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    Locke Lord QuickStudy: INCOTERMS® 2020 Changes Rules for Buyers, Sellers and Shippers of Goods in International Trade

    Locke Lord Publications

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    The International Chamber of Commerce (the “ICC”) has issued INCOTERMS® 2020 (short for ‎International Commercial Terms) to be effective January 1, 2020.  INCOTERMS 2020 provides ‎an updated template and standardized set of definitions for the terms most commonly used in ‎international commercial transactions (and some that are less common but are used for specific ‎purposes).  By specifically designating INCOTERMS 2020 in an agreement prior to January 1, ‎‎2020, buyers, sellers, shippers and others can use INCOTERMS 2020 today even though the ‎official effective date is not until January 1, 2020.  References in agreements, purchase orders, ‎confirmations, letters of credit and other contracts to INCOTERMS after January 1, 2020, ‎without a designation as to an INCOTERMS version will likely result in the application of  ‎INCOTERMS 2020.‎

    INCOTERMS 2020 is written in plain unambiguous language.  Over the decades, ‎INCOTERMS®, in its various versions, has provided for a common shorthand, lexicon and ‎understanding for sellers, buyers, shippers and other participants involved in international trade ‎though the publication of INCOTERMS in multiple languages. The use of commonly defined ‎trade terms provides for predictability for the contracting parties and can avoid lengthy ‎negotiations and disputes over otherwise commonly understood key deal points.‎

    INCOTERMS 2020 makes some significant changes to its predecessor, INCOTERMS® 2010, ‎changing a number of duties and responsibilities, eliminating some terms, and adding new terms ‎that vary the duties of importers, exporters, buyers, sellers, shippers, freight forwarders, logistics ‎operators, banks, letter of credit issuers and others involved in international trade.  Not all of the ‎terms in INCOTERMS 2010 have been changed, but it is important to understand which terms ‎have changed, which have been deleted and which have been added when making reference to ‎any of the INCOTERMS trade terms.  Some of the terms continue to be relevant to transport by ‎sea and inland waterway only, while others have a far wider application.  ‎

    Choosing a term defined in INCOTERMS does not replace the need for a contract between the ‎seller and the buyer.  However, by referencing an INCOTERMS’ defined trade term in the ‎contract (which may or may not be a long form contract, purchase order, confirmation, fax, email ‎or other communication), the parties to an agreement are specifying, among other things, when ‎the risk of loss moves from seller or shipper to buyer, where and how the goods must be ‎delivered (e.g., at the shipper’s dock, at the boat, at the buyer’s facility), which of the parties has ‎responsibility for hiring the carrier, airline or ship and for putting the goods into the hands of the ‎carrier (loading), who pays for shipment and for export or import fees and duties, what ‎documents need to accompany the goods so that they can clear customs, who is responsible for ‎insurance and claims on insurance and sometimes when payment is due (for example, upon ‎tender of documents).  INCOTERMS does not deal with payment terms (unless a specific trade ‎term so provides and the parties have not agreed to the contrary), quantities, when the goods are ‎to be delivered, warranties, damages, force majeure events, hardship, infringement, and a number ‎of other significant terms in the parties’ contract or that are imposed by applicable law or the ‎U.N. Convention on the International Sale of Goods (the “CISG”).‎1 ‎ A prior course of dealings ‎may provide missing terms in sales contracts, especially when under the CISG an agreement is ‎made orally.‎

    It is important that all those involved in international trade or who write agreements, requests for ‎proposals, write or accept letters of credit or other documents affecting international trade review ‎their boilerplate, standard terms, purchase order templates, confirmation forms, shipping ‎documents, letters of credit and other key documents before January 1, 2020.  Changes may be ‎needed to reference the appropriate INCOTERMS 2020 trade term, choose a different term or ‎specify which prior INCOTERMS version should apply to a term that no longer is defined in or ‎has changed in INCOTERMS 2020.‎

