The International Commercial Terms (commonly referred to as the "Incoterms") are a standardised set of trade terms published by the International Chamber of Commerce ("ICC") for use in international sales contracts. The first version of Incoterms was published in 1936. Since their introduction, Incoterms have become the international standard in a wide variety of international sales contracts, including contracts for the sale of LNG, uranium, coal and copper. It should be noted that Incoterms can also be used in domestic sales contracts. Incoterms are periodically updated to reflect developments in international trade and commercial practice. The latest version (the eighth version) is Incoterms 2010, which came into force on 1 January 2011 and revised Incoterms 2000.
Purpose and Function of Incoterms
The aim of Incoterms is to define obligations of buyers and sellers of goods and allocate delivery risk between them in a set of terms capable of being incorporated into contracts by reference, with the intention to reduce uncertainties arising from different interpretations of the rules in different countries.
Incoterms 2010 consist of eleven sets of trade terms (each set of terms is referred to as a "Rule") for use in export-import sales transactions. Sellers and buyers wanting to use Incoterms must choose which of the Rules is appropriate to apply to their transaction. Each of the Rules deal with responsibilities of sellers and buyers for the practical arrangements relating to transportation and delivery of goods (such as responsibility for export and import clearances, loading arrangements and insurance) and determine how costs and risks are allocated between the parties.
Each of the Rules has a distinct name and a three letter abbreviation. Four of the eleven Rules can only be used where delivery of the goods is by sea or inland waterway transport but the other seven Rules can be used whatever mode(s) of transport are used (including where transport is all or partially over water).
It should be noted that none of the Rules have been designed for use where transport is by pipeline, such as is common for oil and gas. The ICC decided against developing a Rule for pipeline transport as it noted that where transport is by pipeline frequently the product shipped is not the exact product received and there are already numerous trade practices applicable to pipeline transport.
Key differences between Incoterms 2000 and Incoterms 2010
The key differences between Incoterms 2000 and Incoterms 2010 are:
- New Rules: Incoterms 2000 consisted of thirteen Rules but Incoterms 2010 only has eleven Rules. Incoterms 2010 introduced two new Rules: Delivered at Terminal (DAT) and Delivered at Place (DAP). These two new Rules replace the following four Rules: Delivered at Frontier (DAF), Delivered Ex-Ship (DES), Delivered Ex-Quay (DEQ) and Delivered Duty Unpaid (DDU).
- New Categories: The Rules in Incoterms 2000 were divided into four categories (departure, main carriage unpaid, main carriage paid, and arrival) but the Rules in Incoterms 2010 are divided into two categories (Rules for any mode of transport and Rules for sea and inland waterway transport):
- The Rules for "any mode of transport" are designed for any mode of transport, and can be used where more than one mode of transport is employed to transport the goods. They can be used where a ship is used for all or part of the carriage, and where transport is entirely over land.
- The Rules for "sea and inland waterway transport" are specific to contracts where both the point of delivery and the destination of the goods are ports. It should be noted that while Incoterms 2000 refer to the "ship's rail" as the reference point for delivery, Incoterms 2010 provide that delivery occurs when the goods are "on board" the vessel to reflect practical reality.
In addition, changes have been made in relation to insurance cover, security related clearances and string sales.
It should be noted that earlier versions of Incoterms which are incorporated into existing contracts will still apply in respect of those contracts. Some of our clients are continuing to make use of the 2000 Incoterms such as FOB (rather than the new DAP), and this is of course possible provided that the contract is clear that the previous rules are to apply.
Summary of the most common Incoterms used in energy and mining transactions
Delivered Ex-Ship (DES)
This is an old Rule which was abolished by Incoterms 2010, but which will continue to apply to any existing contracts into which it has been incorporated or where it is expressly chosen in new agreements. This Rule can only be used where all or part of the transport is by sea or inland waterway.
Delivery occurs when the seller places the goods at the disposal of the buyer on board the ship ready for unloading at the named port of destination, not cleared for import (buyer is responsible for effecting customs clearance and paying any customs duties).
The seller bears all the risks and transaction costs associated with bringing the goods to the named port of destination before unloading and is responsible for clearing goods for export. The buyer must arrange and pay for the unloading of the goods and any necessary import licence(s) and bears all risk and costs from the point of delivery onwards.
Delivered at Place (DAP)
This is a new Rule which was introduced by Incoterms 2010. DAP is said to be replacing the following three Rules: Delivered Ex-Ship (DES), Delivered At Frontier (DAF) and Delivered Duty Unpaid (DDU).
Delivery occurs when the seller places the goods at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination, not cleared for import (buyer is responsible for effecting customs clearance and paying any customs duties).
The seller bears all the risks and transaction costs associated with bringing the goods to the final destination, excluding unloading, and buyer bears all risk and costs from that moment onwards.
If the seller incurs costs in relation to unloading the goods at the named place, the seller is not entitled to recover the costs from buyer unless otherwise agreed by the parties.
DAP was introduced to facilitate use in domestic and international transactions within Customs Unions where no export or import clearance obligations exist, but seller must clear the goods for export, where applicable. If buyer wishes seller to clear goods for import and customs formalities, then Delivered Duty Paid (DDP) should be used.
Free On Board (FOB)
This Rule was amended by Incoterms 2010.
Delivery occurs when the seller places the goods on board the vessel nominated by the buyer at the named port of shipment, or when seller procures the goods to be so delivered (in the case of "string sales"). Seller is responsible for risk and costs prior to delivery (unless otherwise agreed between the parties). Risk passes to the buyer when the goods are onboard the vessel, and the buyer bears all costs from that moment onwards. The seller clears the goods for export.
The seller must physically load the cargo onto the vessel. If the goods go to a container terminal, the seller will not be able to ensure that the goods are loaded onto the vessel. Therefore, Free Carrier (FCA) should be used instead in order to limit risk exposure between the gates of the terminal and when the goods are placed on board the vessel, provided the buyer agrees. If the buyer disagrees to the use of FCA, the seller needs to insure the goods between the terminal gates and delivery "on board" the vessel.
Cost, Insurance and Freight (CIF)
This Rule was amended by Incoterms 2010.
Delivery occurs when the seller places the goods on board the vessel, or when he procures that the goods are so delivered.
Risk passes when the goods are placed on board the vessel, and the seller must contract and pay for the carriage to bring the goods to the named port of destination. The seller is responsible for arrangement of freight and insurance. The seller must obtain any required export licence and pay for customs formalities and loading costs.
Application of Incoterms
Sellers and buyers wanting to use Incoterms should take the following steps to apply Incoterms to their transaction:
- Select the appropriate Rule: The parties should consider carefully which of the Rules is appropriate to the type of goods being delivered, the means of transport used and the allocation of responsibilities, costs and risks desired by the parties.
- Use a formal sales contract: Incoterms cannot be used instead of a sales contract as they do not provide a comprehensive set of terms. Consequently, Incoterms need to be incorporated into a formal sales contract which deals with the areas on which Incoterms are silent, such as: specifications of the goods, price, payment, transfer of title to the goods, tax, warranties, consequences of breach, governing law and dispute resolution.
- Expressly incorporate the Rule into the sales contract: For Incoterms to apply to a transaction, they need to be expressly incorporated into the sales contract by specific reference to the relevant Rule chosen from Incoterms. Care should be taken to reference the appropriate version/year of Incoterms to be applied.
- Specify the place or port for delivery as precisely as possible: The more precisely the place or port for delivery is specified the less room there is for confusion or disputes between the parties.