Changes to the ICC Incoterms

The growth of the global economy enables companies to gain access to worldwide markets on an unprecedented scale. Cross-border trade is constantly increasing in volume and diversity. In order to prevent misunderstandings and cost-intensive proceedings, it is necessary to take into account the increasing complexity of cross-border trade and the associated logistics when negotiating cross-border purchase and supply contracts.

In order to avoid misunderstandings, the so-called Incoterms of the International Chamber of Commerce (ICC) are therefore often referred to in cross-border purchase and supply contracts. This set of rules for the interpretation of national and international trade clauses facilitates the handling of worldwide trade. By referring to the Incoterms in a contract for the sale and supply of goods, the respective obligations of the parties with regard to the transfer of risk, costs and transport modalities as well as customs clearance are clearly defined, thus reducing the risk of legal misunderstandings and resulting legal disputes.

Since the Incoterms were first published in 1936, the standard work has been regularly revised to reflect developments in international trade. A new revision of this kind is now available in the form of Incoterms 2020.

Clause FCA

The first significant change concerns the FCA (Free Carrier) clause. In general, the FCA clause states that the seller delivers the goods to the buyer in one of two ways: If the place specified in the clause is on the seller’s premises, the goods are deemed to be delivered as soon as they have been loaded onto the means of transport organised by the buyer. Otherwise, the Goods shall be deemed to be delivered when, after loading onto the Seller’s vehicle, they reach the named place and are ready for unloading on that vehicle and are at the disposal of the carrier or other person nominated by the Buyer. Regardless of which of these two places of delivery is chosen, this place thus determines where and when the transfer of risk and costs from the seller to the buyer takes place.

The first significant change to the Incoterms concerns bills of lading with an onboard endorsement under this clause: when goods are sold as ocean freight under the FCA clause, the seller or buyer – or banks, if a letter of credit is provided – will probably require a bill of lading with an onboard endorsement (“onboard bill of lading”). However, a delivery under FCA is deemed to be completed before the goods are loaded on board the vessel. Thus, it is by no means certain that the seller can obtain an on-board bill of lading from his carrier. In all probability, this carrier is only obliged and entitled to issue an on-board bill of lading under his contract of carriage once the goods are actually on board.

To address this situation, the FCA clause of the Incoterms 2020 now offers an additional option. The buyer and the seller can agree that the buyer should instruct his carrier to issue an on-board bill of lading to the seller after loading of the goods, whereupon the seller is obliged to hand over this bill of lading to the buyer.

Clause CIP

Another significant change in the Incoterms 2020 concerns the clause CIP (Carriage and Insurance Paid To). When using this clause, the delivery of the goods and the transfer of risk from the seller to the buyer takes place by handing over the goods to the carrier commissioned by the seller or by shipping the goods.

To this end, the seller may transfer the goods to the possession of the carrier in a manner and at a place suitable for the type of transport used. However, once the goods have been delivered to the buyer in this way, the seller does not guarantee that the goods will reach their destination in perfect condition or in the quality specified or that the goods will arrive at their destination at all.
The reason for this is that with the delivery of the goods to the buyer by handing them over to the carrier, the risk is transferred from the seller to the buyer at the same time. The buyer’s risk is compensated by the fact that the seller must conclude not only a contract for the transport of the goods from the place of delivery to the agreed destination, but also an insurance contract for (the risk transferred to the buyer) loss of or damage to the goods during transport.

Since this – crucial – insurance cover proved to be inadequate, the Incoterms 2020 now provide for an extension. Whereas previously the minimum cover (Institute Cargo Clauses Type C) was sufficient, the highest insurance cover (All-Risk, Institute Cargo Clauses Type A) must now be ensured by the seller.

Clauses FCA, DAP, DPU and DAP

After all, the Incoterms 2020 contain a deviation which had been demanded by practice for some time. The FCA (Free Carrier), DAP (Delivered at Place), DPU (Delivered at Place Unloaded) and DDP (Delivered Duty Paid) clauses now allow the seller or buyer to organise transport using their own means of transport.

In the Incoterms 2010, it was still assumed that in the case of a transport of goods from the seller to the buyer, these goods are transported exclusively by an independent carrier who – depending on the Incoterms clause used – is commissioned by the seller or buyer specifically for this purpose.

The new version, Incoterms 2020, now recognises that there may be some situations where the goods have to be transported from the seller to the buyer, but no third, independent carrier needs to be engaged for this transport. For example, a seller can organise the transport of goods by using his own means of transport and not outsourcing this function to a third party. After all, especially in the case of an FCA purchase, there is nothing to prevent the buyer from using his own vehicle to pick up the goods and transport them to his own premises.

As with any change to the Incoterms, entrepreneurs should now pay close attention to adding the appropriate year to the relevant clause. If the inclusion of Incoterms 2020 is desired, the safest course of action is to clearly express this wish in their contract by using the following or similar wording: “[Selected Incoterms clause] [named port, place or location] Incoterms 2020”. If no year is given for the version of the Incoterms, this may lead to problems of interpretation that may be difficult to resolve. In any case, it should be clearly evident and unambiguously determinable for the parties, judges or arbitrators which version of the Incoterms is applicable to a contract.

  • Dr. Thomas Thiede LL.B., LL.M.

    • German and European competition law / Merger control
    • Lawyer