Canada: International Sales Contracts: New Incoterms in Effect January 1, 2011

Last Updated: November 25 2010
Article by Gregory O. Somers

Export transactions generally involve international sales contracts, whose clarity of terms is crucial to avoiding disputes between parties. To ensure consistent interpretation, the International Chamber of Commerce created a set of standard trade "Incoterms" in 1936, whose terms are periodically revised to reflect developments in international trade.

On January 1, 2011, the International Chamber of Commerce (ICC)'s Incoterms 2010 will replace Incoterms 2000 as the authoritative text for determining the allocation of risks and responsibilities in the sale of goods.

Major Changes You Should Know About

New Rules and Deleted Rules

Incoterms 2010 includes two news rules, Delivered at Terminal (DAT) and Delivered at Place (DAP), and eliminates the Delivered at Frontier (DAF), Delivered Ex-Ship (DES), Delivered Ex-Quay (DEQ) and Delivered Duty Unpaid (DDU) designations. DAT replaces the current DEQ, while DAP replaces DAF, DES and DDU. This reduces the number of formal terms from 13 to 11.

The new DAT and DAP rules should help to simplify issues pertaining to the time and place at which risks are transferred. Under the new DAT rule, the seller bears all the risks involved in the movement of the goods until they are delivered. Goods will be considered delivered when they are unloaded at a named terminal and placed at the disposal of the buyer. The seller also has the responsibility to clear the goods for export, but does not have the obligation to deal with import duties or other formalities.

Under DAP, the seller retains all the risks involved in the movement of the goods until they are delivered, but, unlike DAT, the unloading of the goods from the arriving means of transport is the responsibility of the buyer. Thus, the goods are considered delivered when they reach the named place and are ready for unloading by the buyer. Like DAT, the seller is responsible for export clearance but is not responsible for import clearance.

Rule Classification

Under previous Incoterm revisions, terms were grouped in order of increasing responsibility on the seller.  The rules in Incoterms 2010 are grouped according to the mode of transport as follows:

ALL MODES OF TRANSPORTATION:
EXW: Ex Works
FCA: Free Carrier
CPT: Carriage Paid To
CIP: Carriage and Insurance Paid
DAT: Delivered At Terminal
DAP: Delivered At Place
DDP: Delivered Duty Paid

SEA AND INLAND WATERWAY TRANSPORTATION:
FAS: Free Alongside Ship
FOB: Free On Board
CFR: Cost and Freight
CIF: Cost, Insurance, and Freight

The first class of terms can be used for any mode of transport - including cases where a ship is used for part of the carriage. The second class of terms relates to cases where goods are carried to and from ports.

It is also worth noting that the concept of "ship's rail" has been replaced with "on board." Thus, for FOB, CFR and CIF sales, goods are deemed delivered when they are on board the vessel. This eliminates past concerns of risk passing arbitrarily back and forth between the buyer and seller across an invisible line extending upward from the ship's rail.

Insurance Markets

Incoterms 2010 also takes into consideration the 2009 adoption by insurance markets of the Revised Institute Cargo Clauses (LMA/IUA) (2009). However, the evidence of insurance requirements that must be provided to the buyer is only applicable where CIP and CIF terms are used, and these terms generally follow the current requirements under Incoterms 2000.

Other Features

Given heightened security concerns internationally, Incoterms 2010 adds clauses relating to security clearances and the information required for such clearances. These rules apportion obligations between  buyer and seller. For instance, under the term EXW, the seller must provide timely security-related information about the goods required by the buyer for import, export or transport purposes.

Finally, Incoterms 2010 also accounts for newer modes of global electronic communications by extending to electronic means of communication the same effect as paper communication.

Conclusion

With a greater trend towards using Incoterms for purely domestic sales contracts, particularly in the United States, Incoterms 2010 expressly recognizes that the rules are available for both domestic and international sales contracts. However, in both domestic and international contracts, the value of the rules depends mainly on the parties selecting and incorporating into the sales contract the Incoterms that accurately reflect their common intentions.

About Ogilvy Renault

Ogilvy Renault LLP is a full-service law firm with close to 450 lawyers and patent and trade-mark agents practicing in the areas of business, litigation, intellectual property, and employment and labour. Ogilvy Renault has offices in Montréal, Ottawa, Québec, Toronto, Calgary and London (England), and serves some of the largest and most successful corporations in Canada and in more than 120 countries worldwide. Find out more at www.ogilvyrenault.com.

Ogilvy Renault joins Norton Rose Group on June 1, 2011.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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