Exporters & Importers: Are you prepared for change in INCOTERMS effective Jan 2020

November 20, 2019by Admin0
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International Exports and Imports

International sale of goods involve multiple parties and jurisdictions. Each transaction is a complex one.  International Commercial terms, commonly referred to as Incoterms, aims to smoothen the complicated international trade process. It is a set of pre-defined and universally accepted commercial / contractual terms for international sale of goods.  Incoterms clearly defines “who is responsible for what” during international commercial transactions. Incoterms are devised and recognised by International Chamber of Commerce. These are widely recognised by state entities, customs authorities, court & legal practitioners and traders across the world. By incorporating Incoterms into sale of goods contracts, traders can bring a lot of certainty and acceptability to its contractual documents globally. This will significantly reduce misunderstandings and disputes.  

At present there are 11 different Incoterms which are commonly used in the international goods transit. They are further divided into 4 main categories and 2 classes.

Most commonly used Incoterms are as follows:

CFR – Cost and Freight

This term requires the seller to pay for the carriage of goods up to the named port of destination. The risks transfers to buyer when the goods are loaded on board the ship in the country of export. The seller has the right to access B/L.

CPT – Carriage Paid To

In this term, the seller has to bear for the carriage of the goods upto the named place of destination. However, the goods are considered to be delivered when the goods have been handed over to the carrier. In here, the risk transfers to buyer upon handing over of goods over to the carrier at the place of shipment. In here the seller has got the obligation for the export clearance however the discharging cost, except where included in the freight are for the buyer.

CIP – Carriage and Insurance Paid To

This term is broadly similar to CPT, except the seller is to obtain insurance for the goods in transit. In here, the risk passes to the buyer when its carrier receives the goods.

CIF – Cost Insurance Freight

This term requires the seller to contract for the insurance of the goods. The seller must also turn over documents necessary, to obtain the goods from the carrier or to assert claim against an insurer to the buyer. The documents include the invoice, the insurance policy, and the bill of lading. These three documents represent the cost, insurance, and freight of CIF. The seller’s obligation ends when the documents are handed over to the buyer.

DAP – Delivered at Place

Seller covers the risks and costs of transporting goods to an agreed address for the buyer. The legal formalities at the export country is borne by the seller, buyer clears legal formalities at the buyer’s port for importing the goods. Risks transfers from seller to buyer when the goods are ready for unloading at the agreed address.

DDP – Delivered Duty Paid

This term requires the seller to deliver the goods at the named point of the buyer and has to complete the formalities required for import, including import duties and taxes. In this term maximum obligation is on the part of the seller until delivery of goods to the buyer.

DAT – Delivered at Terminal

This term requires the seller to deliver the goods at the named terminal. The seller bears all the cost and risks of the transportation until arrival at the destination port.

EXW –  Ex Works

Seller makes the goods available at their premises or any other named place. Risks transfers from seller to buyer at the point from where the goods are collected.

FOB – Free On Board

This term requires the seller to bear all the cost and risks up to the point goods are being loaded on board the vessel. The seller is responsible for the export formalities. However, the seller is not responsible for the freight and insurance.

FCA – Free Carrier

The seller delivers the goods, cleared for export at a named place. The sellers cost can be negotiated as part of the delivery obligations. In here the seller has got the obligation for the export clearance of the goods but no obligation for freight charges/insurance unless requested.

FAS – Free Alongside Ship

This term requires the seller to place the goods alongside the vessel instructed by the buyer. No obligation is on the part of the seller for freight or insurance.

2020 Changes : To help prepare the trade world to equip themselves to smoothly sail through the high seas of business, the International Chamber of Commerce has drafted the latest version of Incoterms- 2020 which will be in effect as on 1st January 2020.

 International Chamber of Commerce (ICC) revises INCOTERMS or International Commercial terms every 10 years to incorporate necessary changes that make these rules better aligned to modern trade practices and requirements.

The new set of INCOTERMS® 2020 will come into effect from 01st January 2020 onwards. It becomes important to assess how these changes can impact existing or future contracts.

There are 11 INCOTERMS®2020 which have been bifurcated based on mode of transport.