    Unless a specific INCOTERMS version is stated, it will likely be presumed by a court or ‎arbitrator that you are working with the INCOTERMS version in effect when the order is placed ‎or the contract is executed.  However, if a term is specified in an agreement and that term is no ‎longer in the current version of INCOTERMS 2020, then the judge or arbitrator will, hopefully, ‎look to a prior version that included the term, the Uniform Commercial Code (since is too has ‎definitions for common terms) and trade usage.  However, there can be no assurance that the ‎judge or arbitrator will do so.  Similarly, if a preexisting agreement is to be fulfilled or purchase ‎orders are to be issued after January 1, 2020 under long term agreements, there could be some ‎confusion about what duties, documents and actions are expected from the seller, buyer, shipper ‎and carrier, and what carriage and delivery terms may apply.‎

    Under INCOTERMS 2010 there were 11 basic terms that most sellers, buyers, shippers, ‎importers and exporters have used to deal with their international transactions:‎

    EXW -- Ex Works
    FCA -- Free Carrier
    FAS -- Free Alongside Ship
    FOB -- Free On Board
    CPT -- Carriage Paid To
    CFR -- Cost and Freight
    CIP --Carriage and Insurance Paid To
    CIF -- Cost, Insurance and Freight
    DAT -- Delivered At Terminal
    DAP --Delivered At Place
    DDP -- Delivered Duty Paid

    Some of the changes made in INCOTERMS 2020 include2‎:‎

    • FOB (Free on Board) and CIF (Cost Insurance and Freight) which nominally did not ‎apply to container shipments handed over to the carrier before being placed on board the ‎vessel under INCOTERMS 2010, may be used again under INCOTERMS 2020 for ‎transport by containers via carriers before being so placed on board.‎
    • DAT (delivered at terminal) has been split into DAP -- Delivery at Place and DPU -- ‎Delivery at Place Unloaded.‎
    • DDP is replaced with DTP (Delivered at Terminal Paid) and DPP (Delivered at Place ‎Paid), which have very different meanings and duties for the seller.‎

    For domestic transactions, the Uniform Commercial Code (UCC) will continue to apply to deal ‎with some of the matters covered by INCOTERMS in international trade, but the parties may ‎still choose to use INCOTERMS defined transport/carriage terms.  The definitions and risk ‎passing provisions in the UCC may differ from those in INCOTERMS 2020 and INCOTERMS ‎‎2010 so buyers, sellers and others dealing in domestic sales contracts should carefully chose the ‎terms that they want to apply and what default rules (or version of INCOTERMS) will govern ‎their rights and obligations.  If the parties use trade terms in a domestic sales of goods transaction ‎that are found only in a version of  INCOTERMS and INCOTERMS is not specifically ‎incorporated into or referenced in the documentation, then there could be unintended ‎consequences for one or both parties.‎

    A copy of INCOTERMS 2020 can be purchased directly from the ICC in book and electronic ‎versions, found here, with a ‎dedicated INCOTERMS 2020 mobile application and dedicated e-learning platform available ‎from the ICC.  It is also anticipated that there will also be an ICC issued guide available in the ‎future to assist in understanding INCOTERMS 2020.   A number of brokers and carriers may ‎also prepare and make available to their customers, clients and other interested parties charts and ‎summaries of INCOTERMS 2020.  Currently there are a number of such charts and summaries ‎that summarize INCOTERMS 2010 so care is required when relying on such charts and ‎summaries for any of the new or revised terms.‎

     
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    1 This QuickStudy does not address the differences between the CISG and the various commercial codes (including ‎the Uniform Commercial Code in the United States) that might apply to any given transaction. It should be noted, ‎however, that in contracts involving entities in countries that have ratified or adopted the CISG, the CISG may ‎supersede some of the domestic commercial code provisions unless the parties expressly opt ‎out of the CISG in the ‎sales contract.‎ Therefor it is important for buyers and sellers to understand what law applies to their particular ‎transaction, what court or arbitration authority will have jurisdiction to construe and enforce the underlying sales ‎agreement and how the applicable law and chosen transport/trade terms will affect the duties and responsibilities of ‎the parties.‎

    2 It is highly recommended that parties to international and domestic transactions review the actual language of the ‎chosen INCOTERMS® 2020 term before relying upon the shorthand definition attributed to the term since the ‎details concerning the responsibilities of the parties as set forth in INCOTERMS 2020 are key to understanding how ‎the chosen term will be applied in practice.‎

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