Overview

Incoterms are an internationally recognized set of rules, published by the International Chamber of Commerce (the "ICC"), designed to allocate the risks, costs and tasks involved in business-to-business contracts for the sale of goods, and to settle on the place of legal delivery of such goods. 

On September 27, 2010 the ICC published its new Incoterms 2010 which will come into effect on January 1, 2011.  The new Incoterms 2010 contain noteworthy changes for international and domestic contracts for the business-to-business sale of goods. 

Further, the application of Canada's GST/HST, Quebec's QST and the remaining provincial retail sales taxes to purchases and imports of tangible property each depend upon the place of legal delivery of such property, and any changes to the Incoterms should be reviewed with the application of such taxes in mind.  This is particularly true since the introduction of the new Place of Supply Rules for GST/HST and QST purposes, effective July 1, 2010, which work to determine which of these taxes must be collected and at which rate.

The following are the most significant changes in the Incoterms 2010.

New Terms (DAT and DAP)

The most significant change to the Incoterms 2010 is the adoption of two new terms: "Delivered at Terminal" ("DAT") and "Delivered at Place" ("DAP").  DAT and DAP will replace the terms "Delivered at Frontier" ("DAF"), "Delivered Ex Shipping" ("DES"), "Delivered Duty Unpaid" ("DDU") and "Delivered Ex Quay" ("DEQ").  As such, DAF, DES, DDU and DEQ will no longer be relevant or applicable as Incoterms after January 1, 2011.

DAT and DAP are significant because up to the point of delivery, the seller bears all risk related to the goods.  Delivery DAT is satisfied once the goods are put at the buyer's disposal and unloaded at the specified terminal.  Delivery DAP is satisfied once the goods are put at the buyer's disposal and are ready for unloading at the specified place of delivery. 

Revised Classifications

The new Incoterms 2010 are split into two classifications.  There are rules for use with all modes of transport (EXW, FCA, CPT, CIP, DAT, DAP, DDP) and rules for use with sea and inland waterway modes of transport (FAS, FOB, CFR, CIF).  In order for the Incoterms to be properly applied, the rule specified in the contract of sale must be consistent with the mode of transportation.

Rules for Domestic and International Trade

Traditionally, Incoterms were only applicable to international sales contracts; however, the new rules can also be applied to domestic sales contracts.

Transfer of Risk

The new Incoterms 2010 include subtle changes regarding when risk will transfer from the seller to the buyer under the rules FOB, CIF and CFR.  For example, under the old FOB rules, risk transferred from seller to buyer when goods passed over the ship's rail at the port of shipment.  Under the new FOB rules, risk will transfer once the goods are actually on board the ship.

Terminal Handling Charges

Under the old Incoterms 2000, some buyers were at risk of being double charged for terminal handling as freight costs were often included in the sale price of the goods, but buyers were also being charged carriage costs within the port or terminal facilities.  The new Incoterms 2010 attempt to clearly allocate costs to avoid double charging the buyer.

Insurance

The new Incoterms 2010 reflect the most recent updates to the Institute Cargo Clauses.  The Incoterms 2010 also attempt to clarify the parties' obligations under contracts of carriage and insurance.

Security-related clearances and required information

In recognition of increasing security concerns with the movement of goods, the Incoterms 2010 have allocated obligations of the buyer and seller to obtain, or assist in obtaining, certain security-related information.  The new Incoterms 2010 also impose a level of collaboration between buyers and sellers that was not previously required

Electronic Communication

Where it is customary or where the parties so agree, the new Incoterms 2010 give electronic records and procedures the same effect as paper communication.  The new rules regarding electronic communication are intended to provide for greater incorporation of electronic procedures in the future.

String Sales

In the sale of commodities, goods are typically sold multiple times during transit in a "string" of sales contracts.  Because the goods have already been shipped by the first seller in the string, sellers in the middle of the string do not "ship" goods within the meaning of the Incoterms.  A seller in the middle of the string "procures" the goods.  As such, the new Incoterms 2010 include rules addressing the procurement of goods.

For further details of the changes made to the Incoterms or of the potential sales tax implications of such changes, please contact the author.