South Africa: Incoterms 2010

Last Updated: 11 July 2011
Article by Malcolm Hartwell
  • Introduction
  • Removal of terms and introduction of new terms
  • Categorisation
  • Insurance
  • Anicillary issues
  • Changes to specific terms
  • Conclusion

Introduction

The risks attached to international trade are considerable and for business terminology to be effective, phrases must mean the same thing throughout the industry. That is why the International Chamber of Commerce created the Incoterms in 1936 and have updated them periodically with the current version being Incoterms 2010 coming into force from 1 January 2011.

The 2010 version of the Incoterms has been designed to take into account the spread of customs-free zones, the increase in use of electronic communications, heightened security concerns and the increase in use of door-to-door logistics.

The 2010 terms are simpler than the 2000 terms in that four of the terms have been removed and the categories have been changed and reduced from four to two. In addition, the new terms are designed to serve both domestic and international trade and insurance cover has been amended to reflect the alterations made to the Institute Cargo Clauses dealt with at a previous breakfast. The new terms also allocate parties' responsibilities to provide information in order to obtain security related clearances and expressly allocate responsibility for terminal handling charges.

What the new terms cannot do is remove all of the risks relating to international trade. The parties still need to: specifically incorporate the Incoterms; properly identify the correct one to use; and ensure that the selected term properly reflects both the parties' intentions and the logistical peculiarities of that route; and parties must remember the Incoterms are not a complete contract and they must add in terms dealing with the price, the method of payment and the passing of ownership;

Using Incoterms 2010 and avoiding the underlying pitfalls should ensure that any disputes and claims can be dealt with expeditiously.

Removal Of Terms And Introduction Of New Terms

In response to increasing containerisation and point to point deliveries the ICC have removed DAF, DES, DEQ and DDU and introduced two new terms, DAP (Delivered at Place) and DAT (Delivered at Terminal).

The new terms seek to avoid the confusion created by the four similar terms that have been retired.

As with the old "D" terms, DAP and DAT should be used in circumstances where the seller has to bear all the costs and risk required to get the goods to their destination whether it be the terminal or a named place.

Categorisation

The old terms were split into four distinct groups being:

Group E : Where the goods are made available to the buyer at the seller's premises;

Group F : Where the seller must deliver the goods to a carrier appointed by the buyer;

Group C : Where the seller contracted for the carriage of the goods without assuming risk of loss of or damage to the goods and additional costs due to events occurring after shipment; and

Group D : Where the seller has to bear all costs and risks required to bring the goods to the place of destination.

These groups ran from the terms where the buyer has most of the responsibility being EXW through to that where the seller has most of the responsibility being DDP.

Incoterms 2010 now categorise the 11 terms under 2 different categories being:

Delivery by any mode of transport whether sea, road, air or rail. These are EXW, FCA, CPT, CIP, DAP, DAT and DDP; and

Deliveries where the only mode of transport is by sea or inland water being FAS, FOB, CFR and CIF.

Save as is set out below, the terms themselves have not changed, merely their categorisation. This seems to have been designed to make the Incoterms easier to use although I am not convinced that is the case.

Insurance

On those Incoterms which oblige the seller to arrange insurance being CIP, DAP, DAT, DDP and CIF, the insurance requirements have been amended to reflect the changes to the Institute Cargo Clauses. They have also clarified the seller's and buyer's obligations to provide information at the other's request to allow for insurance to be arranged.

Anicillary Issues

In response to our shrinking, electronic and fearful world, Incoterms 2010 clarify a few issues that were not dealt with in the previous versions. The main ones are:

The new Incoterms are expressly stated to be for both domestic and international trade. The rules confirm that the obligation to comply with export and import formalities only exist where applicable. This assists in ensuring that there are no debates when trade is within various trade blocs such as SADC or the EU.

