Businesses that are involved in the international sale of goods should be aware that new Incoterms will be published by the International Chamber of Commerce (ICC) on 1st January 2020.
What are Incoterms?
Where one party wishes to sell goods to another party in a different country, the parties can agree that one of a number of defined sets of rules (i.e. Incoterms) will govern the sale of those goods.
There are currently 11 different sets of Incoterms which parties can use in their international sale of goods contracts, with the most recent collection of Incoterms being produced in 2010.
Why do parties use Incoterms?
Incoterms give both parties clarity and predictability as to what their responsibilities will be under a contract in relation to issues such as transfer of risk, location of delivery and liability for import/export duties. Businesses can therefore benchmark their obligations against the relevant Incoterms and forecast costs arising from the same.
What changes are being made to Incoterms?
Whilst we cannot know for sure what changes will be made in Incoterms 2020, the following changes are widely rumoured:
EXW (Ex Works) &
DDP (Delivery Duty Paid)
EXW and DDP represent both ends of the Incoterms spectrum, with the former placing almost all of the responsibility on the buyer of the goods and the latter placing almost all of the responsibility on the seller.
There are some aspects of EXW and DDP which are confusing and some sources state that they do not comply with the new EU Customs Code.
The ICC is therefore likely to delete both EXW and DDP.
|FAS (Free Alongside Ship)
FAS requires the seller to deliver the goods next to the buyer’s ship.
If the buyer’s ship is late, FAS requires a seller to wait at the port with the goods until the buyer’s ship arrives in order for delivery to be completed.
As a result, FAS is rarely used, with many parties preferring to use FCA (Free Carrier) which affords the parties much more flexibility. The ICC has therefore considered that it can delete FAS.
|FCA (Free Carrier)
FCA is the most popular set of Incoterms as it allows a great deal of flexibility as to where the seller can deliver the goods.
The ICC is considering dividing FCA into two separate sets of rules: one for deliveries over land and one for deliveries over sea.
FOB (Free on Board) &
CIF (Cost Insurance Freight)
FOB and CIF are intended for deliveries over sea but, due to their popularity, are often incorrectly used by parties selling goods over land in containers.
The ICC is rumoured to be extending the application of FOB and CIF to cover delivery over land/by container.
DAT (Delivered at Terminal)
Whilst, under Incoterms, “terminal” is given a wide definition to cover any sort of place, there has historically been some confusion as to whether the word “terminal” dictates that the goods must be delivered to a customs terminal.
As such, the ICC is proposing to rename DAT as DPU (Delivery at Place Unloaded).
|CNI (Cost and Insurance)
CNI will be introduced as part of Incoterms 2020 and will provide that the seller will be responsible for insuring the goods during carriage whilst the buyer will have to bear the risk of transportation.
DTP (Delivery at Terminal Paid) &
DPP (Delivery at Place Paid)
The deletion of DDP has led to the need to introduce two new sets of Incoterms: DTP and DPP.
Under DTP, the seller of the goods will be responsible for all transport costs (including customs fees) when the goods will be delivered to the terminal at the destination.
Under DPP, the seller of the goods will be responsible for all transport costs (including customs fees) when the goods will be delivered to any other place specified by the buyer.
The ICC will also be discussing changes to address issues such as cyber-security and privacy, transportation insurance and the relationship between Incoterms and the international sale of goods contracts to which they will relate.
What impact will Incoterms 2020 have on businesses?
Provided that businesses have been clear on what edition of Incoterms shall apply to their supply contracts, the changes introduced by Incoterms 2020 will not apply to them.
Contrastingly, if businesses would like to benefit from the changes introduced by Incoterms 2020 then they will need to amend their contracts to ensure that references to Incoterms within the contract are to the 2020 edition.
Will Brexit have an effect on businesses who use Incoterms?
Irrespective of whether you are looking at the 2010 or 2020 edition, Incoterms allocate the responsibility for import and export charges/tariffs between the parties.
Post-Brexit, and subject to the terms of any preferential trade agreements, it is likely that we will see an increase in the size and number of import and export charges/tariffs applicable to the movement of goods between the EU and the UK. Such increase is likely to be even more pronounced in the event of a no-deal Brexit.
Parties who are, by virtue of Incoterms, responsible under a contract to pay import and/or export charges, will need to consider whether any increases to such charges caused by or related to Brexit will:
- affect their ability to perform their obligations under that contract; and
- have the effect of ceasing to make that contract commercially viable for that party.
What should businesses do to prepare for Incoterms 2020?
Businesses who use Incoterms should review the interpretation provisions in their contracts to establish whether the position under Incoterms 2010 will continue to apply or whether the changes introduced in incoterms 2020 will take effect.
For those parties responsible to pay import/export tariffs or other customs duties under incoterms, close attention should be paid to how such tariffs and charges might be impacted by Brexit. If a party considers that Brexit could detrimentally increase the cost of its performance of its contractual obligations, then it may wish to insert a Brexit clause or other mechanism in the contract which allows the parties to renegotiate terms or exit the contract.
Finally, as a general comment, businesses should consider if Incoterms provide adequate commercial protection for them, or if bespoke terms are preferential or required instead. Businesses should avoid using both to avoid the possibility of conflict between Incoterms and the general provisions of their contracts.