Introduction
The eighth edition of Incoterms was published on 27th September 2010 and came into force on 1st January 2011. The International Chamber of Commerce (ICC) reviews and amends these terms roughly once a decade to ensure that they are kept up to date with changes in international trade developments. Although there has been no radical departure from the previous edition, Incoterms 2000, the changes seek to accommodate the growing complexities of changes in trade practice over the last decade. It is evident that the main objective in developing Incoterms 2010 was to make the terms easier for all to understand and to promote their applicability globally.
Incoterms operate as voluntary internationally recognised standard rules and definitions which allow traders to speak the same language. The suitable term chosen reflects the agreed contractual obligations relating to the delivery of the goods which is already contained in the international contract of sale. The delivery term abbreviation inserted into the contract of sale assists parties in easily understanding what their responsibilities and risks are at different points during transit of the goods. Incoterms also elucidate who should be responsible for arranging the various required tasks, such as insurance, costs and import/export clearance.
Incoterms 2010 has now introduced detailed guidance notes for each rule which provide useful background for explaining which rule is most suitable for particular goods and means of transport. For example, the 2010 edition now advises that container shipments use the sale terms FCA where FOB was previously used and CPT or CIP for CIF, CFR. This is because FOB, CIF, CFR and FAS are not suitable for container shipments due to the practicalities and complexities of container handling (see definitions below).
The most important changes to be aware of are listed below;
Incoterms 2010 may encourage greater use in the USA and EU
An objective of the ICC for Incoterms 2010 was to encourage and create uniformity and certainty in business transactions globally, thus seeking to reduce the potential for costly disputes. As the name suggests (an abbreviation of “international commercial terms”), Incoterms were primarily developed for use in international cross-border trade. Incoterms 2010 now manifestly accommodates domestic sale contracts where it states that the obligation to comply with import/export formalities only exists where they are applicable. Due to the deletion of the former US shipment and delivery terms in the 2004 revision of the United States’ Uniform Commercial Code (UCC), Incoterms 2010 would make a logical replacement because the terms are now also applicable to purely domestic trade thus leading to a likely increase of their use in the U.S.. The creation of Incoterms 2010 may be an opportunity for traders to move towards the use of Incoterms, which are more applicable to international business than the generally domestic focus of the UCC.
The expansion of the European Union in Europe and trade blocs has meant that the EU has virtually eliminated borders for the purpose of customs and import/export. This change means that the use of Incoterms 2000 has become less suitable for trade within the EU. Incoterms 2010 now recognises these changes by stating in a number of rules that export and import formalities will only have to be complied with where necessary.
Changes to the existing terms
The most apparent change is that Incoterms 2010 adopts a more simplified format taking into consideration containerisation and point-to-point deliveries, as the four terms (DAF, DES, DEQ and DDU) have been abolished and replaced with the introduction of just two new terms DAP (Delivered at Place) which replaces all four terms, and DAT (Delivered at Terminal) which replaces DEQ (Delivered Ex Quay).
The ICC created the new term DAT as it is more applicable for use in the multi-modal trades. DAT means that the seller has effectively delivered the goods once they have been unloaded from the arriving mode of transport and placed at the buyer’s disposal at the named terminal at the named port or place of destination. Therefore the seller’s obligation is solely to clear the goods for export where applicable, not import. The seller still retains all elements of risk in the movement of goods until they are delivered and therefore must enter into a contract of carriage. This clarifies the issue of risk when the container has been loaded into a container stack awaiting shipment at the named terminal but not at the quayside, which was not previously clearly covered by any term.
DAF, DES and DDU were all similar in scope, which often created confusion about the appropriate D term to use. Therefore, the ICC considered that the one term DAP would be sufficient and refers to any mode of transport as well as allowing the delivery place in which the seller would be exposed to any risk to also be a named port. The seller’s liability is the same as in DAT except that the buyer is responsible for the unloading of the goods from the arriving vehicle, whatever that may be.
