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Executive Summaries Feb 14, 2020

Incoterms® 2020: new developments in merchandise trade

The arrival of a new decade marks the publication of a new version of the Incoterms by the International Chamber of Commerce ("ICC"), namely Incoterms 2020, which replaces Incoterms 2010.

Here is a brief reminder of the usefulness of these international trade rules and a summary of the changes brought about by the new version.

What Are Incoterms?

Incoterms are a codification by the ICC of commercial terms and common practices relating to trade of goods into 11 concise rules. The Incoterms manage the obligations of those parties to the contract of sale of goods relating to delivery, transport, customs clearance, insurance and transfer of risk.

The Differences Between Incoterms 2010 and Incoterms 2020

The core of the new version of the Incoterms remains largely unchanged. The ICC has essentially carried out procedural work, reformulating the language for each rule and consolidating the obligations of the parties into more clearly defined articles in order to improve understanding and facilitate the selection of the correct rule by the parties to the contract of sale. Here are the notable changes.

a. Bill of lading with an "on board" stipulation under the rule

The issuance of a bill of lading with the words "on board" is sometimes required by banks in order for the seller to receive payment by virtue of a letter of credit. However, in the case of carriage by sea under the rule, which can be used with all means of transport, the seller may have difficulty in obtaining such a bill of lading, since the seller's obligation to deliver is met before the goods are on board the ship. The seller therefore has no contractual relationship with the maritime carrier.

This is because the place of delivery is not the port - for example, delivery may be in Las Vegas, for loading onto a ship in Los Angeles. As the contract for maritime transport by sea is between the carrier and the buyer, the 2020 rule provides a new option: the parties to the sales agreement may agree that the buyer will instruct the carrier to issue a bill of lading to the seller confirming that the goods have been loaded onboard the vessel. This type of clause is therefore to be expected from now on, which could pose certain implementation problems, as the delivery date will automatically be different from that of the bill of lading.

B. More detailed explanatory notes and a better description of the applicable costs

As the main objectives of the revision to the Incoterms are to improve the understanding of each of the rules and to facilitate the correct choice of rule, the drafting group of Incoterms 2020 has expanded the explanatory notes of each of the rules, thus simplifying the reader's task.

The respective costs to the seller and the buyer, payable to the various parties involved in the sale of goods (e.g. transportation, import/export, insurance, supply of documents, loading/unloading, etc.) were consolidated by the drafting group. As a result, the costs specific to each aspect of a given rule are now consolidated under a single article, which is easier to read and understand.

C. Different levels of insurance under and rules 

Under the 2010 and 2010 rules, the seller's obligation was to provide an insurance contract offering a similar level of protection to that of Clause (C) of the Institute Cargo Clauses (Lloyd's Market Association/ International Underwriting Association LMA/IUA), or any similar clause.

Under the new rule, the minimum coverage is increased to a similar level to that in Clause (A) of the Institute Cargo Clauses, which represents "all risks" insurance and is not customary in commercial shipping. The 2020 rule (applicable to carriage by sea only) maintains the status quo, i.e. less extensive protection covering a limited number of risks.

D. Arranging own means of carriage under , , and rules

The Incoterms 2010 incorrectly assumed that all carriage of goods was done through a third party carrier retained by the seller or the buyer depending on the rule used. However, in reality this is different, and the obligation to transport is sometimes carried out by the seller (under the , or rules) or the buyer (under the rule) themselves, without recourse to a third party. The wording of Incoterms 2020 has therefore been amended so as not to infer the need for a "contract of carriage", but rather to provide for the "arrangement of the necessary carriage".

E. Changing the designation to

Under the Incoterms 2010, the only difference between the and rules was the seller's obligation to unload the goods at a given "terminal" under the rule, rather than making the goods available to the buyer at a given location, ready to be unloaded, under the rule. In addition, the term "terminal" had a broad meaning that could essentially refer to any location. The rule has therefore been renamed in order to emphasise that the place of delivery can be any location. The rule remains unchanged.

F. Inclusion of safety requirements in the description of obligations and transport-related costs

The 2010 Incoterms were the first revision of the Incoterms to include, albeit discreetly, obligations related to security issues. These concerns and the transportation practises they have generated are now much more established. The Incoterms 2020 therefore expressly require:

  • i. the seller to comply, at its own expense, with all security requirements relating to transportation and delivery, or to provide relevant information to the buyer as required, and
  • ii. he seller and the buyer, at their own expense respectively, to obtain any security clearance required by the competent authorities for the import/export of the goods.

Practical Advice

Business development not included in the Incoterms

In July 2016, an amendment to the 1974 International Convention for the Safety of Life at Sea (SOLAS) imposed an obligation on shipping companies to verify the gross mass of containers, either by weighing the loaded container or by weighing all packages and cargo components, then adding the weight of the empty container. Failure to comply with this obligation will result in the container not being loaded on the vessel and the verification itself may result in delivery delays.

Although it would seem logical to us that the Incoterms 2020 would determine who between the seller or the buyer should bear the costs of this new verification, the ICC considered that the obligations and related costs are too specific and complex to warrant mentioning them. The parties to the contract of sale should pay particular attention to this obligation.

Warning -

A common practise in the trade of goods by road or rail transport is the use of the term (destination) or (origin).

Caution: Such sale is not governed by Incoterms 2020, but rather by the American Uniform Commercial Code. Indeed, the Incoterm is only used in carriage by sea and in conjunction with the port of origin. The UCC version of a "land ” differs from the Incoterms version. Thus, issues relating to delivery, transfer of risk, insurance and customs clearance may vary from one approach to another. If you typically use this type of commercial term, we invite you to clearly define its parameters in the sales agreement in order to limit misunderstandings and avoid costly disputes.

Sales agreement

Incoterms are not a substitute for sales agreements relating to goods, but are often used therein to abbreviate delivery clauses. Incoterms do not deal with several important elements relating to the sale, including the timing of the transfer of ownership, the terms of payment, the guarantees offered or the obligations and limits of liability and indemnification. These elements must therefore be expressly mentioned in a comprehensive contract of sale.

In order to avoid unfortunate situations, our professionals are at your disposal to offer advice for your projects relating to the sale and trade in goods, and to help you avoid mistakes.

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