For the smooth conduct of trade and commerce across the globe, the International Chamber of Commerce (ICC) publishes a set of ‘Incoterms,’ an acronym for officially being known as ‘international commercial terms.’ Internationally recognized incoterms prevent confusion in foreign trade contracts and provide clarity with respect to contractual obligations of buyers and sellers.
Incoterms are used to understand the exact terms of business arrangements. These incoterms are used in all aspects of transportation and their related activities. The ICC first developed Incoterms in 1936 and since then has periodically updated them from time to time, owing to the ever-evolving trade practices across the globe. Adherence to incoterms is purely voluntary. However, buyers and sellers, as a regular part of trade and commerce, often use ICC-established rules and terms. Incoterms act like a common, understandable language amongst traders.
However, incoterms will not cover some specific instances such as:
- Address all the conditions of a sale.
- Identify the goods being sold nor list the contract price.
- Reference the method or timing of payment negotiated between the seller or buyer.
- Specify when title, or ownership of the goods, passes from the seller to the buyer.
- Specify which documents must be provided by the seller to the buyer to facilitate the customs clearance process at the buyer’s country.
- Address liability for the failure to provide the goods in conformity with the contract of sale, delayed delivery, nor dispute resolution mechanisms.
How are Incoterms used?
Incoterms do not have any independent force of law and, thus, must be explicitly mentioned in the terms of the contract. However, they can also act as guidance to various trade terms, despite not being expressly incorporated in the contract itself. Furthermore, they are used for multiple practical elements in trade and commerce such as obligations of seller and buyer, their responsibilities and liabilities, time of delivery, transfer of risk, etc. Additionally, various export and import clearances along with the division of certain costs are also dealt with by incoterms.
Why are the 2020 Incoterms introduced?
New Incoterms have been drafted for the first time since 2010. With the new rules, the ICC aims to streamline Incoterms with the current relevant market of global trade. It must be remembered that these Incoterms were drafted before COVID-19 was declared as a pandemic. The pandemic changed global trade and commerce forever, with most projections suggesting that it has set the world economy back by at least two decades.
However, the ICC introduced these Incoterms keeping in mind the wider access to markets by traders, the increase in scrutinization and security in transportation of goods, flexibility and enhancement of insurance coverage depending on the goods/transport methodology, and a call from banks for an on-board bill of lading. Bill of lading is a detailed list of a ship’s cargo in the form of a receipt provided by the master/captain of the ship to the person consigning the goods.
What are the changes in the 2020 Incoterms?
Following are the substantive changes in the 2020 Incoterms:
Bills of lading with on-board notation in FCA Delivery
FCA stands for ‘Free Carrier’ and it refers to the delivery of goods to a carrier or another person nominated by the buyer, at either the seller’s premises or any other place of delivery. In such deliveries, the parties (or their banks) require a bill of lading with on-board notation of the goods. However, given the nature of FCA, the seller may not be able to obtain an on-board bill of lading since delivery is completed before the goods are loaded.
Under the new Incoterms, the buyer and seller may reach an agreement which ensures that the buyer will instruct the carrier to issue an on-board bill of lading to the seller after the goods are loaded. The seller will then tender the bill to the buyer. If this option is exercised, the seller does not take obligation of the buyer in terms of carriage in the contract.
Levels of Insurance in CIF & CIP
CIF stands for ‘Cost, insurance, and freight’ and it represents charges paid by a seller to cover ‘costs, insurance and freight’ of a buyer’s order while the cargo is in transit. CIP stands for ‘Carriage and Insurance Paid’ and is used when the seller pays freight and insurance to deliver goods to a party appointed by the seller at an agreed location. In essence, the two are similar, with the only difference being that CIF applies only to sea freight, while CIP applies to all modes of transport.
Earlier, both CIF and CIP required minimum insurance cover as prescribed by the Institute Cargo Clauses, Clause (C). The position for CIF remains the same, as per the International Cargo Clauses, Clause (C). Parties may set higher levels of cover upon discretion. However, for CIP, this has been shifted to Clause (A) of the Institute Cargo Clauses, i.e., the ‘all risks’ category. The minimum threshold for CIP, therefore, has been increased for the benefit of the buyer but parties are free to set lower levels of insurance upon discretion.
Arrangement for own transportation
Previous Incoterms were drafted with the assumption that when goods were in transit, carried from the seller to the buyer, they would be carried by a third-party assigned by the seller or buyer. This did not account for instances wherein the transport was not a third-party contracted by either the seller or buyer but was the buyer or seller’s own transportation. The new Incoterms acknowledge such situations by expressly providing for the arrangement of own carriage and to the making of a contractual term regarding the same.
