International Trade and Incoterms
Sales contracts generally incorporate the internationally-recognised terms of sale known as the Incoterms Rules. Published by the International Chamber of Commerce, the Incoterms Rules allow buyers and sellers to transact business with the certainty that each understands:
- various obligations of the seller and the buyer,
- the point at which the risk of loss of or damage to the goods passes from the seller to the buyer, and
- which party bears various costs associated with the shipment.
The risk transfer point, also called the delivery point, is important in relation to marine cargo insurance underwriting and claims, because it is a factor in establishing insurable interest. (Another factor is title; but the Incoterms Rules do not deal with payment or the passing of title.)
Letters of Credit
Because banks will only release funds to sellers on presentation of documents that match the applicable terms of sales, where sales are made against letters of credit, care should be taken to ensure that the incorporated Incoterms Rules that are appropriate for the method of carriage. For example, CIF terms are not generally suitable for containerised shipments.
What’s Changed in the 2020 Rules?
In the Introduction to the Incoterms rules, there is greater emphasis about making the right choice, and there are enhanced explanatory notes as the beginning of each Incoterms rule.
Because the CIP term is typically used for containerised goods, the minimum level of cover has been increased to ICC(A). The minimum level of cover for the CIF term, which is not suitable for containerised shipments, remains at ICC(C).
The ten obligations within each Incoterms rule have been re-ordered, to give greater prominence to the more important ones, such as transfer of risk.
“On-board” bills of lading are now catered for under the FCA rule to comply with letter of credit requirements.
The use by buyers and sellers of their own means of transport under the FCA, DAP, DPU and DDP rules is now expressly provided for. (Remarkably, this was never previously included.)
The DAT term has been replaced by DPU (Delivered at Place Unloaded). The provisions of this rule have not changed, the aim simply being to better convey the difference between DAP and DPU.
Security-related obligations have been enhanced.
All the costs for which the seller and buyer (respectively) are liable have been grouped together in one place in each rule.
The last section of the Guide includes a useful comparison of the rules, grouped by obligation.
For more information about the Incoterms Rules, we’ve produced an easily digestible flyer which can be downloaded below or contact your local NMU Development Underwriter.