This article discusses International Commercial Terms – or ‘Incoterms’ – which are often found in international trade contracts.
‘Incoterms’ is an abbreviation of International Commercial Terms. These terms have been published by the International Chamber of Commerce (ICC) since 1936 and have been subject to review and updating since that date. The most recent updates were announced by the ICC in 2020.Although earlier versions of Incoterms may still be incorporated into future contracts if the parties agree, it is likely that most contracts made now will refer to this latest edition of Incoterms. In order to avoid the possibility of confusion, contracts should refer specifically to the ‘Incoterms 2020’ rather than just Incoterms, if the parties wish the new terms to apply. This will avoid any subsequent dispute as to which set of rules apply. The assumption is that the new version of the ICC terms will apply to LW-GLO.
The Incoterms are often to be found in international contracts, and they seek to provide a common set of rules for the most frequently used international terms of trade with the aim of removing confusion over their interpretation. For example, the terms set out exactly who is under the obligation to take control of and/or insure goods at a particular point in the shipping process. The terms also deal with the obligation for the clearance of the goods for export or import, and requirements on the packing of items.
Incoterms 2020 are separated into two classes. The current two classes of terms are:
(i) rules for use in relation to any mode or modes of transport
These can be used in cases where either maritime transport is not involved in the carriage of the goods, or where maritime transport is used for only part of the carriage. This first class includes the following seven Incoterms that can be used irrespective of the mode of transport selected and irrespective of whether one – or more than one – mode of transport is employed:
EXW Ex Works
FCA Free Carrier
CPT Carriage Paid To
CIP Carriage and Insurance Paid To
DAP Delivered at Place
DPU Delivered at Place Unloaded
DDP Delivered Duty Paid
DPU (Delivered at Place Unloaded) replaces DAT. This is to emphasise that the place of destination can be any place and not just a ‘terminal.’ It is also to emphasise the difference from DPU – under DAP the seller does not unload the goods, and under DPU the seller does unload the goods.
Incoterms 2020 includes arrangements for carriage with their own means of transport in FCA, DAP, DPU and DDP.
It should be emphasised that although all the terms listed apply when there is no maritime transport, they can be used in cases where a ship is used for part only of the carriage.
(ii) rules for maritime transport only
These rules apply where the point of delivery and the place to which the goods are carried to the buyer are both ports. There are four substantives rules:
FAS Free Alongside Ship
FOB Free on Board
CFR Cost and Freight
CIF Cost Insurance and Freight
Incoterms 2020 aligns different levels of insurance coverage in CIF and CIP.
The rules apply to domestic as well as international trade, whereas previous Incoterms applied to international sale contracts. The rules state that the obligation to comply with export/import formalities exists only where applicable.
Given the context of uncertainty regarding potential terrorism and the need for heightened security, many countries have introduced security checks in relation to goods crossing their boundaries. The Incoterm rules now require both sellers and buyers to provide sufficient information to one another so that export/import clearance can be obtained. Incoterms 2020 include clearer and more detailed security -related obligations on carriage and export/import clearance of each Incoterms rule.
The rules provide for the use of paper communications or ‘equivalent electronic record or procedure’ where agreed or customary, with customary indicating recognition of current practice in this regard.
Incoterms are a core constituent of international contracts and have frequently formed the basis for questions in the LW-GLO exam. Although in the manner of an updating exercise, the new Incoterms 2020 do introduce new rules for students of the LW-GLO syllabus to take into consideration in their preparation for future exams.
Written by a member of the Corporate and Business Law examining team