Also, in contrast to the previous four classes: E = Departure; F = Main Carriage Unpaid; C = Main Carriage Paid, and D = Arrival, Incoterms 2010 will now be separated into two groups categorised as either suitable for sea and inland waterway transport, or suitable for any mode of transport. Therefore there are now eleven, not thirteen, terms to choose from. The definitions below illustrate the structure of the new Incoterms;
Rules for any mode or modes of transport
- EXW - Ex Works
- FCA - Free Carrier
- CPT - Carriage Paid To
- CIP - Carriage and Insurance Paid To
- DAT - Delivered At Terminal
- DAP - Delivered At Place
- DDP - Delivered Duty Paid
Rules for sea and inland waterway transport
- FAS - Free Alongside Ship
- FOB - Free On Board
- CFR - Cost and Freight
- CIF - Cost, Insurance and Freight
Changes made to the maritime terms FOB, CIF, CFR and FAS
Incoterms 2010 now allows for the seller to arrange for the contract of carriage under an FOB contract in trades where it may be commercial practice for the seller to arrange carriage, something which was not previously provided for.
As already previously mentioned Incoterms 2010 provides clarity to the important definition of the critical point of delivery when transfer of risk from the seller to the buyer takes place. The accepted understanding that risk passes once goods have passed the imaginary line of the “ship’s rail” in FOB, CFR and CIF has now been replaced with the simple rule that risk passes when the goods are on board the vessel. This occurs when the whole consignment has been loaded on board the vessel. This is to be welcomed as it will avoid any potential costly disputes regarding the exact point in which the goods pass the “ship's rail”, rendering the concept of goods hanging on a ships hook crossing the ship’s rails out-dated.
Insurance requirements
Where an Incoterm rule requires a party to obtain insurance, as in CIP and CIF, Incoterms 2010 requires that the cargo insurance obtained must comply at least with the minimum cover provided by Clauses (C) of the Institute Cargo Clauses to reflect the recent 2009 updates.
Heightened security requirements cross-borders
Incoterms 2010 now provide specific obligations for the parties to either supply each other with information or to provide assistance in obtaining necessary security related import/export and transport documentation, such as chain of custody information, for approvals and clearance. This is because many countries now require heightened security checks for the transportation of cargo whereas this level of co-operation was not previously required.
Terminal handling charges
Incoterms have been amended so that the possibility of a buyer being charged twice for terminal handling costs is minimised. Where the Incoterms rules required the seller to arrange for the contract of carriage to the agreed destination, the costs of unloading and handling at the import port/terminal may have been passed on to the buyer by the seller as part of the cost of the goods. However, sometimes buyers are charged again for this service by the port or terminal. Incoterms 2010 now states more clearly who is responsible for terminal costs. Also the new Incoterms encourage the parties to make this clear in the contract of sale.
The increase of the use of E-Communications
Incoterms 2010 now allows for paper communication or an “equivalent electronic record or procedure” where this is agreed or customary. Customary means when parties are unable to refuse the use of electronic communications where for example email is customarily used. This is a progression from Incoterms 2000 which only allowed for the use of Electronic Data Information. This change is evident because all forms of E-Communication are now easily affordable and common place even in small companies and the ICC recognises that change in trade practices.
Sellers are now able to procure the goods under the new Incoterms
Incoterms 2010 now allows for a seller to have the obligation to “procure goods shipped” which is in line with existing commercial practice. Previously Incoterms 2000 meant that the seller had, theoretically, to “ship” the goods even though the sellers in the middle of the chain do not ship the goods as they are already in transit. This recognises that in some instances goods are on-sold several times, but it may be the initial seller who contracted for the carriage of the goods to the buyer at the end of the chain. This should allow for the Incoterms rules to be more attractive to commodity traders.
General comments
Although the changes in the usual maritime transport terms of FOB, CIF, FAS and CFR in Incoterms 2010 are subtle, it is important for ship owners and charterers alike to understand all of the above-mentioned changes due to the global growth of parties entering into multi-modal transport contracts of sale. Incoterms 2010 is a positive move forward which provides clarity in the operation of containerisation, both domestically and cross-borders. Changes in phraseology now applied in Incoterms 2010 accommodate for recent and potential future developments in trade, individual agreements reached between parties, customary practices used and the growing use of e-communication.
It must be remembered that for Incoterms 2010 to apply they have to be included into sale contracts expressly. Standardised sale contracts need to be amended. In addition, contracts made under Incoterms 2000 remain valid even after 2011 and, therefore, will need to be amended if parties intend the 2010 Incoterms to apply. It is also important to remember that parties must state in their contract of sale not just the Incoterms which they wish to apply to their specific contract, but which relevant version.
Article by Claire Blackmore
