Incoterms® 2020: What will the changes mean for your international business?

Chris Southworth: I'm Chris Southworth, Secretary General, of ICC UK speaking to Charles Debattista, ICC Special Advisor on Incoterms® and Counsel and Arbitrator at 36 Stone and David Lowe, Co-Chair of the Incoterms Drafting Group and Partner at Gowling WLG. We're here to talk about ICC Incoterms which are a fundamental set of rules supporting global trade, used in over 100 countries, translated into 30 languages. Now Charles, why don't we start with you, what are Incoterms in simple language?

Charles Debattista: Incoterms stand for International Commercial Terms, Incoterms, they've been around since the 1930s. They've been through several different versions, this is, I think, the seventh or the eighth version and they're currently revised every 10 years. They're basically a voluntary code of words or terms which international traders around the world can, at any stage, incorporate into their sales contracts and what they do is set out where the seller's responsibilities are and where the buyer's responsibilities are. Who has responsibility to clear export, who has the responsibility to pay the carriage, who bears the risk if things go wrong?

Chris: So David, who are they for? Who's the core audience?

David Lowe: The most important audience are the people who sell and buy goods because the Incoterms set out the relationship between them - who is responsible to do what, on what costs. But it's not just them - everyone who helps them along that whole supply chain, they're also an important part of this so that's the freight forwarders and logistics providers, the port authorities, the customs brokers, the trade finance providers, the insurers they all need a good understanding of Incoterms to help the seller or buyer make a successful trade.

Charles: So anyone in this whole jigsaw puzzle that David has just described, whether they be sellers, buyers, banks, insurers, carriers, logistics people who think of the connections to CIF or FCA or CIB and think "oh, I can't quite remember what that means for me in terms of my obligations, in terms of my rights, in terms of the moment at which goods are delivered, the moment at which risk is transferred" they think CIP, CIF and they will find them in Incoterms 2020.

Chris: So, if I were a classic goods exporter in Birmingham, where should I be using Incoterms and why should I use them?

David: In every one of your contracts. It should be in your standard sale terms and any other bespoke contract you should be setting it out because what could be more basic than to agree with the other party where the delivery point is and what the responsibilities are? It should be part of your pricing.

Chris: And Charles, the question we often get asked is what's the relationship between Incoterms and trade financing and trade insurance?

Charles: A couple of things, first of all, there are 11 Incoterms in the 2020 version, let's state CIF or let's state CIP costs insurance stage two. You've got 20 terms in the CIF term, term for the seller, term for the buyer - but that is not your contract of sale. If you're selling sugar or shoes or bananas, whatever, you do need a contract. What Incoterms does, is it provides you with the underpinning of the safety net of definitions, which underlie that contract. Now, Incoterms are not a sale contract, neither are they an insurance contract, neither are they a trade finance contract, neither are they a transport contract, instead it's saying they all have some effect, they're all impacted by Incoterms to some degree which is why these other players in international trade need to be aware.

David: So some Incoterms will say that if a party has a particular responsibility to carry insurance, say CIF carriage insurance rates, the seller is responsible for getting some insurance and, therefore, if you're the insurer around that you need to understand that. Some Incoterms don't mention insurance but if you're selling goods you need to make sure you're insured at the point of delivery in case something goes wrong, its obvious risk management and, again, the insurer needs to understand that. And then on trade finance, you need to understand what's going to be required to affect the sale that needs to be financed, how that's going to fit in with the trade financer if you're using a letter of credit, the letter of credit will demand certain documents to be presented to be paid, so as the trade financer you need to understand whether that's a realistic set of documents and whether there is a list of documents that you need as a trade financer to secure your position.

Chris: So is the buyer or insurer likely to ask you to make sure that you have Incoterms in your contract, is that possible?

Charles: Yes.

Chris: So, I'm a classic goods trader back in Birmingham, so what if I don't use them, what's going to happen? Do you need lawyers?

Charles: What will happen is that if you use the wrong Incoterm - if your insurance arrangements don't tally with what you're meant to be doing under your sale contract, if your letter of credit doesn't match the documents that you are entitled to under your terms of Incoterm, if there are gaps between the contracts or misunderstandings on various terms - then the likelihood is that if there is a motive for a dispute, if the market moves against you, if your buyer loses interest in your goods, then there is likely to be a dispute and then, of course, everyone reaches for their lawyers, start to make costs. All of this could be avoided by some care and attention right at the start, by training yourself in Incoterms.

David: If you don't use Incoterms that's not a problem in itself, you don't have to use Incoterms but it's a really convenient way of covering all the main points with just one phrase, you can incorporate all legal terms. If you have to think about the detail of the drafting of who's responsible for export clearance terms then it's just convenient but if you don't use Incoterms, you're going to have to detail each and every one of those points in your contracts and most people just don't have the time or inclination to do that.

Chris: And this is why the ICC revises them every 10 years, to reflect changes in trade practice, to try and respond to problems which have been brought to the attention of national committees and ICC HQ in the interview in 10 years. The process of change and revision is very, very user friendly. You may think that it's an exercise indulged in only by lawyers but we're only two of four lawyers where there is in a group eleven draftsmen the rest were real people, with real problems and the several revisions for it went out to national committees around the world and the drafts were looked at very, very carefully by real businessman with real problems, real issues, they were fed back to the drafting group in order to respond to those problems.