Legal Bits - Incoterms? 2010 vs Incoterms? 2020

Incoterms? are a set of international rules and predefined commercial terms which have very precise meaning for the sale of goods. The rules are published by the International Chamber of Commerce (ICC). “Incoterms?” stands for “international commercial terms” and is a registered trademark of the ICC.

Incoterms? consist of three letter acronyms related to common contractual sales practices and stipulate rules for the domestic and international trade. The Incoterms? acronyms are used in commercial transactions worldwide. If duly incorporated in the sales agreement, the rules inter alia define the duties of the parties in relation to the delivery and the payment regarding customs, as well as the cost and risk allocation in the delivery of goods between the buyer and seller.

The use of Incoterms? in a sales contract has to be agreed upon between the parties and has legal implications for the entire agreement. Therefore, the integration into the agreement requires diligent drafting of the relevant provisions. The rules are global in their reach and intended to reduce or remove uncertainties arising from differing interpretations of the agreed clauses and duties by the contracting parties.

However, the Incoterms? rules do not determine the purchase price, the terms of payment in relation to the purchase price, the transfer of the legal title regarding the object of purchase, the governing law or the place of jurisdiction. In general, the adoption of Incoterms? shall be considered regarding all intentions of the parties. In this light, the purpose of the contract shall be supported by the use of Incoterms? and the casual adoption of the Incoterms? rules should be avoided.

The Incoterms? 2010 are currently applicable and define eleven rules which are divided into two distinct classes on the basis of the method of delivery. The first and larger class includes seven rules that can be used irrespective of the mode of the selected transport and regardless of whether one or more than one mode of transport is applicable to the commercial transaction.

EXW (Ex Works) -- FCA (Free Carrier) -- CPT (Carriage Paid To) -- CIP (Carriage and Insurance Paid to) -- DAT (Delivered At Terminal) -- DAP (Delivered At Place) -- DDP (Delivered Duty Paid)

In the second class, the point of delivery and the place to which the goods are carried to are both ports. The rules apply to sea and inland waterway transport.

FAS (Free Alongside Ship) -- FOB (Free On Board) -- CFR (Cost and Freight) -- CIF (Cost Insurance and Freight)

Each Incoterms? 2010 rule has a guidance note which explains the fundamentals of the respective acronym and shall help to choose the appropriate rule for the particular commercial transaction.

The ICC has announced the preparation and publication of a new edition and update of the Incoterms? rules. The Incoterms? 2020 are set out to reduce grey areas and dispel current misunderstandings of the predefined commercial acronyms. To achieve this goal on a global level, the drafting committee of the ICC consists of representatives from Europe, USA and Asia.

The Incoterms? 2020 rules shall contain content and structure related changes. Due to the fact that these rules are considered to be more applicable to domestic transactions, the removal of the Incoterms? rules EXW and DDP is under consideration. While the Incoterms? rule EXW is widely used, it may in fact only be useful in domestic transactions, due to unspecified customs duties. On the other hand, the Incoterms? rule DDP seems to be hardly used at all and may disappear due to inconsistencies with payments of customs expenses. The rule may be substituted by two more precise Incoterms? acronyms.

The FAS rule may be deleted in favour of the commonly used FCA rule, which may be split according to transport by sea and land. However, the modifications and amendments by the ICC shall be described in more detail following the presentation and release of the Incoterms? 2020.

The Incoterms? 2020 are expected to be published in the last quarter of 2019 and shall enter into force on 1 January 2020.

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? Prof. Dr. Stefan Gurmann