The International Chamber of Commerce has recently released an updated version of the Incoterms® rules, which are an essential and important component for businesses engaged in importation and exportation of goods. The new rules, Incoterms® 2020, are designed to be more accessible and easier for businesses to use.

what are the Incoterms®?

“Incoterms®” is an acronym which stands for ‘international commercial terms’. They are a set of rules that define the key responsibilities of buyers and sellers who enter into trade contracts for the delivery of goods.

These definitions are commonly accepted in global trade, and are regularly incorporated into contracts as essential terms of trade. The Incoterms® have been periodically updated since their launch in 1936 to mirror changes in the international trade system.

how can your business utilise the Incoterms® 2020?

The Incoterms® 2020 offer more detailed guidance about which Incoterms® rules are appropriate for what types of transactions. Accordingly, businesses will be better equipped to determine the correct rule that applies to their particular transaction. This will minimise the risk of confusion or misunderstanding about each parties’ obligations under the trade contract.

The updated rules also include detailed explanations and helpful graphics which better illustrate the distinct responsibilities of both importers and exporters under each Incoterms® rule. This will allow businesses who incorporate Incoterms® in their dealings with overseas suppliers or customers to be increasingly confident that all parties to the transaction share a common understanding of their contractual obligations.

There are 11 Incoterms® trade terms, which are divided into two categories – those that apply to any mode of transport, and those that apply specifically to sea and inland waterway transport.

The question of “what term is most applicable to a trading contract” will depend both on the type of freight method, and on the level of risk each party is willing to accept under the contract.

For example, typical distribution agreements for the manufacturing of goods will generally incorporate an “Ex-Works” (EXW) term, whereby the buyer assumes nearly all costs and risk throughout the transit process. However, this approach does present practical difficulties in many cross-border transactions where the exporter of the goods still needs to be involved in reporting and clearance processes. As an alternative, Free Carrier (FCA) may be a more flexible rule for the parties to agree to use.

If your business is engaged in importing and exporting goods, and you wish to rely upon the Incoterms® in your trading relationship with customers, it is crucial that you are aware of which terms are applicable to different transactions. Using an incorrect Incoterm can not only cause confusion between the parties about their obligations under the contract, but could also prove costly if the misunderstanding results in delays in delivery or unanticipated liability for damage to goods.

Going forward, it will be equally important for businesses who incorporate the Incoterms® in their trading contracts to specify that they are relying upon the updated Incoterms® 2020, rather than the previous version from 2010, to again minimise the risk of misunderstandings or conflict.