What are Incoterms®?
The increase in the volume and complexity of the sales of national and international merchandise has generated a growth in the misunderstandings and litigation that can always arise between the parts of a contract; with greater reason when the two main parts of a contract, seller and buyer, are located in different countries.
Already in 1936, and in order to facilitate international trade, Incoterms® were born from the hand of the International Chamber of Commerce (ICC). Rules that, applied to a contract of sale, help to define the obligations and responsibilities that each of the parties assumes in the business they jointly undertake. So, the Incoterms® are not a supranational legal rule, but Lex Mercatoria.
When choosing a rule adjusted to our business needs, there are many more aspects that we should take into account.
- The means of transport to be used to send the goods from the seller’s premises to those of the buyer.
- The nature of the merchandise that is the object of the sale, as it is not the same, if we have to urgently deliver perishable merchandise, send bulk merchandise on ships or carry out a palletized truck transport, among other cases.
- The means of payment agreed between the parties. In this case, the situation will be conditioned on having to make the payment by means of documentary credit with banking entities.
- The buyer’s own wishes. In fact, there is more and more competition between companies so, in many cases, the seller is forced to make the difference from their competitors.
- The situation of the countries of origin and destination of the merchandise, since it may happen that we are facing countries with protectionist tariff policies or unstable legal situations or policies.
This year the last version of these rules has been finalized, which is born under the name “Incoterms® 2020” and will enter into force on January 1, 2020.
The rules are classified in the different groups that we detail below:
|Group E||EXW||Ex Works.|
|Group F||FCA||Free Carrier|
|FAS||Free Alongshide Ship|
|FOB||Free on Board|
|Group C||CFR||Cost and Freight|
|CIF||Cost, Insurance and Freight|
|CPT||Carriage Paid to|
|CIP||Carriage and Insurance paid to|
|Group D||DPU||Delivery at Place Unloaded|
|DAP||Delivery at place|
|DDP||Delivery Duty Paid|
Among the novelties presented by this new version, the first and probably most striking is the redenomination of the rule DAT (Delivered At Terminal) that now happens to be called DPU (Delivered at Place Unloaded). This change of acronyms is a simple redenomination, since the obligations and functions of both terms remain exactly the same.
The term DPU is classified within the group of multipurpose terms, meaning that it is an Incoterm® suitable for any type of contracted transport (Road, road, air or sea transport), and is the only Incoterm® that provides that the delivery will only be carry out once the merchandise has been unloaded from the means of transport in which it has been transported. The new nomenclature that has been given to this term only evidences the fact that the merchandise will be delivered unloaded, unlike the rest of the Incoterms® in which the merchandise will be made available to the buyer at the port of destination , in the place designated by the parties.
Secondly, we must mention that in this new version of the Incoterms® when applying the Rule FCA (Free Carrier), it gives us the option, only in case that the main international transport contracted is maritime transport, that the buyer request the carrier or maritime carrier to issue a Bill of Lading on behalf of the seller, wherein the clause “on board” is included, which will record that the merchandise has been loaded on board the ship.
The introduction of this clause in the Bill of Lading or Bill of Lading will facilitate the payment made by means of documentary credit, as mentioned above.
Thirdly, in this new version it is explained precisely which party will be responsible for carrying out customs procedures, assuming the costs and risks of that phase. The responsibility will be assumed by those who are obliged to transport the goods to the designated place of delivery. Also, for the first time, the dispatch of goods in transit is included.
Finally, we want to talk about what we consider to be the most important difference that this new version of the Incoterms® 2020 rules has brought. This are the different coverages for the merchandise insurance, during their international transport under the terms CIP (Carriage and Insurance Paid to) and CIF (Cost, Insurance and Freight).
While in the CIF term the seller will contract in favor of the buyer a transport insurance with a minimum coverage of clause C of the English Institute Cargo Clauses, which does not vary from the previous Incoterms® version 2010, in the CIP term, the seller will contract for the buyer the transport insurance with a maximum coverage according to clause A of the English Institute Cargo Clauses.
Difference between CIP and CIF that is justified because CIF is commonly used for the maritime transport of bulk goods (raw materials, scrap, minerals, etc.) whose price per kilo is very low. Therefore, if insurance with maximum coverage is demanded, the policy would become more expensive, which would damage the negotiation margin of the sellers with their potential buyers.
In any case, we must not forget that the rules are part of the ancestral business of buying and selling merchandise, and will be subject to the modifications that the parties consider appropriate and determined in their contracts, within the freedom that national and international trade and rules grant them.