Incoterms 2020 as a risk management tool for operators: an Italian perspective - Maritime and Transport Law Committee, July 2020
Andrea La Mattina
BonelliErede with Lombardi, Genoa
1. The centrality of delivery in international sales
In international selling transactions, transport represents a way of performing the contract and, more specifically, the means by which a seller (eg, in China) fulfils its obligation to deliver goods sold to a buyer (eg, in Italy).
The allocation of costs, risks and liabilities between the seller and the buyer relating to goods during transport is normally unrelated to when ownership of the goods is transferred.
In fact, for the purposes of this allocation of risks and charges, it is not so much a matter of determining who the owner of the goods sold is (and when ownership passed from the seller to the buyer), but rather of examining the contractual arrangement that those parties put in place to govern the sale and purchase and, in particular, the aspects and methods of delivery of the goods sold.
In other words, the rules relating to the moment of delivery of the goods sold take on a central role in resolving matters relating to the allocation of the costs to transport the goods, as well as the problems associated with the allocation of risks and liabilities arising out of loss or damage sustained by the goods during transport.
2. Incompleteness of and derogation from national and international laws governing delivery
National and international laws offer no clear-cut resolution with regard to the aforementioned issues. In fact, both the Italian Civil Code (and the corresponding domestic laws of other countries) and the Vienna Convention on the International Sale of Goods 1980 contain solutions that are incomplete and that can, in any case, be derogated from by the parties with regard to the aspects relating to the moment of delivery in the dynamics of the relationship between seller and buyer.
For example, Art. 1510, para. 2, of the Italian Civil Code resolves the issue of the transfer of risk between seller and buyer by opting (as a ‘default’ solution) for the ‘sale with shipment’ (with transport costs borne by the buyer), as follows: ‘Without prejudice to any contrary agreement or practice, if the good sold is to be transported from one place to another, the seller is released from its shipping obligation once it delivers the good to the carrier or freight forwarder; transport costs are borne by the buyer’.
Similarly, Art. 31(a) of the Vienna Convention 1980 provides that ‘[i]f the seller is not bound to deliver the goods at any other particular place, his obligation to deliver consists: (a) if the contract of sale involves carriage of the goods—in handing the goods over to the first carrier for transmission to the buyer’.
Art. 32 of the Convention then specifies certain matters relating to the allocation of the obligations and costs connected with the carriage between seller and buyer, providing in particular as follows: ‘2. If the seller is bound to arrange for carriage of the goods, he must make such contracts as are necessary for carriage to the place fixed by means of transportation appropriate in the circumstances and according to the usual terms for such transportation. 3. If the seller is not bound to effect insurance in respect of the carriage of the goods, he must, at the buyer’s request, provide him with all available information necessary to enable him to effect such insurance’.
As previously mentioned, however, the above rules do not provide complete regulations for all the issues relating to the dealings between the seller and buyer in distance selling with regard to the delivery of the goods sold. This is partly because, as has been correctly pointed out, delivery is a ‘protracted process’ consisting of multiple actions which – if the law is silent – can (and must) be regulated by the parties.
3. Incoterms: a modern lex mercatoria born in 1936
The gaps left open by national and international laws have, moreover, been filled by the private, autonomous initiative of parties, which, in the area in question, has demonstrated the capacity of international commercial operators for ‘self-governance’ and led to the emergence of what is referred to by many as the modern lex mercatoria. In particular, the Incoterms rules, drawn up by the International Chamber of Commerce since 1936 (and which are periodically updated), consist of a set of 11 commercial terms, each identified by three letters (eg, EXW for Ex-Works) which reflect the practice of operators in allocating risks, obligations and costs between the seller and buyer in distance selling operations and which – where appropriately referred to in the sales contract – make it possible to bridge the regulatory gaps cited above.
The Incoterms contain analytical provisions governing the aforementioned aspects, and specifically regulate the division between seller and buyer of:
a) risks: they specify where and when the seller actually delivers the goods and where and when the risk of loss or damage to the goods passes to the buyer;
b) obligations: they determine which of the parties (seller or buyer) must arrange transport or take out insurance cover for the goods sold, or handle customs operations, e.g., by obtaining import or export licences; and
c) costs: they determine the party that must bear the costs of transport, insurance, packaging, loading and unloading, customs charges, etc.
Incoterms can ideally be divided into ‘multimodal’ terms (applicable to any mode of transport: EXW, FCA, CPT, CIP, DAP, DPU and DDP) and ‘maritime’ terms (applicable to sea transport only: FAS, FOB, CFR and CIF).
The above terms range from the extreme of EXW/Ex Works (which means that the seller is discharged of its delivery obligations by simply making the goods sold available at its warehouse to the carrier designated by the buyer, which from that point on bears all risks, obligations and related costs) to the opposite extreme of DDP/Delivered Duty Paid (which basically means a sale ‘with delivery at the place of destination’, under which the seller bears the risks and liabilities until delivery to the destination agreed with the buyer, and also bears all the associated costs for transport, insurance, customs clearance, etc.).