International Exports and ImportsIncoterms 2020

Choosing the most appropriate INCOTERM when negotiating contracts for the sale of goods depends upon factors such as the type of goods being sold, how best it can be transported (mode of transport by road, rail, air or water), position of parties and their ability to comply with obligations of the chosen INCOTERM rule and whether a Letter of Credit is used.

Some of the key changes in INCOTERMs® 2020 are as follows:

  • FCA On Board Bill Of Lading: FCA (Free Carrier) Under INCOTERMS 2010, where goods are sold FCA carriage by sea, delivery is completed, when the goods are delivered by the seller to the carrier and is ready for loading on the vessel. A frequent issue for sellers with container shipments, delay in payment to seller from the bank issuing the Letter of Credit (since Bill of Lading would be with buyer in FCA) as well as risk of damage still with seller until loading, has now been addressed. FCA has a new provision under the revised rules, if the parties agree, the buyer, at its cost and risk, must instruct the carrier to issue the seller a transport document in the form of a Bill of Lading with an On-board notation, that can be submitted to the bank to receive payment.
  • DAT renamed: DAT (Delivered at Terminal) has been replaced by DPU (Delivered at Place Unloaded). It improves the flexibility in determining the place of delivery of goods. By clarifying that the delivery of goods can take place at the named location other than terminals such as quays, container yards, warehouses or terminal hub. However the seller discharges his obligation only after the goods have been unloaded from the means of transport at the destination. DPU thus, has the distinction of being the only INCOTERM that requires unloading by the seller at the buyer’s destination. Hence, under DPU the cost and risk of damage to goods while unloading stays with seller till goods unloaded and made available to the buyer.  During transit any formality till the delivery point will be in the seller’s account. However the buyer has the responsibility for import clearance, import duty and taxes. So in case the seller seems unable to fulfil these obligations, he may instead choose the INCOTERM DAP (Delivered at Place – where goods are deemed delivered at place of destination, before unloading, made available to the buyer.
  • Cargo Insurance emphasis: In CIP (Carriage Insurance Paid) where the seller discharges his obligation when the goods are delivered to the contracted carrier. In the revised rules, the seller has to make arrangement of insurance from point of delivery to the named place or destination. Since it is more frequently used for multimodal transport and for expensive manufactured goods an increased emphasis on “all risks” cover insurance has been laid. However for CIF (Cost Insurance Freight), which is a maritime only INCOTERM often used for bulk carriers, a minimum insurance cover by seller is sufficient. The right of parties to agree to a higher or lower level of cover has been retained.
  • Security related obligations: With increased costs for security and screening, both parties are responsible for helping and supporting each other with security clearances related to import and export procedures.
  • Organization of responsibilities of buyer and seller in delivery of goods into the following  10 main categories as below:

  • Classification of Allocation of Costs: A classification of allocation of costs between buyer and seller, where all costs before delivery are the seller’s responsibility and the costs after delivery that of the buyer. Also now each INCOTERM® now includes a full summary of all the costs allocated to the buyer and seller.
  • Own transport: Under INCOTERMS 2010, there is no distinction of a third party carrier with own transport. Increasingly, as buyers and sellers are relying on their own carriers instead of third party logistics (especially when using FCA, DAP and DPU) this has been added to the rules referring to transport. INCOTERMs® 2020 allows the seller to either contract or arrange for the transport of goods.

Therefore compared to INCOTERMs 2010, the International Chamber of Commerce (ICC) has primarily given emphasis on delivery terms and security risks associated with the transport of goods. The new version of INCOTERMs® 2020 has a more user-friendly format, aided with labels, visuals and short summary for each INCOTERM®. It also specifically lists out buyer-seller obligations, costs and risks to remove ambiguity issues related to the delivery of goods to ensure smoother transactions globally.

Disclaimer

The opinions expressed in this blog are those of the respective authors. ATB Legal does not endorse these opinions. While we make every effort to ensure the factual accuracy of the information provided in our blogs, inaccuracies may occur due to changes in the legislative landscape or human errors. It is important to note that ATB Legal does not assume any responsibility for actions taken based on the information presented in these blogs. We strongly recommend verifying information from official sources and consulting with professional advisors to ensure its accuracy and relevance to your specific circumstances.

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