Many companies frequently use so-called Incoterms®, particularly in terms of international trade. This set of rules helps interpret contractual clauses and has been redrafted by the International Chamber of Commerce (ICC) after ten years. This Digitorney LexShot gives an overview of what the new Incoterms® 2020 contain, for whom and when they are valid.
Incoterms® have significant practical relevance to import and export of goods as these rules provide a consistent basis for business partners from different jurisdictions to interpret purchase agreements. Although it is not mandatory by law to make use of the Incoterms®, these rules are used in more than 90% of all international sales contracts over 120 countries. The new Incoterms® 2020 came into force on 1 January 2020 and are stipulated in the official book of the ICC, which can be ordered via the website https://2go.iccwbo.org/incotermsr-2020-english-french-config+book_version-Book/
Incoterms® 2020: relevant for whom?
The Incoterms® 2020 only apply to purchase agreements for goods of various kinds, e.g. raw materials, auxiliary materials, consumables, technical equipment, equipment, spare parts, supplier parts or food. In contrast, services, transfer or granting of rights (e.g. intellectual property) or software are not covered by the Incoterms® 2020.
The Incoterms® 2020 primarily address to buyers and sellers of goods. In addition, the clauses are also important for logistics companies, forwarding agents, packaging service providers, customs officers in companies or insurers involved in the settlement of international sales contracts – for example, through freight or storage contracts as well as insurance policies.
Incoterms® 2020: when applicable?
If the clauses of the previous Incoterms® 2010 or older versions have been agreed for a purchase agreement, the new Incoterms® 2020 do not automatically apply. However, if only the “current version” of the Incoterms® is referred to in the purchase agreements or if reference is made to the Incoterms® without specifying the version, the version in force at the time of conclusion of the agreement shall be applicable. If a company has made only a general reference to the Incoterms® in its contracts and/or general terms and conditions so far without reference to a specific version, it can be assumed that from 1 January 2020 the Incoterms® 2020 shall be used for offers, orders or order confirmations in case of mutual declarations. If this shall be avoided, the parties need to explicitly refer to the preferred previous or older version of the Incoterms®, which can also be used in future based on mutual consent.
Incoterms® 2020: what’s changing?
The new Incoterms® 2020 have brought some fundamental changes. For instance, the previous clause DAT (Delivered At Terminal) has been deleted. Instead, the term DAP (Delivered At Place) or alternatively the new term DPU (Delivered at Place, Unloaded) can now be used. Consequently, the pre-existing narrow term “terminal” has been extended to “Place”. Unlike DAP, where the goods must be delivered ready for unloading at their destination, DPU already includes unloading.
With regard to CIP (Carriage and Insurance Paid), the insurance cover has changed in the event of loss or damage to goods during transport: although only the clauses CIF (Cost, Insurance, Freight) and CIP lead to an obligation for the seller to take care of the transport insurance in favor of the buyer in future, the minimum amount of protection at 110% of the purchase price of the goods is newly regulated. Hence, the insurance must cover the full risk (All-Risk) if the CIP clause is used. In terms of the coverage level, Group A of the Institute Cargo Clauses is decisive. On request of the buyer, the seller must organize additional insurance cover if this is available and if the buyer provides the seller with the required information.
Moreover, new rules for bills of lading have been included in the Incoterms® in connection with the sender clause FCA (Free Carrier): it can be agreed in the purchase contract that the seller receives a bills of lading which is required, for example, for processing a letter of credit. This document confirms that the goods have been taken over on board of a vessel or that there is an intention to do so. The Incoterms® 2020 determine the procedures for this – also with regard to the fact that the transfer to the carrier takes place beforehand in case of an FCA.
The previous obligation of the buyer towards the seller to conclude a transport contract in case of delivery with FCA if DAP, DPU or DDP have been agreed, has now been relativized: the parties can also organize the transport with their own logistics.
Furthermore, the Incoterms® 2020 have specified the seller’s obligations with regard to transport: for example, transport-related safety requirements with validity for the goods on the transport – even if this is moved to other countries – must be fulfilled by the seller, if necessary at his own expense, depending on the chosen Incoterms® clause.
Recommendations for companies
In order to avoid the risk of misinterpretation and contradictions, buyers and sellers of goods should urgently check whether their standard contracts or general terms and conditions are in line with the new version of the Incoterms®. In case of deviations, a conscious decision should be made as to whether the deviations are practicable and acceptable. In addition, the consequences of the Incoterms® 2020 for operational processes should be clarified. Finally, it is advisable for contracting parties to clarify the applicable version of the Incoterms®.