What Are the Incoterms® Rules?
We have all heard of and used Incoterms® but what is the history of the Incoterms® and how can we understand clearly how to use them?
Incoterms® 2020 (current revision) rules are the official terms published by the International Chamber of Commerce (ICC). They are a voluntary, authoritative, globally-accepted, and adhered-to text for determining the responsibilities of buyers and sellers for the delivery of goods under sales contracts for international trade. Incoterms® closely correspond to the U.N. Convention on Contracts for the International Sales of Goods. Incoterms® are known and implemented by all major trading nations.
Incoterms® are only part of the whole export contract. They do not say anything about the price to be paid or the method of payment that is used in the transaction. Furthermore, Incoterms® 2020 rules do not deal with the transfer of ownership of the goods, breach of contract, or product liability; all these issues need to be considered in the contract of sale. Incoterms® 2020 rules cannot override any mandatory laws.
The Origin of Incoterms®
Differences in trading practices and legal interpretations between traders of different countries necessitated a need for a common set of rules. These rules needed to be easy to understand by all participants to prevent misunderstandings, disputes, and litigation.
Incoterms® were first conceived by the ICC in 1921, and the first Incoterms® rules were created in 1936. They were officially designated as Incoterms® in 1936. Since then, Incoterms® have evolved into a codified worldwide contractual standard. They are periodically updated as events in international trade occur and require attention. Amendments and additions were made in 1953, 1967, 1976, 1980, 2000, 2010 and 2020.
Who Decides Incoterms® Rules?
It is no small task to manage an international standard. These international trade terms are decided upon by 13 ICC commissions made up of experts from the private sector from across the world. These individuals specialize in everything from points of immediate concern to international business.
How Are Incoterms® Rules Revised?
The Incoterms® 2020 drafting group, led by co-chairs Christoph Martin Radtke and David Lowe, revised the Incoterms® rules. According to the ICC, “The group is formed by experts from various nationalities chosen for their extraordinary contribution to international commercial law and to the International Chamber of Commerce along the years.”
Here is a look at the process followed to revise Incoterms® rules:
- After the drafting group made its revisions, the revised drafts were circulated broadly and internationally through ICC National Committees, with the resulting comments and suggestions channelled back to the drafting group.
- The final draft, once approved by the ICC Commission on Commercial Law and Practice, was submitted for adoption by the ICC Executive Board.
- This broad, international consultation aimed to ensure that official ICC products possess authority as representing the true consensus viewpoint of the world business community.
Incoterms® 2020 Rules
- The most current revision of the terms, Incoterms® 2020, went into effect on January 1, 2020, and consists of 11 Incoterms®.
- The latest revision’s changes include the following:
- The most obvious change is renaming the term Delivered at Terminal (DAT) to Delivered at Place Unloaded (DPU).
- The most significant change relates to the term Free Carrier (FCA). Under this term, the buyer can now instruct its carrier to issue a bill of lading with an on-board notation to the seller so that they may satisfy the terms of a letter of credit.
- Under the revised term CIP, the seller is now responsible for purchasing a higher level of insurance coverage—at least 110% of the value of the goods as detailed in Clause A of the Institute Cargo Clauses. The insurance requirement has not changed for CIF.
- Incoterms® 2020 rules recognise sellers who may use their own transport to deliver the goods. The terms now expressly state that sellers can make a contract for carriage or simply arrange for the necessary transportation.
- Incoterms® 2020 rules now specifically call out the import and export security requirements and identify whether the buyer or seller is responsible for meeting those requirements.
- While you can still use previous versions of Incoterms® rules, like Incoterms® 2010, it’s not preferred; if you’re not using Incoterms® 2020 rules, you must clearly state which version you’re using and make sure your documentation is correct throughout the transaction.
Incoterm® 2020 Definitions
Because each of the different Incoterms® identifies the responsibilities of the seller and the buyer in the transaction at different points in the shipping journey, certain Incoterms® work better for certain modes of transportation.
For the next 11 editions of the ECA’s GTU - 1 Incoterm® of the 11 Incoterms® will be summarised each fortnight. Keep tuned.