Author: Olena Andriyko, lawyer at F&P
Incoterms (International Commercial Terms) are internationally recognized standards developed by the International Chamber of Commerce (ICC) that set out clear rules for the allocation of costs, risks and responsibilities between the seller and the buyer in international and domestic trade transactions. The 2020 version of Incoterms, which entered into force on January 1, 2020, is a relevant tool for regulating commercial transactions. This article discusses the key aspects of the practical application of Incoterms 2020, legal nuances that may arise when using them, and recommendations for avoiding problems.
Overview of Incoterms 2020
Incoterms 2020 includes 11 terms divided into two main groups depending on the mode of transport.
Terms for all types of transportation:
EXW (Ex Works) – Ex Works: the seller transfers the goods at his enterprise, the buyer bears all costs and risks from that moment on.
FCA (Free Carrier) – Free Carrier: the seller transfers the goods to the carrier chosen by the buyer.
CPT (Carriage Paid To: the seller pays for transportation to the specified location, but the risks are transferred to the buyer after the goods are handed over to the carrier.
CIP (Carriage and Insurance Paid To) – Carriage and insurance paid to: similar to CPT, but the seller also provides insurance.
DAP (Delivered at Place) – Delivery at the point: the seller bears the costs and risks until the goods arrive at the destination.
DPU (Delivered at Place Unloaded) – Delivery with unloading: the seller is responsible for the delivery and unloading of the goods at the destination.
DDP (Delivered Duty Paid) – Delivery with payment of duty: the seller bears all costs, including customs payments, before the goods are transferred to the buyer.
Terms for sea and inland water transportation:
FAS (Free Alongside Ship) – Free Alongside Ship: the seller delivers the goods to the ship’s side.
FOB (Free on Board): the seller bears the costs until the goods are placed on board the vessel.
CFR (Cost and Freight): the seller pays for transportation to the port of destination, but the risks are transferred after loading onto the ship.
CIF (Cost, Insurance and Freight: similar to CFR, but the seller also provides insurance.
Each term clearly defines the moment when risks, costs and responsibilities for transportation, insurance, customs clearance, etc. are transferred. However, misuse or insufficient understanding of these terms can lead to legal and financial problems.
Legal nuances and potential pitfalls
Despite the clarity of the Incoterms rules, there may be difficulties in their practical application due to legal aspects. The main pitfalls include:
- Unclear wording of delivery terms in the contract
- An incorrect or ambiguous definition of the term Incoterms in a contract may lead to disputes over who is responsible for certain costs or risks. For example, if a contract states “FCA” but does not specify a specific place of delivery, the parties may interpret their obligations differently.
- Incorrect choice of term
- Choosing a term that does not match the logistical capabilities, type of goods, or jurisdiction can complicate contract performance. For example, using EXW for international trade can be problematic for a buyer who has no experience in organizing export customs clearance.
- Failure to consider the moment of risk transfer. Incoterms clearly define the moment when the risks pass from the seller to the buyer. However, the parties often fail to take this into account, which can lead to disputes in case of damage or loss of goods. For example, under the FOB term, the risks pass after the goods are loaded on board the vessel, but the buyer may consider the seller to be responsible for the goods until they arrive at the port of destination.
Practical recommendations for avoiding legal problems
In order to effectively use Incoterms 2020 and minimize legal risks, it is recommended to follow the following practices:
- Thorough review of contracts
Before signing the contract, engage a lawyer specializing in international trade to analyze the terms of delivery. Make sure that the term Incoterms is clearly defined, with a specific location (for example, “FCA, seller’s warehouse, Kyiv, Ukraine”). This will help to avoid ambiguities.
- Staff training
Provide training for employees involved in contracting, logistics, or customs clearance. The team should understand the meaning of each Incoterms term and its impact on cost and risk allocation. For example, it is important to know that the term DDP gives the seller maximum responsibility, including customs procedures in the buyer’s country.
- Coordination with partners
Make sure that all parties, including the carrier, buyer, and insurance companies, have the same understanding of the term. For example, under the CIP term, the seller is obliged to provide minimum insurance coverage, but the buyer may require additional insurance, which should be specified in the contract.
- Monitoring changes and updates
Although Incoterms 2020 are up-to-date, the International Chamber of Commerce periodically reviews the rules. Follow the ICC news to be prepared for possible updates. For example, in 2020, the term DPU was replaced by DAT, which necessitated the adaptation of contracts.
Conclusions
Incoterms 2020 is an indispensable tool for structuring international trade transactions, helping to clearly allocate responsibilities, costs and risks between the seller and the buyer. However, their effective use requires a deep understanding of the legal nuances and a careful approach to contracting. Typical mistakes, such as unclear wording of terms or incorrect choice of terms, can be avoided by hiring qualified lawyers, training staff, agreeing on terms with partners, and monitoring changes in the rules.
Compliance with these recommendations will allow businesses to minimize legal risks, optimize logistics processes, and ensure the successful execution of international trade operations.