The new Incoterms specifically provide that if the parties agree the contractual documentation may be electronic only. It still requires parties to agree that electronic documents are sufficient and this, of course, will also be subject to any local, banking or shipping line requirements with regard to the original bills of lading, certificates of origin etc;

Following the general tightening of security post 9/11 the New Incoterms oblige both parties to provide all necessary information in order to obtain import and export clearance. The previous Incoterms were silent on this.

The previous Incoterms provided for a party to ship the goods. In commodity transactions the traders who purchased and then on-sold goods after shipment could actually never be in a position to ship the goods, the goods already having been shipped. The New Incoterms cater for this by including the option of "procuring goods already shipped" as an alternative to the obligation to ship goods.

Changes To Specific Terms

Freight on board (FOB):

Under the FOB term, it is the buyer's obligation to arrange and pay for the transport of the cargo. The seller has no obligation other than to arrange for the goods to be loaded on board the vessel arranged and paid for by the buyer. The New Incoterms introduce, in my view, some confusion by stating that if it is the commercial practice and the buyer does not give instruction to the contrary, the seller may contract for the carriage of the goods at the buyer's risk and expense. The seller is not obliged to do so, but if he does not do so the seller must promptly notify the buyer.

This may create some confusion if the buyer thinks that it is the commercial practice for the seller to arrange shipment from a particular country and the seller is ignorant of this. To avoid any confusion the simplest solution is for the seller to specify, when using the FOB clauses, that the buyer is to arrange and pay for the carriage.

Passing Of Risk

It was perhaps only the lawyers that were delighted with the arguments that could arise as to exactly when risk into goods passed from the seller to the buyer. Everyone knew that this happened at an imaginary point perpendicular to the ship's rail which most of the time was a fairly reliable point for risk to pass. There were the odd anomalies involving loads swing backwards and forwards across the rail before dropping into the water or landing on the rail itself. There were also problems with ships where cargo does not cross the rail as it is loaded via a ramp such as on ro-ro vessels.

The New Rules provide that the seller's obligation is to place the goods "on board the vessel". I suspect that all this has done is moved the debate from the rail into the hatch but the idea was to simplify the issue. It would be prudent, depending on the trade, for a seller or buyer to specifically set out what this means.

Insurance

Under the previous Rules the seller who was obliged to arrange cargo insurance could arrange any insurance available as it was only a requirement that insurance was placed. Often this was the minimum cover available, but it was up to the seller to elect what insurance to arrange. The buyer could request full cover at his expense. The New Rules confirm that the minimum cover to be provided by the seller obliged to arrange insurance is in terms of the Institute Cargo Clauses (C). This sets a fairly low standard given that the ICC (C) are designed only to respond to casualties. The buyer is entitled, at its expense, to ask the seller to procure insurance with much broader cover but this would have to be included in the contract. Buyers need to remain alive to this.

Delivered At Place (DAP):

DAP is perhaps most closely aligned with the old DDU term and is to be used when the cargo is delivered to the nominated place and is ready for unloading by the buyer at the nominated place. Importantly, when this term is used there must be an agreed point for unloading e.g. "DAP WAREHOUSE, 103 Umgeni Road, Durban". This would mean that the goods are delivered to the seller when the truck carrying them is at the position at the warehouse where the container would normally be unloaded from the truck. This term specifically provides that the seller has to pay all costs of unloading at the designated delivery point.

Delivered At Terminal (DAT):

DAT obliges the seller to take one further step compared to DAP namely to unload the goods on delivery and place them at the disposal of the buyer.

As with the DAP terms it is important to specify exactly where the goods are to be unloaded to ensure certainty as to when risk passes. "DAT Durban" would simply not suffice.

Conclusion

The changes effected are evolutionary rather than revolutionary. They have been simplified and in certain instances have clarified issues that were left open for debate under Incoterms 2000. They have responded to logistical and security developments and deprived lawyers of the opportunity to debate whether goods had in fact crossed the ship's rail.

Please remember however that it is still critical to select the correct term, specify options such as electronic documents and insurance and deal with critical contractual terms such as price, method of payment and passing of ownership.

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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