Incoterms 2000 & 2010

Incoterms 2000 & 2010 .

“The Incoterms rules are a perfect example of an efficient standardization of an international business tool. Their day-to-day use in international sales contracts brings legal certainty to business transaction while simplifying the drafting of international contracts.” - Emmanuel Jolivet General Counsel of the International Court of Arbitration

Main changes in INCOTERMS 2010 • Removal of four terms (DAF, DES, DEQ and DDU) • Introduction of 2 new terms (DAP - Delivered at Place and DAT - Delivered at Terminal). • Creation of two classes of INCOTERMS - (1) rules for any mode or modes of transport and (2) rules for sea and inland waterway (INCOTERMS 2000 had four categories). • Rules which are able to serve both domestic and international trade. • Express reference to the use of "equivalent electronic records", if the parties agree or it is customary.

Main changes in INCOTERMS 2010 • Amended insurance cover to reflect the alterations made to the Institute Cargo Clauses. • Allocation of parties' respective obligations to obtain or to provide information in order to obtain security-related clearances. • Responsibility for Terminal handling charges expressly allocated. • Including an obligation to "procure" goods to reflect current practices in string sales.

Removal of four terms from INCOTERMS 2000 • Delivered At Place (DAP) which should be used in place of DAF, DES and DDU; and • Delivered At Terminal (DAT) which replaces DEQ. • These terms may be used irrespective of the agreed mode of transport. • Part of the reasoning for fewer terms/simplification was that traders often chose the "wrong" term or muddled terms, leading to contradictory or unclear contracts.

Creation of two, rather than four categories of terms • The 11 terms have been categorized under two categories: • Deliveries by any mode of transport (sea, road, air, rail) - EXW, FCA, CPT, CIP, DAP, DAT and DDP. These may all be used where there is no maritime transport at all; and • Deliveries by sea/inland waterway - FAS, FOB, CFR and CIF. • This, again, is to make the new INCOTERMS easier to use.

DAF, DES and DDU replaced by DAP: Delivered at Place • DAP replaces what were DAF, DES and DDU and can be used in any situation where such terms were used previously. The rationale for this consolidation was that the INCOTERMS 2010 drafting committee felt that DAF, DES and DDU were all similar in scope and that there was often confusion about the appropriate D-term to use. • Of the legacy terms, DDU is most similar to the new DAP which is to be used when goods are delivered on the arriving means of transport, ready for unloading by the buyer, at the named place of destination, but not import cleared. • Risk is materially the same.

DEQ replaced by DAT: Delivered at Terminal • DAT replaces DEQ and should be used where DEQ would have been used previously. DAT is primarily for use in the sale of containerized goods, which are delivered by unloading them from the arriving means of transport and placing them at the disposal of the buyer at the named port or place of destination. Note that "terminal" replaces "quay" as a global change and includes any place, whether covered or not, such as quay, warehouse, container yard or road, rail or air cargo terminal. Both DAP and DAT may be used irrespective of the mode of transport employed. • Risk is now explicit that the risk is with the buyer if the buyer fails to obtain import authorization.

Adapted Rules • The new INCOTERMS are expressly stated to be for "both domestic and international trade". In fact, this is stated on the front page! This is achieved by statements within the rules that the obligation to comply with export/import formalities only exists where applicable. • For trade blocs (eg the EU) where "border" formalities have largely disappeared and in the US, where there has been an increasing willingness to use INCOTERMS rather than the former Uniform Commercial Code shipment and delivery, the new terms are now easier to apply.

Electronic Records • The buyer's and seller's obligations to provide contractual documentation may now be by "electronic record if agreed between the parties or customary", reflecting recognition by the ICC of the increasing importance and contractual certainty (owing to speed of transfer) provided by electronic communication. These will also "future-proof" INCOTERMS 2010 as electronic procedures/communications develop over time.

Institute Cargo Clauses • Where an INCOTERM requires that one party obtain insurance, the insurance requirements have been amended to reflect the changes to the Institute Cargo clauses. The parties' obligations regarding insurance have also been clarified.

Security • The issue of security of goods /vessels, etc, is now at the front of most people's minds when considering international trade. Given that many countries now require heightened security checks, the rules now require that both parties are obliged to provide all necessary information (e.g. chain of custody information) in order to obtain import/export clearance. The previous INCOTERMS did not require this degree of co-operation.