4. The new Incoterms 2020: between continuity and innovations
The new Incoterms 2020 reflect substantial continuity with the previous Incoterms 2010. That notwithstanding, it is worth mentioning some new features – in addition to the stylistic and editorial improvements/clarifications – which, given the impact (significant in some cases) on the contractual arrangements envisaged by operators, must be taken into account when drafting contracts for the sale and purchase of goods between parties located in different locations.
A) FCA (Free Carrier) and issuance of a ‘shipped’ bill of landing: The contract of sale may contain a provision obligating the buyer to instruct the sea carrier to issue a bill of lading to the seller certifying the actual loading on board the ship (‘shipped on board’ indication), thereby allowing the seller to present the transport document to the buyer’s bank and thus facilitating the collection of the price of the goods sold by documentary credit. The provision is justified by the fact that in sales on FCA terms, the seller frequently delivers the goods to a land carrier, without interfacing with the sea carrier, and cannot provide evidence to its bank that the goods sold were actually loaded on board the ship.
B) DAT (Delivery At Terminal) was changed to DPU (Delivery at Place Unloaded) and inserted after DAP (Delivery At Place): The new DPU term intends to solve the application problems that arose by referencing the DAT term, making it unambiguously clear that, in this context, the delivery of the goods sold is made at the designated place (not necessarily a terminal) once the goods have been unloaded from the means of transport (unloading operations are still a risk for the seller). In this sense, it is clear why the new DPU was inserted after the DAP term (where unloading operations are a risk borne by the buyer).
C) Differentiated insurance coverage in CIF (Cost Insurance and Freight)/CIP (Carriage and Insurance Paid to): As is well known, the CIF and CIP terms require the seller to insure the goods sold and pay the related costs. Incoterms 2010 provided that the seller was obliged to take out, on behalf of the buyer, a ‘minimum’ insurance cover for damage to the goods – i.e., a cover equivalent to that referenced in the Institute Cargo Clauses ‘C’ (named perils basic) – under both CIF and CIP conditions. However, the new Incoterms 2020 make a distinction, based on the term cited, and provide in particular that in the case of a sale:
(i) under CIF conditions: the seller is still obliged to insure the goods under ICC ‘C’ terms – named perils basic; and
(ii) under CIP conditions: the seller is obliged to insure the goods by taking out ICC ‘A’ cover – all risks.
This distinction is justified when considering the context in which the two terms are used: CIF is a ‘maritime’ term, normally used in bulk transport of commodities (of low unit value); CIP is used in the context of multimodal transport relating to the sale of processed and semi-processed goods (of significant unit value).
D) Organisation of own-account transport: Incoterms 2010 were developed on the assumption that the FCA, DAP, DPU and DDP terms were used in connection with transport carried out by third-party carriers on behalf of the seller or buyer. In reality, the seller and buyer often carry out own-account transport, i.e., without hiring external carriers to perform the transport. The Incoterms 2020 were amended to reflect this situation, and the rules relating to these terms were adapted accordingly.
E) Inclusion of security within transport obligations and costs: Lastly, the increase in security compliance over the last decade made it appropriate for Incoterms 2020 to allocate, in detail, the various obligations (and the corresponding costs) between sellers and buyers.
5. New Incoterms and old problems
Travelling goods are generally insured with policies ‘on behalf of those who are entitled’, taken out by carriers under Art. 1891 of the Italian Civil Code in the ‘interest of those who are entitled’, ie, for the benefit of the person who bears the risk of damage or loss of the goods transported. In this context, there is normally a disconnect between the policyholder (the carrier) and the insured (who can only be identified at the time of the accident as the person who actually bears the insured risk). With regard to the latter, in practice, questions frequently arise as to who holds the ‘insured interest’ and who is entitled to compensation if the goods are damaged.
Italian caselaw tends to answer these questions by applying the res perit domino principle and thus awards the insurance proceeds for losses or damage of goods transported to the owner of the goods (see, most recently, Italian Supreme Court Decision No. 4716 of 19 February 2019).
As stated in section 2 above, in international trade the risks and liabilities associated with the transfer of goods from a seller to a buyer are allocated by the parties to sale and purchase contracts based on considerations that depend on the structure of the economic transaction – and delivery of those goods is the central, decisive moment to consider.
In this respect, Incoterms do not govern matters relating to the transfer of ownership of the goods sold but rather provide rules for allocating obligations, risks and costs relating to delivery and its modalities.
Prevailing Italian caselaw does not consider Incoterms to be ‘delivery’ clauses but merely ‘expense’ clauses.
In particular, Italian caselaw holds that the terms developed by the International Chamber of Commerce are ‘provisions relating to the economic impact of transport and related costs, so that even with those provisions, the transfer of ownership and passing of risks continue to be governed by common rules’ (see Italian Supreme Court Decision No. 4716 of 19 February 2019). In short, there is a substantial ‘disconnect’ between the practice of international operators and the Italian case law approach to international sales, with the consequence that the solutions and arrangements developed by operators may not be applied predictably in the event a dispute arises after the contract is performed.
All of these critical issues were not solved by the new Incoterms 2020, with the consequence that operators will have to be especially careful to govern, in a clear and precise way, all aspects of the allocation of risks, obligations, liabilities and costs associated with the transfer of goods in distance sales – not only when drafting the sales contracts but also when taking out insurance cover for the related goods, as well as when drafting the transport/shipping contracts for delivery of the goods to the buyer.