Contract interpretation can be a serious frustration in international trade, owing to differences in language, law and custom, and leading to misunderstandings, delays, and costly disputes. Since the 1930s, the International Chamber of Commerce (ICC) has published its International Commercial Terms, or “Incoterms”, as a set of uniform rules for interpreting the chief provisions used in foreign freight delivery contracts, aimed at assuaging some of the difficulties often experienced by international merchants. Incoterms are not contained in the text of any multilateral agreement or convention, but rather act as stand-alone instruments that parties can incorporate by reference into their agreements. Parties to international sales contracts will often specify that their contracts will be subject to “the most recent version of the Incoterms”, which then prescribe the various duties and obligations to be assumed by the vendor and purchaser.
As the nature and scope of international trade are changing constantly, the ICC has amended its Incoterms in every decade since the 1950s. September 10, 2019, saw the release of the most recent iteration, which will come into effect on January 1, 2020.
Principal Changes in Incoterms 2020
The basic purpose of the Incoterms is to delineate how obligations, costs and risks will be divided between the parties in connection with delivery of the goods from the vendor to the purchaser. Such division is achieved by identifying the point where the obligation to arrange for further transport of the goods and to assume further costs and risks is transferred from the vendor to the purchaser. The previous edition — Incoterms 2010 — contains eleven trade terms that could be grouped broadly as (i) rules for sea and inland waterway transport, and (ii) rules for any mode of transport.
In the 2020 amendments, the ICC Drafting Committee has kept all eleven trade terms, but made some notable changes that sellers and buyers should be aware of:
Free Carrier Alongside (FCA).
- FCA is the most widely-used Incoterm. Offering the most flexibility with delivery location, it is currently referenced in roughly 40 per cent of international trade agreements. Until now, FCA was applicable to all forms of transportation, making it ideal for multimodal transport contracts. Interestingly, the 2020 amendments have revised FCA to govern land and maritime transport separately.
- This change addresses a gap between the FCA and Free On Board (FOB) Incoterm often used for container shipments. Whereas FOB directs that a seller deliver goods and load them on board the vessel, FCA requires a seller to deliver goods alongside the vessel, at which point the buyer assumes responsibility for loading and all costs thereafter. This process often requires the seller to secure an onboard bill of lading, which may not be easily obtained. Incoterms 2020 amends FCA such that a buyer may direct the carrier to issue such bill of lading to the seller and provides some clarity on the associated financing obligations.
Carriage and Insurance Paid (CIP) and Cost, Insurance and Freight (CIF).
- The 2020 amendments also make important changes to the Incoterms insurance provisions. Previously, the CIP and CIF Incoterms directed that the seller be responsible for insurance, but required only a minimum level of coverage. This is often commercially unrealistic, requiring parties to better define the insurance and carriage obligations elsewhere in their agreement. Incoterms 2020 has increased the insurance required under CIP, acknowledging the reality that CIP is more often used with manufactured goods. Conversely, CIF typically governs with bulk commodity trades.
- This Incoterm should also help to abate disputes surrounding duty payment, which frequently arise when using the CIP and CIF rules.
Delivered at Terminal (DAT)/Delivered at Place Unloaded (DPU).
- In the new Incoterms, DAT has been renamed DPU. DAT is a useful rule, well suited to container operations where the seller bears responsibility for the main carriage. Risk transfers from seller to buyer when the goods have been unloaded. As the instructions to Incoterms 2010 explained however, ‘terminal’ in DAT could be any place — a quay, container yard, warehouse or transport hub. The renaming to DPU simply acknowledges that goods subject to this term need not be unloaded at a terminal. The change is small, but one that international merchants will appreciate.
Other Notable Changes
While Incoterms 2020 contains some notable improvements, the changes are not nearly as drastic as some commenters were speculating. Perhaps most useful for international traders, Incoterms 2020 includes a more detailed explanation on how to choose the most appropriate Incoterms rule for a given transaction, or how a sales contract interacts with ancillary contracts. The ICC Drafting Committee noted in the lead up to the release that it was well-aware of the seriousness and potential consequences caused by misinterpretations of Incoterms and explicitly aimed to facilitate the understanding of its transport terms with Incoterms 2020. To this end, the amended document includes much-needed clarifications on costs, and contains more precise allocations of the amounts to be paid between buyer and seller. Incoterms 2020 also makes security obligations more prominent, to address ever-increasing security requirements across all forms of transport.
It is also worth noting that, for the first time, the ICC Drafting Committee included representatives from China and Australia. The Committee has been predominantly comprised of European representatives for previous iterations of the Incoterms, so these additional perspectives were no doubt valued in drafting the 2020 amendments. Further, the ICC intends to make all essential information of the rules available via a dedicated Incoterms 2020 mobile app.
Impacts for You and Your Business
Incoterms 2020 will come into effect on January 1, 2020. In the interim, businesses would be well advised to adapt, prepare and train their personnel to address these amendments, and the effects they might have on their current trade practices. To help Canadian businesses get up to speed on the changes and what they mean, the Canadian Chamber of Commerce is working with the Forum for International Trade Training (FITT) to organize training sessions at local chambers of commerce. The locations and dates for these Incoterms 2020 training sessions are to be announced.