Incoterms are rules used for domestic and international trade published by the International Chamber of Commerce (the "ICC") in order to facilitate global commerce. In particular, these terms clarify certain obligations of parties to a sale of goods contract. The recently‐launched Incoterms 2010 rules will become effective as of January 1, 2011.
Given that Incoterms 2010 are the ICC's first revision of the terms in the past decade, Incoterms 2010 provide certain noteworthy changes from the Incoterms 2000 rules reflecting contemporary business practice. These changes are generally described below.
1. New Incoterms (DAT and DAP) Replacing Previous Incoterms (DAF, DES, DEQ, DDU)
The most significant change since the previous Incoterms is the addition of two new rules: Delivered at Terminal (DAT) and Delivered at Place (DAP). In turn, the ICC has abolished four Incoterms 2000 rules (DAF, DES, DEQ and DDU).
The new Incoterms require the seller to specify, in the case of DAP, the place of delivery and, in the case of DAT, the terminal of delivery. By adding such a specification in the contract of sale, terms and conditions or other documents or schedules, the parties determine the time and place at which risks are transferred. In contrast with the Delivery Duty Paid (DDP) rule, DAP and DAT impose upon the buyer the obligation to clear the goods for import, to pay corresponding duties and to carry out other import customs formalities.
The main distinctions between the two new Incoterms are the delivery terms. For DAP, the seller's obligation to deliver the goods is when they are at the buyer's disposal, and ready for unloading at the named place (as under former DAF, DES and DDU rules), whereas DAT provides that the goods are delivered once they are unloaded from the ship or other means of transportation and are at the buyer's disposal at the named terminal (as under the former DEQ rule). Accordingly, the seller bears all risks involved in bringing the goods to and unloading them at the named terminal pursuant to the DAT rule, and at the named place pursuant to the DAP rule.
Given that the named terminal in DAT can be in a port, the former DEQ rule (which provided that delivery occurred when goods were placed at the disposal of the buyer on the quay at the named port) is no longer relevant. Moreover, the means of transportation under DAP may be a ship and the named place may be a port; therefore, the DES rule (which provided that delivery occurred once the goods were placed at the disposal of the buyer on the ship at the named port) is also superfluous.
2. New Classification of Incoterms
In order to better reflect modern commercial reality, the ICC created a new classification system for Incoterms and abolished the previous classification system which was based on the first letter of the Incoterm rule. Under Incoterms 2010, the ICC has divided the Incoterms in accordance with the means of transportation as follows:
Rules for any Mode or Modes of Transport: EXW, FCA, CPT, CIP, DAT, DAP, DDP
Rules for Sea and Inland Waterway Transport: FAS, FOB, CFR and CIF
This new classification system should not be a surprise to international traders given that it was foreshadowed in the introduction to the ICC's handbook on the 2000 rules. Therein, the ICC namely mentioned, that the FOB rule was often erroneously used to indicate any point of delivery, such as "FOB Factory", "FOB Plant", "FOB Ex seller's works" or other inland points, thereby creating confusion given that the FOB rule was meant to be used solely for sea and inland waterway transport. This is now clear with the new classification system.
3. Transfer of Risks under CIF, CFR and FOB Rules
Unlike the previous versions of the FOB, CFR and CIF rules, which provided that the responsibility for costs and the transfer of risks of loss or damage to the goods passed to the buyer once the goods passed the ship's rail at the named port of shipment, the new versions of FOB, CFR and CIF provide that the transfer occurs once the goods are on board the vessel nominated by the buyer at the named port of shipment.
This amendment was made to remedy the impracticality of the previous Incoterms which involved delivery occurring during the actual loading of the goods onto the ship. In light of the foregoing, the 2000 version of the FOB rule was often varied such as "FOB stowed", thereby ensuring that delivery and, by implication, the transfer of risks, only occurred once the goods were stowed. This made the calculation of loading fees easier for the parties. With the amendments, such a variation is no longer necessary.
4. Other Noteworthy Features
a) Terminal Handling Charges
A concern which was brought to the attention of the ICC during their revision of the Incoterms 2000 was that certain buyers complained about being charged twice for terminal handling charges in that, although it is one of the purchaser's obligations to arrange for carriage of the goods to the agreed upon destination (CPT, CIP, CFR, CIF, DAT, DAP and DDP), it was reflected in the purchase price. Thus buyers contended that they should not be charged again for these costs by the carrier or terminal operator. In light of the foregoing, the Incoterms 2010 rules clearly allocate these costs (articles A6/B6 of pertinent rules).
b) Insurance
The Incoterms 2010 take into account the revised Institute Cargo Clauses and therefore reference is made to this more recent version of the clauses. In addition, the new rules clarify certain information obligations relating to insurance. For instance, the new CIF rule provides that, in addition to providing evidence of insurance coverage, the seller must provide the buyer, at the buyer's request, risk and expense (if any), with information that the buyer needs to procure any additional insurance.
c) Security
In light of the heightened security concerns since September 11, 2001, certain new rules allocate obligations between buyer and seller with regard to obtaining security‐related clearances. For instance, the new EXW rule states that the seller must provide, at the buyer's request, risk and expense, any information in his possession that is required for the security clearance of the goods.
d) Electronic Communication
The new Incoterms 2010 rules provide that, to the extent that it is agreed upon by the parties or that it is customary, electronic records or procedures have the same effect as paper communication. Electronic communication is used broadly in order to allow for future technological developments.
e) Rules for Domestic and International Trade
Although Incoterms are traditionally used in international sale contracts, the Incoterms 2010 formally recognize that they can be used in domestic sale contracts as well. This change was made to respond to the fact that traders often use Incoterms for purely domestic sales including by U.S. traders who prefer Incoterms to the Uniform Commercial Code's equivalent rules.
f) String Sales
The new Incoterms 2010 rules were adapted to be consistent with the practice of string sales (i.e. the multiple sales of goods during transit "down a string"). As such, the language of the rules was modified to provide that, in such cases, the seller in the middle of a string has an obligation to "procure goods shipped" and not to "ship" the goods. Similarly, under rules FCA, CPT, CIP, FAS, FOB, CFR and CIF, the seller's obligation to contract for the carriage of goods has been amended to allow the seller to procure a contract of carriage. This adaptation of the rules makes them more attractive to commodity traders.
5. Conclusion
Given the January 1, 2011 effective date of the new Incoterms, it will be important for traders who wish to keep on using the previous version of the Incoterms to provide a specification to that effect. Otherwise, it is strongly recommended that the contract of sale, terms and conditions or other documents or schedules used in international (or domestic) trade be amended to properly take into account the new rules, including those described above. Fraser Milner Casgrain LLP remains available to provide any such advice or for any other questions in relation herewith.
Information on ordering Incoterms 2010 is available at: http://www.iccwbo.org/Incoterms/
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.