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Incoterms - 10 years on

What are incoterms?

Incoterms, short for International Commercial Terms, were first published by the International Chamber of Commerce (ICC) in 1936 and have since facilitated business' terms of trade around the world. Traders can choose to incorporate Incoterms into their contracts to provide a common set of rules to govern their commercial contracts concerning the duties of the parties, costs, the transfer of risks and insurance.

The ICC has recently announced the preparation and publication of a new set of Incoterms due to come into force on the 1st January 2020. The new Incoterms are currently being drafted by a Committee of Experts Drafting Group, and the development has involved countries such as China and Australia for the very first time.

What are the proposed changes?

The new changes are designed to accommodate businesses throughout the ongoing transition of global trade and the emergence of e-commerce. Previous decades have seen consistent revision of the Incoterms, which were last updated in 2010. The 2010 Incoterms will remain in force for contracts that are currently governed by them and we regularly incorporate them into terms and conditions and bespoke trading agreements.

One of the proposed changes includes removing the incoterm Free Alongside Ship (FAS). One of the main driving factors behind the change is the little use the incoterm has in international trade and its similarity to the FCA incoterm. The Committee are also proposing to remove the Delivery Duty Paid (DDP) and Ex Works (EXW) Incoterms as they are considered to be more appropriate in a domestic context.

Currently incorporated into approximately 40% of international trade operations, Free Carrier (FCA) is most often used for goods which are delivered in the port of departure. It is a very flexible Incoterm which can be applied to multimodal transport. It allows for the delivery of goods in a variety of places, such as the seller's address, port airport, land transport terminal etc. The Committee are therefore looking to expand it under two new specific Incoterms, one for terrestrial delivery and the other for maritime delivery.

One of the new anticipated Incoterms is Cost and Insurance (CNI). The Committee's main reason for introducing the incoterm is to bridge a gap between the FCA, Costs and Freight (CFR) and Cost Insurance and Freight (CIF). The incoterm will operate as an arrival incoterm as it will pass the risk and responsibilities from the seller to the buyer at the departure port. It will also cover the cost of international insurance on the seller-exporter. The Drafting Committee are also considering the implementation of two new Incoterms based on DDP (Delivery Duty Paid), which previously has caused problems to sellers by imposing tariffs and customs expenses on them. The new changes are expected to provide clarity to the parties surrounding the final delivery destination. The buyer/seller position relating to privacy and security is also expected to be covered by the new Incoterms.

In the development of the new Terms the Committee have also considered transportation security, transportation insurance and regulations, and the general effect of changes across International Sales. Overall the new Incoterms are designed to be clearer and easier to interpret with exact details expected to be published at the end of 2019 when we shall issue a full update and be recommending that businesses use this as an opportunity to review their terms of business.

For more information contact John Pickervance in our Commercial department via email or phone on 0333 207 1134. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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