Incoterms 2010 - Making trading easier
This article was written by David Lowe, partner and Anna Giles, solicitor and published in the October issue of PLC magazine.
The International Chamber of Commerce (ICC) launched the new Incoterms 2010 rules (the new rules) in Paris on 16 September 2010.
The Incoterms rules are a series of internationally recognised standardised terms governing the costs, risks and practical arrangements of the sale of goods, so the new rules are relevant for anyone involved in the buying and selling of goods and services relating to the movement of goods, especially international traders.
Taking effect from 1 January 2011, the new rules reflect the changes in international trade since the last version of the rules was published in 2000 (Incoterms 2000 rules).
There are significant changes: four Incoterms rules have been abolished and two new ones have been developed. There are changes to deal with cargo security and insurance, and the rules have been generally updated to make them more user friendly and mirror the modern language of international trade.
New rules for delivery
Delivered at Terminal (DAT) and Delivered at Place (DAP) are new rules. They replace Delivered at Frontier (DAF), Delivered Ex Ship (DES), Delivered Ex Quay (DEQ) and Delivered Duty Unpaid (DDU). Delivered Duty Paid (DDP) is unchanged.
Under the new rules, delivery under DAT takes place when the seller puts the goods at the disposal of the buyer unloaded at the named terminal. Under DAP, delivery is when the seller puts the goods at the disposal of the buyer at a named place, on a vehicle ready for unloading (that is, not unloaded). DAT and DAP can be used regardless of the mode of transport; they are not just limited to maritime transport. The changes should make them more useful for container traffic. DAP specifically does not refer to "duty" in its title to encourage its use in domestic and free trade (as well as in international trade).
Wherever DAF, DES and DDU were used under the Incoterms 2000 rules, DAP should now be used. Where DEQ was used under the Incoterms 2000 rules, DAT should now be used.
For container traffic, where goods are sold on a "delivered" basis, the normal options will be:
- DAT (named terminal) where delivery is at the container port/terminal.
- DAP (buyer's premises) where delivery is at the buyer's premises but not cleared for import.
- DDP (buyer's premises) where delivery is at the buyer's premises cleared for import.
Security has become a much more important issue since 9/11. Mandatory security checks have been introduced by many countries such as scanning of containers. The new rules have made no change to reflect these checks, taking the approach that the checks are part of the mandatory requirements for any export/import.
Both sellers and buyers need to provide more information to obtain export/import clearance and to allow international carriers to transport. Therefore, in the new rules, both parties (seller and buyer) are obliged to provide the information the other party needs. This is a level of collaboration not previously required.
Where an Incoterm rule requires a party to obtain insurance (for example, CIP and CIF), then the insurance requirements (at A3/B3 of each Incoterm rule) has been changed to reflect the recent updates to the Institute Cargo clauses.
Note that the seller is only obliged to procure the minimum cover as provided by Clause (C) of the Institute Cargo Clauses (LMA/IUA) (or similar). This is a low level of insurance. Buyers of, for example, manufactured goods should consider requiring a higher level of insurance.
Terminal handling charges
With increasing focus on costs, terminal handling charges have become increasingly contentious. Where the Incoterms rules required the seller to arrange and pay for the carriage of the goods to the agreed destination (CPT, CIP, CFR, CIF, DAT, DAP and DDP), the costs of unloading and handling at the import port/terminal may have been passed on to the buyer by the seller as part of the cost of the goods. However, some buyers reported then being charged again for this service by the port or terminal (in effect, double charging).
The new rules have sought to address this problem by stating more clearly who is responsible for the terminal costs. For example, under A6 of CIP, if the seller's contract of carriage includes handling costs at the port/terminal of import, then the seller is not permitted to recharge them to the buyer.
Updated for the 21st century
The Incoterms 2000 rules refer to electronic documents in a cumbersome way. The new rules state that any document may be replaced with an equivalent electronic record or procedure if the parties agree or it is customary. This gives electronic means of communication the same validity as paper. What is meant by electronic communication has deliberately been given a wide remit so the rules will remain current as this area evolves.
Under FCA, CPT, CIP, FAS, FOB, CFR and CIF, the seller's obligation to contract for the carriage of goods has been amended to allow the seller to procure a contract of carriage. This is to recognise that in some instances goods are sold several times down a string of organisations, but it may be the initial seller who actually contracted for the carriage of the goods to the end buyer. This should allow for the Incoterms rules to be more attractive to commodity traders.
FOB, CFR, and CIF traditionally have referred to delivery being across the ships rail. This has become dated and so the new rules have been changed to simply refer to loading "on board" the vessel.
A key issue with the Incoterms rules is not their substantial content but their incorrect use. All too often buyers and sellers do not use the correct rule. Therefore, attempts have been made to make the new rules more accessible, as follows:
- There are more detailed guidance notes for each rule, which are more specific about when a rule should and should not be used. For example, the guidance note for FOB discourages its use for containers.
- There is a picture at the beginning of each rule to summarise it at a glance.
- The rules have been split into two classes: one class which can be used for any form of transport; and a second set which can only be used for maritime transport.
How to use the new rules
To use the new Incoterms rules properly:
- Incorporate the new rules specifically into the relevant contract. They will not apply otherwise.
- Choose the right rule. Review the wording of the rule to make sure it is appropriate.
- Use as precise a named place as possible; for example: FCA, Seller's premises at 142 Holborn, London, England, EC1N 2SW, Incoterms 2010.
However, it is important to note that while the new rules shorten a contract, they are not complete. For example, they do not describe the goods, the warranties, liabilities, the price and payment, title, intellectual property, law and jurisdiction.
David Lowe is one of the eight experts who sat on the ICC Incoterms 2010 international drafting group and is Chairman of ICC UK's Commercial Law and Practice Committee.
Information about ordering Incoterms 2010 is available at http://www.iccbookshop.com/.
For further information about this published article, contact Kathryn Hobbs on +44 (0)121 685 2785, Rebecca Davies on +44 (0)121 685 3819, Gayle Biddle on +44 (0)121 685 2708 or Amy Richards on +44 (0)121 260 9973
This published article may contain information of general interest about current legal issues, but does not give legal advice.