Terminal Handling Charges • Where the seller is required to arrange and pay for the carriage of the goods to an agreed destination (CIP, CPT, CFR, CIF, DAT, DAP and CCP) it may be the case that terminal handling charges are passed on to the buyer as part of the contractual price for the goods. However, historically, in come cases, the buyer also had to pay the terminal for this service (i.e. a double charge). • INCOTERMS 2010 has attempted to remedy the situation by clarifying who is responsible for terminal costs. It remains to be seen, however, whether this will put an end to the double charging previously experienced.

String Sales • In contracts for the sale of "commodities", as opposed to manufactured goods, it is often the case that a cargo is on-sold a number of times during transit (i.e. a string sale). In such situations, sellers in the middle of the string do not ship the goods, as the goods have already been shipped by the seller at the top of the string. As such, the obligation on sellers in the middle of the string is to procure goods that have been shipped. The new INCOTERMS clarify this by including an obligation to "procure goods shipped" as an alternative to the obligation to ship goods.

FOB and CIF - Key Terms/Changes • As with all of the terms in the new version, there are diagrams at the start of the FOB and CIF sections, which helpfully indicate where "delivery" occurs (e.g. on board the vessel) and what to put after the term (i.e. named port of shipment or named port of destination). • Similarly as with all of the terms, any of the documents which the seller and buyer are required to provide may be supplied electronically "if agreed between the parties or customary". While this may be a good idea in practice, to ensure speed and consistency, a party who wishes to insist on paper documentation should make that clear in the sale contract.

FOB (Free on board) • The seller owes no obligation to the buyer to make a contract of carriage, as this is normally the responsibility of the buyer. However, the new INCOTERMS provide that if requested by the buyer or if it is commercial practice and the buyer does not give a timely instruction to the contrary, the seller "may" contract for carriage on usual terms at the buyer's risk and expense. Equally, the seller may decline to do so but "shall promptly notify" the buyer. • Therefore the new FOB INCOTERM requires a notice from the seller in trades where it may be "commercial practice" for the seller to arrange carriage. Logically, we think that it is preferable for the seller to exclude this unless the seller wishes to have an option to ship e.g. "buyer to arrange carriage in all circumstances". The alternative that you see in many contracts is, if the buyer does not tender a vessel, the seller has a right to store at load port and be paid against warehouse receipts - this requires express wording in the sale contract.

FOB (Free on board) • The transfer of risk provision remains the same, aside from the clarification that risk passes when the goods are on board the vessel, not when they pass over the ship's rail. • INCOTERMS 2010 provide that the seller must actually pack the goods; under the previous Terms the obligation was only to provide packaging. In relation to the costs of "checking operations", the new Terms now provide that the cost of any pre-shipment inspection required by the authority of the export country is part of the costs that the seller must bear. Express terms should be used if the parties wish to allocate costs differently.

CIF (Cost , Insurance and Freight). • The buyer must now provide the seller (upon request), with any information necessary for the seller to procure any additional insurance as request by the buyer and the seller must provide the buyer with the insurance policy or other evidence of insurance cover, as well as any information that the buyer needs to procure any additional insurance. • The seller has to bear all risks of loss of or damage to the goods until they have been delivered on board the vessel. The concept of the "ship's rail" has been abandoned, given the uncertainty of when goods actually pass the ship's rail.

FOB/CIF Variants • INCOTERMS 2010 has not made any provision for "refined" FOB/CIF terms, for example CIFFO, CIF Liner Terms or FOB stowed/trimmed. If a party wishes to contract on these terms, it must explicitly provide for this in the sale contract.

To Summarize : Incoterms 2010 • In the future, instead of 13 clauses, there will only be 11.• These are divided into two categories:Clauses for all types of transport: EXW, FCA, CPT, CIP, DAT, DAP, DDPClauses for sea and inland water transport: FAS, FOB, CFR, CIF• The DAT and DAP Incoterms replace the former clauses DEQ, DAF, DES and DDU.• Pursuant to Incoterms 2010, for clauses FOB, CFR and CIF, goods are regarded as having been delivered as soon as they are on board the ship, and not as previously, at the reeling of the ship.

Conclusion • INCOTERMS 2010 does not represent a major departure from INCOTERMS 2000 in respect of FOB, FAS, CIF and CFR terms, rather they have been refined and clarified for ease of understanding and use. Parties should still include express terms where they are of particular importance or where INCOTERMS does not cover the issue.

Incoterms 2000 & 2010