What are Incoterms?
Incoterms (short for 'International Commercial Terms') are a series of three letter standard trade terms that were created by the International Chamber of Commerce (ICC) for the interpretation of trade terms in international contracts for the sale of goods.
Incoterms were first published in 1936 and provide internationally accepted definitions and rules of interpretation for most common commercial terms. Incoterms are accepted by governments, legal authorities and practitioners worldwide and their advantage is that when they are used they have an accepted meaning reducing the potential for misunderstanding in international trade. The scope of Incoterms is limited to the rights and obligations of the parties with respect to the delivery of tangible goods sold, and are not concerned with intangibles such as computer software.
Incoterms simply clarify which party, buyer or seller, carries the risk of loss or damage to the goods, when the risk passes and who will pay for carriage and insurance of the goods as well as customs clearance.
What Incoterms do?
The primary purpose of Incoterms is that they are designed to be used where goods are sold for delivery across national boundaries. The terms operate only on the relationship, rights and obligations of the parties in respect to the delivery of the goods sold.
It should be noted that by themselves Incoterms do not:
- Constitute a contract
- Supersede the law governing the contract
- Define where title transfers
- Address the price payable, currency or credit terms.
The rules
On 1 January 2011, the ICC published revisions to its Incoterms and Incoterms 2010 will replace Incoterms 2000 as the primary avenue for determining the allocation of risks and responsibilities in the sale of goods.
Incoterms 2010 takes into account the latest developments in commercial practice and updates and consolidates some of the former rules.
Incoterms 2010 consists of only 11 Incoterms, a reduction from the 13 Incoterms included in Incoterms 2000. The reduction from 13 to 11 Incoterms was accomplished by substituting two new Incoterms, Delivered at Terminal (DAT) and Delivered at Place (DAP) for DAF (Delivered at Frontier), DES (Delivered Ex-Ship), DEQ (Delivered Ex-Quay) and DDU (Delivered Duty Unpaid). The new terms apply to all modes of transport.
Under previous Incoterm revisions, terms were grouped in order of increasing responsibility on the seller. The rules in Incoterms 2010 are organised into two categories according to the mode of transport as follows:
Incoterms for any mode or modes of transport:
- EXW – Ex Works
- FCA – Free Carrier
- CPT – Carriage Paid To
- CIP – Carriage and Insurance Paid
- DAT – Delivered At Terminal (new)
- DAP – Delivered At Place (new)
- DDP – Delivered Duty Paid.
Incoterms for Sea and Inland Waterway Transport:
- FAS – Free Alongside Ship
- FOB – Free On Board
- CFR – Cost and Freight
- CIF – Cost, Insurance and Freight.
The first class of terms may be used for any mode of transport and may function even where there is no maritime transport. The second class of terms refers to cases where goods are carried between ports.
Summary of new rules
Both new rules provide a named destination for delivery. In DAT, the seller bears all the risk in the goods until they are delivered. Goods are considered delivered when they are unloaded at a named terminal and placed at the disposal of the buyer.
Under DAP, the seller retains the risk in the goods until they are delivered, however, the unloading of the goods upon arrival is the responsibility of the buyer. The goods are considered delivered on reaching the named place ready for unloading.
In both cases the seller is responsible for export clearance but is not responsible for import clearance.
Incoterms 2010 also addresses duties to provide information regarding security related clearances and other chain-of custody information.
The aim of the Incoterms 2010 is to adapt to changes in international trade since 2000, changes reflecting new security concerns and the growing trend to replace paper documents with electronic documents. It is designed to be more user friendly with an expanded list of explanations to assist users and to more accurately reflect current trading practice.
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.