Incoterms 2010-a brief commentary

Each decade or so, Incoterms are revisited based on queries and suggestions received by the ICC.

What prompted the revision to Incoterms 2000 and what are the highlights of the latest revisions as incorporated in Incoterms 2010? What are the key changes relevant from an insurance point of view?

1.Let us first understand the structure of the new Incoterms:

The 2000 edition had 13 terms where as the 2010 edition has only 11 terms: DAF, DES, DEQ and DDU have been removed as they are seldom used. DDP has been retained and 2 new ones viz., DAT (delivery against terminal) and DAP (delivery against place) added which could well serve the void created by DES, DEQ etc.

While Incoterms 2000 had four categories, Incoterms 2010 only has two categories:

Rules for Any Mode (or modes) of Transport
CIP - Carriage and Insurance Paid
CPT - Carriage Paid To
DAP - Delivered At Place
DAT - Delivered At Terminal
DDP - Delivered Duty Paid
EXW - Ex Works
FCA - Free Carrier

Note: Same as 2000 but DAP and DAT added

Rules for Sea and Inland Waterway Transport Only
CFR - Cost and Freight
CIF - Cost, Insurance and Freight
FAS - Free Alongside Ship
FOB - Free On Board

Note: Same as 2000 but DES and DEQ deleted

This could be illustrated pictorially: (the star denotes the point of delivery):

Note: The delivery points appears identical in many of these terms (just as they are identical in CFR , FOB and CIF ). The difference lies in who nominates the conveyance and/or who pays for the freight

Use of an inappropriate term can cause lot of disputes. For instance, using FOB or CFR term when container has been stuffed and delivered at an inland depot by the Seller and the containers are now no more in his care, custody and control. The FOB seller would be in no position to guarantee that the container will be loaded on the vessel nominated by the buyer. You also have the possibility of disputes –did the loss or damage to goods (inside a container) take place before the FOB point or after? This thorny issue cannot be eliminated in any of the Incoterms (barring EXW or DDP) but at least the use of Category terms would minimise the problem.

2. One key change that has taken place is the removal of “ship’s rail” as a critical point to determine the passage of risk of loss or damage to goods from seller to buyer in the case of FOB, CFR and CIF.

This was an archaic term and often caused confusion. For instance, in my book I have pointed out two possible criticisms that could be levelled against using ship’s rail. First, in bulk cargo (e.g, bulk oil), how does one determine when a particular portion of cargo passed the ship’s rail? Second, there have been cases where the cargo/container has swung across ship’s rail but crashed onto the hold and become a total loss. The goods crossed the rail and hence they were at buyer’s risk. This could lead to disputes. For instance the Letter of Credit might call for a clean on board B/L whereas no B/L was issued in this case. How does the buyer pay for the goods then without the B/L. Therefore this change in 2010 edition (whereby the risk passes not at ship’s rail but when deposited on board the vessel) is a very welcome change indeed.

3. Taking stock of the growth of Customs Free Trade Zones (the most apt example being EEU) E.g., the new rules recognise that there is often no customs’ boundary. The new terms therefore use the expression Custom’s boundary, if any.

4. In 2000, a number of developments in Electronic Communication had taken note of. At that time EDI was a high level and expensive form of transferring documents electronically. Only large companies could afford that format. During the last 10 years, Electronic Communication has become common place and easily affordable. This development finds a reflection in the 2010 edition

5. While 2000 edition was intended for International trade, the 2010 terms are applicable for both domestic and international trade.

6. Due to the events of September 11 and other subsequent events governments are careful to take stringent actions against terrorist activity especially transfer of goods across borders. Now Incoterms cast responsibility on one of the parties to ensure adequate documentation in this regard.

7. The Institute Cargo Clauses were revised and a new set of Clauses dated 2009 were introeduced. Incoterms 2010 takes into account these changes.

8. There is a mention of "string sales" . Often commodities are sold on high sea. Therefore there is a mention of merchants "procuring goods" as opposed to "shipping goods."

 I wish there was clarity as to whether the entire contracted quantity has to be on board (in FOB, CFR and CIF) or risk passes as and when goods are being loaded. I have written in detail about this in my book. Maybe the drafters of Incoterms would prefer this to be taken into consideration in the Sale Contract of which Incoterms is just a part.

These are my thoughts on the first review of the new Incoterms. Your comments would be most useful to me and other readers. I have some queries with regard to the new terms and will try to seek a clarification from experts. Watch this space!