The new edition of Incoterms® came into use on 1 January 2011. Frazer Hunt, Partner, looks at some of the changes it includes and what organisations need to be aware of.

The International Chamber of Commerce (ICC) has published a new edition of Incoterms to replace the previous 2000 version, which took effect from 1 January 2011. The previous 2000 version of the Incoterms has been updated to reflect changes in global trading in light of the greater number and use of customsfree trade zones, increased electronic communications and fresh security concerns.

There are a number of significant changes for those involved in the buying and selling of goods, especially trading companies, exporters and importers, and those involved in associated services including marine, multimodal transport, logistics and financial services – whether or not involved in the international sale of goods – should be aware.

What are Incoterms?

Incoterms are for a bundle of specific rights and obligations allocated as between the seller and buyer in contracts for sale of goods, indicating which party is responsible for the cost of transportation, transfer of risk of loss, export/customs clearance, where the goods are to be delivered and, in some cases, who arranges insurance. They consist of shortform abbreviations ranging from EXW (ex works) where the seller makes the goods available for collection by the buyer, to DDP (delivered duty paid), where the seller undertakes the cost and risk of actually delivering the goods to the buyer at the named destination.

What is not covered by Incoterms?

Incoterms are incorporated by reference into contracts for sale of goods, but do not provide an alternative to a full contract detailing (amongst other things) price, terms of payment, the transfer of ownership of the goods, the conclusion of the contract, the consequences where it becomes impossible to deliver the goods, defects, warranty issues, product liability, packaging and stowage of the goods, the applicable law or the place of jurisdiction.

What’s new in the Incoterms 2010®?

Incoterms 2010® has consolidated the rules and classified them according to the mode of transport relevant to the reader. Additionally, guidance notes help buyers and sellers to choose a suitable rule for their own contract.

The rules are now divided into two distinct categories:

The first category – EXW, FCA, CPT, CIP, DAT, DAP and DDP – can be used by the parties regardless of the mode of transportation and whether or not more than one mode of transportation is used. They should be used where either the intended point of delivery or the intended destination (or both) is an inland point rather than a port, so are suitable for use where goods are carried in containers.

The second category – FAS, FOB, CFR, and CIF – only applies to sea and inland waterway transport and are suitable for loose (break-bulk) cargo and bulk trades. FOB and CIF are inappropriate terms for containerised cargo, which is typically delivered at a terminal. In this situation, FCA and CIP should replace the FOB and CIF terms for containerised goods. FOB and CIF should not be used for air carriage for the same reasons. Importantly, with respect to FOB, CFR and CIF, delivery and the passing of risk now occurs when the goods are placed “on board” rather than over the ship’s rail. They should be used where either the intended point of delivery or the intended destination (or both) is a port.

There are now 11 rules detailed in the publication with two new additions. Delivered at Terminal (DAT) and Delivered at Place (DAP).

Electronic means of communication have been given the same standing as their equivalent paper versions and the definition of an electronic communication has been left open to avoid the new Incoterms becoming outdated prematurely.

Both buyers and sellers now have a positive duty to provide each other with information about export/import clearance and exchange information for insurance purposes. This obligation is a new aspect to the Incoterms which reflects the enhanced security checks that are being undertaken around global ports.

Finally, Incoterms were previously intended solely for international sales, but can now be used for both international and domestic contracts. A number of the rules provide that export and import formalities will only need to be complied with where applicable.

What do I do now? Here are some tips:

For businesses operating with standard forms, you should review the use of Incoterms in old forms and update them appropriately.

When using an Incoterm, you should be as precise as possible in specifying a place or address along with the three-letter abbreviation and specify the particular version of the Incoterms rules being applied. An example would be “DAP Level 23, Governor Macquarie Tower, 1 Farrer Place, Sydney NSW 2000 Australia, Incoterms 2010”. The designated location is important as the seller bears the risk of loss or damage up to the point of delivery.  

In relation to the seller’s obligation to obtain cargo insurance, the new rules clarify that under CIF terms, the seller must obtain cover complying with at least the minimum cover provided by the “C” Clauses of the Institute Cargo Clauses (LMA/IUA) or any similar clauses. Most buyers would (and ought to) insist that the contract of sale requires the seller to arrange additional cover provided by Institute Cargo Clauses A or B and Institute War or Strike Clauses.