause in individual cases, and the key differences between Incoterms® 2010 and Incoterms® 2020. It is explained what the Incoterms® can achieve and, equally important for awareness, what the Incoterms® cannot achieve.

Arrangement and Formulation of Interpretation Rules

The ten A-/B interpretation rules for each Incoterms® clause have been reformulated and rearranged. The order 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 Checking/Packaging/Marking

• A9/B9 Allocation of Costs

• A10/B10 Notices

Comments on the Individual Clauses

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

In practice, the comments provide a useful aid as they guide the user precisely and quickly to the appropriate Incoterms® clause in each case and offer orientation for disputable matters in the event of conflicts.

Horizontal Presentation of Interpretation Rules

Finally, the Incoterms® 2020 for the first time contain a user-friendly, horizontal presentation, where all interpretation rules are arranged side by side, allowing the user to easily comprehend the different handling of certain issues within the Incoterms® clauses.

Clearer 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 give the contracting parties a better overview of cost allocation. Individual cost elements are still mentioned in the specific interpretation rules.

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

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

Change of the Clause DAT to DPU

The previous clause DAT (Delivered Terminal) is changed to DPU (Delivered Named Place Unloaded) to emphasize that the destination can be any location and does not necessarily need to be a "terminal." If this location, however, is not a terminal, the seller should ensure that the goods can be unloaded at the location to which they intend to deliver them.

Inclusion of Security-Related Requirements with Transport Obligations and Costs

The Incoterms® 2020 now include clear rules on the allocation of security requirements for the transport of goods and the associated costs.

Examples of security requirements: 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 aviation security. The security-related obligations are included in the interpretation rules A4 (Transport) and A7 (Export/Import Clearance) for each Incoterms® clause.

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

Organizing Transport with Own Means of Transport by the Seller or Buyer

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

Insurance Coverage Levels 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 existing rule with the standard position of the Institute Cargo Clauses (C) is retained, although the parties are, of course, free to agree on higher coverage amounts if necessary.

For CIP, the seller must now provide extensive insurance coverage in accordance with Institute Cargo Clauses (A), although here, too, the parties have the option to agree on a lower minimum coverage amount for the insurance. For sea transports with CIF, the usual minimum insurance remains, while for CIP, largely used in multimodal transport practice, especially with containers, it was found to be insufficient.

Solutions for Increased Legal Certainty

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

Commonly used clauses EXW (Ex Works) or DDP (Delivered Duty Paid) are, for example – contrary to common belief – the best solution only in exceptional cases.

The agreement of DDP often leads to difficulties in terms of customs and tax law. This is particularly true for the processing of cross-border sales contracts where export and import processing is required. Often, DDP is agreed upon without the contracting parties being aware of the difficulties resulting from customs and tax law requirements or restrictions. This is because under DDP, the seller is responsible for customs clearance; however, the seller is not always entitled, for customs reasons, to actually carry out customs clearance in the buyer's country.

Furthermore, the ICC has been pointing out for years that the clauses FAS, FOB, CFR, and CIF are only suitable for sea and inland waterway transport. These clauses are equally unsuitable for container shipments.

Incoterms do not govern load securing. This is instead governed by the legal provisions relating to freight law. According to German law (§ 412 para. 1 sentence 1 HGB), the sender is generally responsible for safe loading for transportation. The sender in terms of freight law (§ 407 para. 2 HGB) is only the principal of the freight carrier. This is not necessarily the seller and/or shipper. For example, if the buyer instructs the freight carrier to pick up a shipment from the seller, the buyer is also the sender. In these cases, the seller is not responsible for securing the load.

Also not regulated in the Incoterms® are the obligations and costs associated with the determination and verification of the confirmed gross mass of freight containers (VGM – Verified Gross Mass). The international editorial committee considered this topic to be too specific and complex. It should be regulated between the parties.

Another problem is that companies often modify Incoterms® clauses (e.g., "EXW with loading"). While modifications are generally possible, to avoid unnecessary discussions in the event of a dispute, the contracting partners should closely examine the legal and practical consequences of the desired changes and clearly articulate the intended effect of such a modification in their contract. This is particularly true for the question of whether the transfer of risk shifts from the seller to the buyer as a result.

Caution is also advised if something different is "lived" than contractually agreed. In such cases, a court might assume in the event of a dispute that the contracting partners have implicitly agreed on a different clause.

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

This includes, for example, specifications of the sold goods, warranties, the time, place, method, or currency of payment, transfer of ownership, including retention of title, liability or limitation of liability, legal consequences of delay, obligations and legal consequences, effects of sanctions, imposition of duties, export or import prohibitions, force majeure, intellectual property rights, choice of law, especially concerning the UN Convention on Contracts for the International Sale of Goods (CISG) as well as mandatory domestic laws (safety, health, environmental protection, etc.), evidentiary rules, type of dispute resolution, place of jurisdiction or arbitration clause. These important aspects must be regulated by the parties in the sales contract.

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

The Incoterms® do not replace legal advice by attorneys specializing in international trade law.

Furthermore, responsible employees regularly report inadequate coordination between the individual departments. This also applies to communication with external third parties (freight forwarders, carriers, banks, insurers, lawyers, tax consultants, customs, and tax authorities, etc.). The Incoterms® serve as an important interface between key topics (sales contract, export and import control, taxes, customs law, transport contract, insurance contract, and financing). A smooth process in international trade will only succeed if all parties coordinate and ensure that the individual contracts are aligned. For this purpose, in-house training involving all departments is advisable.

Conclusion

The new Incoterms® 2020 bring more legal certainty when the appropriate clause is applied in conjunction with professionally drafted international sales contracts. This requires problem awareness and critical engagement with this topic.

(Article first appeared in FOREIGN TRADE 4/2019)