On January 1st, 2020, a new version of the "rules for the use of domestic and international trade terms" -commonly known as
"Incoterms®"
- came into force. The Incoterms
® were
originally issued in 1936 by the International Chamber of Commerce (ICC), who usually introduces changes to the same the same based on the international trade experience.
Their use is internationally recognized in international sale and purchase of goods agreements. Their main objective is to facilitate the international trade transactions by establishing a set of terms and rules to determine certain rights and obligations of both the seller and the buyer regarding the delivery obligations, allocation of insurance and transport costs, and the transfer of the risks associated to the loss or damage to the goods, without prejudice of what the applicable law to the contract may establish.
The main changes are the following:
1. Bill of lading with "on board" mention in "Free Carrier" rule (FCA)
Usually the seller requires (generally to enable payment collection by the seller, or as a requirement/condition of payment by the issuing bank of a letter of credit) a copy of the bill of lading ("B/L") with a mention that the goods have been delivered "on board" to the carrier. Given that in FCA conditions the delivery of the goods is completed by the seller before goods are loaded onto the vessel (upon which seller is usually able to issue its invoice and collect the price of the sold goods), and the carrier usually issues the B/L once the goods are on board of it, the seller was not always able, under FCA condition, to obtain an "on board" B/L from the carrier.
Sophisticated carrier companies usually do not issue a B/L without having previously loaded the goods onto the vessel. Under the new version of Incoterms® 2020, the parties may contractually agree that the buyer will instruct its carrier to issue to the seller, at buyer's own risk and cost, the B/L with an "on board" note, even when goods have not yet been carried on the vessel at loading port, anticipating that -if the carrier accepts buyer's request- the seller will be obliged to deliver the bill of lading to the buyer. In no event this will imply that the seller assumes an obligation to contract the transport of the goods. If the carrier refuses to issue the B/L until the goods have been loaded, our firm recommends to contractually agree to replace the B/L for collection with a document evidencing the delivery of the goods to the carrier (for example a delivery note).
2. Distribution of costs
In order to have a clear picture of the distribution of costs between the parties, it is included under section A9/B9 of each Incoterm® a detailed description of all costs associated to the delivery of goods (such as carriage, packaging, loading, unloading, costs related to the required documentation, duties and taxes, security) which each part must assume according to each Incoterm®. Previously, such costs were mentioned under the provisions of each Incoterm®.
3. Insurance in "Carriage and Insurance Paid" ("CIP") and "Cost, Insurance and Freight" ("CIF") rules
The new rules provide a different minimum insurance cover for CIF and CIP deliveries as well as the possibility for the parties to expressly agree on lower or higher levels of insurance, as they deem fit. Previously, in both cases, minimum coverage was required at the level of Clause (C) of the Institute's Cargo Clauses[1]. Now, for CIF deliveries, the predetermined level remains unchanged; however, for CIP deliveries, the seller is obliged to obtain insurance at the level of Clause (A) of the Institute's Cargo Clauses covering all risks. Therefore, the minimum insurance coverage for CIP deliveries has been increased for the benefit of the buyer.
4. Means of transport in "Free of Carrier" ("FCA"), "Delivery at Place" ("DAP"), "Delivery Duty Paid" ("DPU") and "Delivery Duties Paid" ("DDP") rules
The Incoterms
®
2010 assumed scenarios where the transportation was performed by an external carrier, whether hired by the seller or the buyer. The new Incoterms® also cover scenarios in which a carrier is not requested nor hired by either seller or buyer, particularly on FCA, DAP, DPU and DDP deliveries. Under Incoterms
®
2020, two options are contemplated in relation with the carriage defined in each rule: obligation to contract the carriage to a third party or undertaking to perform the same.
5. Name changed from "Delivered at Terminal" ("DAT") to "Delivered at Place Unloaded" ("DPU")
The name of the rule called DAT under Incoterms® 2010 entails the delivery of the goods at a "terminal", term which was not expressly defined and therefore conveyed different interpretations. The new Incoterms® replace the name DAT for DPU (Delivery at Place Unloaded). In this way it is clarified that the place of destination may be any place -suitable for unloading- that has been agreed by the parties, and not just in a terminal.
6. Requirements and security costs
The Incoterms® 2020 establish more stringent requirements related to the security on the loading and carriage of the goods. In this sense, the express allocation of security-related obligations and their cost allocation between the parties is added to each Incoterm®.
In connection with the use of the different versions of the Incoterms®, the following considerations are to be taken:
- For the existing contracts by which the parties have agreed the use of the Incoterms® 2010 or other previous edition, they will continue to apply even if the contract is executed during the year 2020.
- For contracts entered into after January 1st, 2020, to the extent the contract does not expressly mention which Incoterms® Edition will apply, it can be expected that the tribunal courts and arbitration procedures will assume that any reference made to Incoterms® in new contracts is intended to be a reference to Incoterms® 2020, unless there is evidence to the contrary.
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Understanding the Incoterms® rules in their form and substance reduces the risks to sellers and buyers under international contracts for the purchase and sale of goods. The misapplication of the terms may be a source of conflict or inconsistency in relation with the contractual terms and conditions, distorting in such way, the terms and conditions regulated by the Incoterms® and therefore, the rights and obligations of the parties. Misinterpretation of the scope of these rules can be a source of conflicts, litigation and economic losses between buyers and sellers. Our Firm is highly recognized for its extensive experience in international commercial law and offers advice on commercial contracts, including for international sales and purchases. We are unique among Argentine firms in our ability and proven experience in providing legal services on cross-border transactions.
We invite you to contact us should you have any inquiry on this matter.
[1]
Lloyd´s Market Association (LMA)/International Underwriting Association (IUA) or similar.