Security Requirements
With the rise in smuggling and trafficking of goods, security in trade and commerce have taken primary importance now. An express inclusion of security-related obligations is now prevalent under each rule, with explanation to costs.
DAT Incoterm changed to DPU
DAT stands for ‘Delivery at Terminal (unloaded)’, while DPU stands for ‘Delivery at Place Unloaded’. The word ‘terminal’ often caused confusion and, thus, the Drafting Group of the new Incoterms decided to get rid of it. Following some critical feedback, DAT was changed to DPU to broaden the types of unloading facilities and cover ‘any place, whether covered (roof) or not’. This ensures that delivery of goods could take place at any delivery-conducive facility and not just a ‘terminal’, as described by DAT earlier.
Listing of Costs
All related costs are now listed under ‘Allocation of Costs’ under each rule. Costs often caused inconsistencies as carriers changed their pricing structure to deal with add-ons and sellers were often surprised to find themselves being charged for terminal handling. The A9 section of the 2020 Incoterms provides a fresh guide on all costs with the aim of expressly stating the costs associated with each party.
Liability for Quality and Risk of Loss/Damage During Transit under Incoterms
According to Incoterms 2020, once the goods are aboard the vessel, they are understood to have been ‘delivered’ to the buyer by the seller. Hence, this is the point when the risk for the goods is transferred from the seller to the buyer.
- It is the duty of the parties to establish the mode of transport, i.e., sea, land or air and separate liabilities must be discussed in accordance with each of these modes of transport. This is the reason why naming the exact place or point of delivery in such trades is of paramount importance. However, it is important to note that such ‘transfer of risk’ is only legitimate when it is in the knowledge of the buyer that the said goods are ‘in transit’ and, thus, the burden has shifted. Without the knowledge, the risk is not transferred.
- Any damage that occurs from the period of transit to delivery is the liability of the buyer alone. In case of a third-party involvement, i.e., a carrier, the buyer has no remedy against him. If goods are damaged by a carrier the buyer is unaware of, even then, any damage/loss is on the buyer only. This is because the buyer is not privy to the contract. However, the remedy may lie against the seller who would have a contract with the carrier to deliver the goods at a certain place before transit. The buyer can, therefore, directly deal with the seller in any such instance.
- Incoterms do not provide any guidance on the quality of goods and it does not form a part of the contract. They only govern aspects of trade at different stages and do not provide any guarantee with respect to quality of goods or any responsibility/liability thereof.
Provisions for quality reassurances in some cases of goods and trade
Section 16 of the Sales of Goods Act, 1930 has implied conditions on quality (or fitness) of goods. The provision states that there is no implied warranty or condition as to the quality or fitness for any specific purpose of goods, with certain exceptions. These exceptions can be utilized to ensure quality of goods while trading.
- 16(1) deals with an implied understanding that the goods shall be reasonably fit for use if the buyer showcases that he depends on the seller’s skill and judgement, if the seller’s business is to supply the goods (as a manufacturer or producer).
- 16(2) deals with the implied condition that they (goods) must be of merchantable quality.
- 16(3) says that an implied warranty may be annexed to the contract given the usage of trade and business – in essence, meaning the nature of business.
Thus, this provision provides for quality reassurances in some cases of goods and trade. It is, however, not all-encompassing.
The other method to ensure quality of goods is via Section 31 of The Indian Contracts Act, 1872. Section 31 deals with ‘contingent contracts’, and through this, a contract may be signed which states that the contract is valid and will only be performed or upheld if the quality of the goods in trade is ensured. If the quality suffers, the contract may be void or repudiated. This ensures that the party performs the contract within the stipulated time and with the requisite standard of quality of the goods.
Thus, while the Incoterms themselves provide no quality assurance of goods in contracts, it is only through alternative Indian statues that one can ensure quality of goods in trade and commerce.
Conclusion
The importance of Incoterms in trade and commerce cannot be stated enough. It is hugely important that Incoterms are carefully and correctly used to ensure smooth running of contracts, and, in turn, trade and commerce. To avoid ambiguities, companies must be fully aware of the changes in Incoterms and ensure that the most appropriate Incoterms are chosen with respect to the nature of the trade and contract. As changes and amendments are afloat, trading companies must be aware of the new terms and their effects on business. Having been introduced/drafted in 2020, it was expected that the new terms would take a couple of years before they are fully in use. This means that today, we are right in the middle of when new Incoterms are shaping the arena of trade and commerce contracts.
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