Copyright 2011, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on International Trade & Investment, January 2011
The International Chamber of Commerce (ICC) released a revised version of Incoterms® rules that formally became effective on January 1, 2011. There are a number of significant changes included in Incoterms 2010 of which all traders – whether or not involved in the international sale of goods – should be aware.
WHAT ARE INCOTERMS?
Incoterms are "international commercial terms" established by the ICC that are intended to reflect the practice of parties to contracts for the sale of goods. Originally intended solely for international sales, they are now intended for both international and domestic contracts. Incoterms are short-form abbreviations for a bundle of specific rights and obligations allocated as between the seller and buyer. Incoterms are not laws, and they do not override domestic laws. Nor are they mandatory. Instead, the seller and buyer may elect to adopt an Incoterm or may choose to specify in detail all rights and obligations of buyer and seller in a detailed contract rather than adopt any particular Incoterm. However, Incoterms are limited to certain rights and obligations, chiefly in the areas of allocating responsibility for freight costs, transfer of delivery/risk of loss, export/customs clearance and, in some cases, the requirement to obtain insurance. As such, Incoterms alone cannot constitute a contract but rather form only one part of a contract of sale.
PRINCIPAL NEW FEATURES OF INCOTERMS 2010 RULES
A number of notable revisions have been made to the Incoterms rules. They include, among others: a deletion of four existing terms and their replacement by two new terms; a change in the presentation of the terms into two distinct classes, by mode of transport; the introduction of "guidance notes" before each Incoterm rule; and the deletion of the reference to "ship's rail" in the context of the three Incoterms rules that previously were premised on this concept.
TWO NEW INCOTERMS RULES
The number of Incoterms rules has been reduced from 13 to 11. Four existing terms were deleted and two new Incoterms rules were introduced. The four Incoterms rules that were deleted are Delivered at Frontier (DAF), Delivered Ex-Ship (DES), Delivered Ex-Quay (DEQ), and Delivered Duty Unpaid (DDU). These were replaced by two new Incoterms rules, namely, Delivered at Terminal (DAT) and Delivered at Place (DAP). The two new rules have made the deleted terms superfluous and are simpler to use.
For businesses operating with standard forms, it is advisable to review the use of Incoterms in old forms, particularly if any of the deleted Incoterms have been used. While it is still possible to use the old terms, such use may cause confusion and potential disputes.
TWO DISTINCT CLASSES BASED ON MODE OF TRANSPORT
Previously, the Incoterms were categorized as "E, F, C, or D" terms. In Incoterms 2010, the terms are presented in two distinct classes: rules which can be used for any mode or modes of transport; and rules solely for sea and inland waterways transport. The following seven Incoterms rules can be used for any mode or modes of transport, even where a ship is used for part of the transportation: EXW, FCA, CPT, CIP, DAT, DAP, DDP. The remaining four terms are intended to be used only for sea and inland waterways transport, where the point of delivery and the place to which the goods are carried both refer to ports: FAS, FOB, CFR, CIF. As an illustration, containerized shipments are inherently multimodal and therefore the water-based terms would not be appropriate where containerized shipments are at issue. Some of the changes that were made represent a clear direction by the ICC to extend the utility of the Incoterms rules to domestic contracts as well as to their traditional use in international contracts. For example, developments such as customs unions (i.e., the European Union) result in less of an emphasis on "border" issues and payment of customs duties and the need for customs clearance. In addition, the repeal in 2004 of the U.S. federal UCC "FOB" terms has opened an opportunity for Incoterms rules to reach a wider audience of users for both wholly domestic as well as international trade.
DELETION OF "OVER THE SHIP'S RAIL" CONCEPT
In the case of the terms FOB, CFR, and CIF, the seller's obligation previously extended to the loading of the receiving vessel. This was complete once the cargo was "over the ship's rail". This concept was deleted in Incoterms 2010. Now, the goods are considered to be delivered by the seller when the goods are "on board" the vessel. This adds greater clarity to the point in time where risk of loss is transferred from seller to buyer in such cases.
ADDITION OF "GUIDANCE NOTES"
Guidance Notes have been added at the beginning of each Incoterm rule, describing the main features of each rule and recommendations on when particular rules should be preferred over others. The Guidance Notes replace a longer "Introduction", which previously was found prior to the discussion of the terms and, like the Guidance Notes, was not considered to form a part of the Incoterms themselves. The Guidance Notes are quite clear and readable.
Incoterms rules represent a bundle of rights and obligations that may, when agreed by the parties to a contract of sale, form part of the contract. An Incoterm does not have to be adopted in its entirety. Variations from the Incoterms rules are possible but, when doing so, parties should be careful to clearly specify the deviations from the usual Incoterms rules. In addition, Incoterms should not be considered in a vacuum. Other laws and treaties which may impact contracts for the sale of goods should also be considered. These include the Convention on the International Sale of Goods (which has been implemented into Canadian domestic law at both the federal and provincial levels), as well as the sales of goods legislation in each province.
The particular Incoterms rule to be applied to any particular contract for the sale of goods is not fixed. The parties' choice of Incoterms may be determined by reference to a number of factors, such as: the type of goods at issue (bulk goods, containerized); the mode or modes of transport; the respective bargaining strengths and/or capabilities of the seller and buyer, etc.
When using an Incoterm rule, the parties should strive to be as precise as possible in specifying a place or address along with the three-letter abbreviation, and should also clearly specify the particular version of the Incoterms rules being applied. An example would be DAP 199 Bay Street, Toronto, Ontario, Incoterms 2010.
Sellers and buyers can benefit from use of Incoterms rules in negotiating domestic and international contracts for the sale of goods. Parties should ensure that they fully understand the obligations they are undertaking when they agree to a particular Incoterm, and clearly specify any variations from the term consistent with the bargain they have reached. In this way, the parties will better achieve the goal of the Incoterms rules – to allow business to function more quickly and efficiently with a minimum of uncertainty and misunderstanding between the parties.
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.