UK: Incoterms Updated

On 1 January 2011 Incoterms 2010 (ICC Publication No. 715) will enter into force, although there is nothing preventing their immediate use, should the parties wish to do so. The foreword states that the changes are designed to "take account of the continued spread of customs-free zones, the increased use of electronic communications in business transactions, heightened concern about security in the movement of goods and changes in transport practices".

The ICC has recognised that Incoterms 2000 have been increasingly used for purely domestic sales and that trade blocs have made border formalities less significant. Accordingly, the cover of Incoterms 2010 now refers to the "ICC Rules for the Use of Domestic and International Trade Terms" and the rules now state that the compliance with export/import formalities is only required where applicable. This ties in with changes to the Commercial Code in the USA and is designed to encourage the use of Incoterms in that part of the world. The relevant Incoterms' suitability for string sales where the seller buys goods afloat is also now made explicit via the introduction of the phrase "procure goods shipped".

The "E", "F", "C" and "D" grouping of Incoterms 2000 has been abolished. Under Incoterms 2010, there are two groups; those that are suitable for sea and inland waterway transport (FAS, FOB, CFR and CIF) and those that are suitable for any mode(s) of transport (EXW, FCA, CPT, CIP, DAT, DAP and DDP). The guidance note for each Incoterm expressly states for what mode(s) of transport it is suitable and contains a diagram highlighting the point of delivery, which is designed to bring clarity to the Incoterm in question. These changes are designed to assist the parties in choosing the appropriate Incoterm to incorporate into their sale contract.

Two new Incoterms (DAT – delivered at terminal and DAP – delivered at place) have been introduced and four abolished (DAF – delivered at frontier, DES – delivered ex ship, DEQ – delivered ex quay and DDU – delivery duty unpaid) reducing the total number of Incoterms to 11. Both new Incoterms can be used irrespective of the mode(s) of transport selected.

DAT has replaced DEQ. The guidance note provides that the seller delivers "when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named terminal at the named port or place of destination". The DAT Incoterm will be useful where containers are involved.

DAP replaces DAF, DES and DDU. Under a DAP sale, the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading.

The reference to the "ship's rail" in FOB, CFR and CIF has been replaced and the goods are now delivered when they are "on board". Whilst the departure from the notional perpendicular projecting from the ship's rail may be of disappointment to the enthusiastic lawyer as described by Mr Justice Devlin in Pyrene Co. v Scindia Navigation Co. Ltd., it is submitted that this is a welcome change reflecting developments in commercial practice. In this regard it is also worth noting that there is no longer a requirement that the parties agree to the use of electronic communications as articles A1/B1 give electronic records the effect of paper documents "if agreed between the parties or customary", the reference to custom acknowledging the expectation that in most cases today, parties will have to accept communication by email.

As with Incoterms 2000, only the CIF and CIP terms in Incoterms 2010 require the seller to arrange insurance for the benefit of the buyer. The ICC has taken the opportunity to clarify the buyer's obligations following the extensive revision of the Institute Cargo Clauses undertaken by the London market's Joint Cargo Committee, which was concluded in November 2008. However, a buyer should be aware that there is no requirement that the seller obtain appropriate insurance. All that is required of an Incoterms CIF/CIP seller is that it obtains, at its own expense, the minimum cover under or comparable with the Institute Cargo Clauses (C) from an underwriter of "good repute". If the buyer requires wider coverage, for example, the more comprehensive Institute Cargo Clauses (A), it must specify this in the sale contract.

Finally, articles A2/B2 and A10/B10 of the various Incoterms deal with security. The introduction to Incoterms 2010 states that "the rules have allocated obligations between the buyer and seller to obtain or to render assistance in obtaining security-related clearances, such as chain-of-custody information". Whilst it remains to be seen how this will work in practice, the parties should once again ensure that any special terms required are set out in their sale contract.

In summary, there is nothing in Incoterms 2010 that represents a radical departure from Incoterms 2000. The changes take account of developments in practice since Incoterms were last revised and are to be welcomed. It remains to be seen however, whether the changes introduced will result in an increase in the uptake of Incoterms in the USA and the commodity trade.

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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