Change is Coming: International Commercial Terms (Incoterms®) 2020
What Are Incoterms®?
Incoterms is an abbreviation for “International Commercial Terms.” Incoterms are commonly used in equipment leasing and sale industry to define the delivery and redelivery locations and the transactions between the parties with respect to importation, exportation, costs, risk and obligations. Incoterms are developed by the International Chamber of Commerce (“ICC”) and the current rules were ratified in 2010. New rules are expected to be published in the last quarter of 2019 and will be effective January 1, 2020.
Anticipated Changes in 2020
The most significant change to occur in 2020, as applicable to aviation-related transactions, is the removal of the Incoterms Exworks (EXW) and Delivery Duty Paid (DDP). EXW is commonly used on engine and aircraft part sales and leases. Under EXW, the seller delivers the equipment when it places the goods at the disposal of the buyer at the named location, i.e., EXW Seller’s Facility in Tucson, AZ. There is no obligation on the seller to load the equipment, pay for shipping, nor export the equipment from the delivery location and the risk of loss passes to the buyer (absent express contract terms to the contrary) when tendered for delivery by the seller. DDP requires that the seller bear all costs and risks of delivering the equipment to the delivery location. Seller is responsible for clearing the equipment for export and import, including paying any and all duties for both export and import and all customs formalities.
Also to be removed is Free Alongside Ship (FAS) which is a rule for Sea and Inland Waterway Transport and not readily used in aviation equipment leasing and sales.
To replace DDP, two new terms will be introduced: Delivered at Terminal Paid (DTP) and Delivered at Place Paid (DPP). With the DTP designation, the seller will be responsible for all delivery costs, including export and customs duties when the seller delivers the equipment to an airport or another terminal. Seller will be equally responsible for all delivery costs, including export and customs duties when equipment is delivered to the buyer’s address or any place that is not a transport terminal.
FCA will be divided to provide for a new term for ground transportation. This will address the past misuse of EXW and add clarity on exporter responsibility.
FOB is anticipated to cover containers and a new term Cost and Insurance (CNI) is anticipated to cover a gap between FCA and CRF/CIF.
Why the Changes?
Primarily, EXW and DDP are exclusively used in domestic transactions involving US trade and misused in international transactions. Since they are ultimately domestic terms, they’re being eliminated in favor of international terms. Additionally, EXW and DDP appear to contradict the new Customs Code of the European Union since the responsibility of the exporters and imports takes place once the clearance of export and import have already been carried out. The remaining proposed changes are to ensure that the delivery terms match delivery practice to increase consistency and accuracy in application and practice.
Effective Date of Incoterms 2020
The ICC will be continuing its discussions and analyzing further need in areas such as security and international sales and purchase contracts. Final rules will be published the last quarter of 2019, therefore, the information in this article is subject to change until the new rules take effect on January 1, 2020.
If you are interested in discussing incoterms or these changes, FMJ’s Transportation & Logistics practice group is happy to discuss these with you. Contact the group at 952-995-9500.