The Incoterms rules are internationally recognised standardised terms reflecting business practice in the allocation of tasks, costs and risks in international sales contracts. The ICC has just published the latest version of these rules, Incoterms 2010.

The new rules are relevant for those involved in the buying and selling of goods, especially trading companies, exporters and importers, together with those involved in associated services including marine, multimodal transport, logistics and financial services.

The new Incoterms 2010 rules enter into force on 1 January 2011. This update outlines the main changes introduced in the new rules.

Background

Incoterms have been devised and published by the International Chamber of Commerce (ICC) since 1936. The aim of the Rules is to facilitate the conduct of global trade by providing clear definitions of the parties' respective obligations, thereby reducing the risk of legal complications.

The latest version replaces the 2000 edition and is the culmination of a lengthy process of drafting and consultation involving over 30 national committees and several key trade bodies. The extensive comment and response process resulted in the production of three consultation drafts leading up to the final version of Incoterms 2010.

The Incoterms 2010 rules take account of changes in transport practice, together with the spread of customs-free zones, increased use of electronic communication and security issues.

The Key Changes:

  • Consolidation of 'D' Terms

    The following rules have been abolished:

    DAF – Delivered At Frontier
    DES – Delivered Ex Ship
    DEQ – Delivered Ex Quay
    DDU – Delivered Duty Unpaid

    The DDP rule (Delivered Duty Paid) is unchanged and is joined by the following new 'D' rules:

    DAT – Delivered At Terminal

    This is intended to replace DEQ with terms more suitable for container transportation. The terms provide for delivery when goods are unloaded from the arriving means of transport and are placed at the disposal of the buyer at the named terminal. An example would be where a container has been unloaded from a ship and placed in the container stack at the port of delivery.

    DAP – Delivered At Place

    This replaces DES, DAF and DDU and provides for delivery on the arriving means of transport, ready for unloading. An example of likely use would be for delivery by truck to the buyers' premises, or delivered by ship to a named port, not unloaded or import cleared.
  • Terminal Handling Charges

    The Incoterms 2010 rules seek to clarify the allocation of terminal handling costs between the parties. This is in response to difficulties that have arisen where such costs, although sometimes included in the carriage costs paid by the buyer, have nevertheless been charged to the buyer by the carrier or terminal operator. The new rules are intended to reduce the risk of the buyer being charged twice for terminal handling costs.
  • Insurance

    Minor changes have been made in Incoterms 2010 to those rules that require a party to obtain insurance (CIF and CIP). It is important to note that Incoterms 2010 still requires the seller to obtain only the minimum cover under Institute Cargo 'C' Clauses, or equivalent, on a CIF or CIP transaction. In many cases, the buyer will want to include in the contract an express requirement for the more extensive Institute Cargo 'A' Clauses. For other terms, there are new provisions requiring the parties to exchange information regarding insurance.
  • Electronic Communication

    Incoterms 2000 provided that certain specified documents could be replaced with Electronic Data Interchange (EDI) messages where the parties agreed to do so. Incoterms 2010 now allow for paper communication to be replaced with an 'equivalent electronic record or procedure' where the parties so agree or where customary. The reference to custom is significant as it means that in certain cases parties will be unable to refuse electronic communication, such as email.
  • Security

    Heightened international concern about security has resulted in increased clearance requirements relating to the movement of goods. In response, Incoterms 2010 includes provisions that allocate responsibility for obtaining or assisting to obtain clearances between the buyer and seller.
  • String Sales

    In the sale of commodities it is common for cargo to be sold, perhaps several times, during transit. Incoterms 2000 included obligations for a seller to 'ship' the goods but this did not accurately reflect the position of a seller in the middle of a string of transactions who was unable to 'ship' goods that had already been shipped by the first seller. Incoterms 2010 now provides an option, where relevant, to allow the seller to procure goods that have been shipped as an alternative to the obligation to ship the goods.
  • Domestic and International Trade

    Although Incoterms have traditionally been used in international sale contracts, the ICC has noted that in certain parts of the world trade blocs (such as the EU) have made border formalities between different countries less significant. In addition, there has also been a greater trend towards using Incoterms for purely domestic sale contracts, including in the United States. With this in mind, Incoterms 2010 formally recognises that the rules are available for both domestic and international sale contracts and, where appropriate, the rules state that the obligation to comply with export / import formalities exists only where applicable.
  • General Points
    • The Incoterms 2010 rulebook has been reorganised into two classes;

      • 'RULES FOR ANY MODE OR MODES OF TRANSPORT' and
      • 'RULES FOR SEA AND INLAND WATERWAY TRANSPORT'

      For rules included in the second class, the point of delivery and the place to which the goods are carried are both ports. FAS, FOB, CFR and CIF all belong to this class. The first class contains the remaining seven Incoterms.
    • All reference to the 'ship's rail' as the point of delivery has been removed from Incoterms 2010. Instead for FOB, CFR and CIF sales, goods are deemed delivered when they are 'on board' the vessel.
    • Incoterms 2010 includes clearer guidance notes. These do not form part of the rules but are intended to encourage use of the most appropriate Incoterms rule for any given transaction.

Comment

Incoterms 2010 introduce changes that reflect developments in international trade practice and regulation and as such are to be welcomed. The new rule book also includes improvements in organisation and guidance information that will be appreciated by users. However, it is essential to note that, as ever, the usefulness of the rules is largely dependent upon the parties selecting the correct Incoterms rule for any given transaction and in ensuring that the rules are properly incorporated into the sales contract. Even when the rule has been selected and incorporated correctly, attention must also be paid to ensuring that other relevant contracts (such as letters of credit, contracts of carriage and insurance) reflect the agreed terms.

Finally, parties should always be aware that Incoterms 2010 are not comprehensive and that even where Incoterms rules have been properly incorporated, there are additional key provisions that will remain to be agreed by the parties.

The Incoterms 2010 Rulebook is published by the International Chamber of Commerce (www.iccbookshop.com). For information about Clyde & Co seminars on Incoterms 2010 please email seminars@clydeco.com

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.