Incoterms 2010-A detailed commentary

Meaning and Purpose of Incoterms

Incoterms is the abbreviation for International Commercial Terms.

“Provide a set of international rules for the interpretation of  the most commonly used trade terms in domestic/foreign trade.”

Incoterms reduce uncertainty and “interpretation slippage” as parties are often   unaware of each other’s different trading practices-they enable parties to know each others’ rights and obligations

Present edition (2010) came into effect w.e.f 1.1.2011 and contains 11 Terms

ICC (International Chamber of Commerce, Paris) first published Incoterms in 1936.  Later amendments in 1953, 1967, 1976, 1980, 1990, 2000 and 2010.

Remember: Incoterms

• Do not deal with ownership/title to the goods
• Do not deal with payment terms
• Do not deal with payment methods
• Do not replace Contract of Sale 

Passing of title (also called ownership/property of goods) is a complex issue and depends, among other things on various  ‘national’ laws-it is for this reason that Incoterms deal with “risk” rather than “title/ownership” - This ‘ risk’ vs. ‘title’ dichotomy often leads to very contentious issues and it is important that a detailed Contract of Sale is in place

Using Incoterms  Correctly

1. Remember - Incoterms are NOT the main contract of sale- Incorporate Incoterms® 2010 into your contract
2. Use the term appropriate to the goods
3. Use the term appropriate to the transport required -e.g., term suitable for airfreight)
4. Decide who will organise transport - e.g., domestic transportation in Seller’s &/or Buyer’s country, international (main) voyage
5. Decide who will organise Insurance (if required) -See *
6. Consider local customs or practices at the port or place
7. Specify Place as precisely as possible-Point/Port/Place to be described precisely
8. Some terms do not fit in with Documentary Credit term
9.  Some terms are not very appropriate for containerized goods (e.g. FOB)

* Who bears the risk during each stage of transportation? Is insurance premium included in the Invoice? Do both seller and buyer have insurable interest (direct/contingent interest) etc

Why Incoterms 2010?

• Need to respond to current trading practices/global trend
• Feedback from users of Incoterm
• Changes in US Legislations

For example:

Ø  Growth of Customs Free Zones. For example EEU (does not have a customs boundary between member countries)-Incoterms 2000 did not deal with such issues adequately

Ø  EDI: Incoterms 2000 dealt with it but a decade ago, EDI was costly and used by large corporations. Today EDI is common place.

There was a need for Incoterms that did not require customs’ clearance at all to respond to inter-European Union trade and other regions where customs procedures are not required. 2010 edition only mention that clearing for import/export is required “where applicable.”

Key Changes in 2010 edition

1. The structure of the terms has changed. 2000 started with ExW , going then to F and C terms and ending with D terms

Within these families of terms, the maritime terms appeared first. The main concern was possibility of mis-use of Incoterms

In particular the choice of maritime terms where point of delivery intended or eventual destination was “inland” point. For example FOB Manchester or CIF Frankfurt would lead to mismatch between the sale contract and carriage or insurance contracts.

 

Therefore 2011 cluster the 11 terms under two headings: 

• Rules for any mode of carriage (to be used when intended where either the intended point of delivery or the intended destination (or both) is an inland point rather than a port)

• Rules for sea and inland water way transport ( to be used when intended point of delivery and/or destination is a port. 

Under 2010 edition, it is not so much the mode of carriage but the points of delivery and destination which is important

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. This was an archaic term and often caused confusion

Now it is truly “free on board” rather than “free on rails”

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

5.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-including providing information in advance about goods, scanning/inspection of goods.

6.2000 edition took note of a number of developments in Electronic Communication. 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

Note: Rule A1 appears in all 11 terms.

In 2000 edition of Incoterms, all kinds of electronic documents were mentioned and strewn across all terms.In 2010 deals only with the concept of electronic documents. It now accepts the functional equivalent of paper documents. 

 

EDI and Incoterms

EDI allows one company’s computer system to be connected to those of its trading partners

The difference between EDI and electronic mail or other private computer networks is that EDI involves the transmission of standardized messages, like invoices between two companies

With the help of a single software a company can communicate with hundreds of other clients, suppliers

EDI is thus a computer-to –computer transmission of electronic messages often in substitution of paper documents that were previously mailed or faxed

It leads to instantaneous transmission of data-suitable for “just in time” era

It enables quick ordering of goods and services and can reduce warehousing and inventory

Hurdles

• EDI lacks a fully functional universal standard though UN’s EDIFACT (EDI for Administration, Commerce and Trade) may eventually become a standard 
•  Legal uncertainties
•  Lack of awarenessCommercial Resistance
•    One of the principal application of EDI technology to business is in the transportation sector. 
• Therefore 2010 Incoterms  provides for electronic  documents (instead of paper documents)  if either mutually agreed by parties or where customary. 

• CMI system of Electronic B/L: A B/L is negotiable. It can be endorsed. The electronic solution to this has been the Private Key (i.e. a code known only to one party). Only the holder of this private key can give delivery instruction to the Carrier . With each sale, the carrier cancels the previous private key and issues a new one.
•  CMI system has been criticised since the Carrier is now repository of all confidential information and merchants have to depend on them.Bolero Project: (commissioned by the Commission of European  Communities). It has  developed CMI by  introducing an independent third party who will maintain a central register independent of seller, buyer and carrier. It also uses the mechanism of electronic signature.

7. String Sales

2010 recognises that these terms can now be used when a sale contract forms part of a string.

      Main Trade Associations were not recognizing Incoterms but commodity traders were using them in their contracts. Such an incorporation however caused a problem-A CIF seller in the middle of a string/high sea sale could not meaningfully be said to be under a "duty to ship" goods already shipped by another seller upstream or to make a contract a of carriage already concluded by some other seller upstream.      Incoterms 2010 has addressed these issues: rather than ship goods and make a carriage contract, a    seller in a string can procure goods high seas and procure carriage contract high seas and fulfill his obligation to the subsequent buyer downstream

l

	You will find mention of string sales only in maritime Terms (FAS, FOB, CFR and CIF)

 

8. Incoterms 2010 has deleted a few and introduced two new terms:

DAF (Delivery at Frontier)	Replaced by DAP
DES( Delivered Ex Ship)	Replaced by DAP
DDU( Delivered Duty Unpaid)	Replaced by DAP
DEQ (Delivered Ex Quay)	Replaced by DAT

Structure of New Incoterms 2010

2011 Edition-11 Terms

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

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

In all the Incoterms, the risk passes from seller to buyer at the point of delivery i.e, when seller completes his delivery obligation Remember: In some terms the seller pays for the freight  & enters into Contract of Carriage but he does not bear the risk during the main voyage (eg. CFR, CIF, CPT, CIP)

l  The trend towards Delivery terms instead of maritime terms for manufactured goods. 

–        View large annual turnover and constant flow of goods, the exporter finds it easier to entrust carriage of his goods in various directions of the globe to a logistic provider

–        The logistic providers would like to communicate continuously with their original contracting party.  If such a party is the Seller, then they advise the seller to control carriage and delivery to buyer.

–        The seller is in a better position to bargain a cheaper freight and also control quality of carriers.

A reputed car manufacturer reportedly said “ Although I may be relieved of the risk of damage to my cars sold under an FOB contract, I am not pleased to see how they are being damaged when hopeless efforts are made to squeeze them into a cargo hold of a wholly inappropriate ship.” 

2000 Edition	2010 Edition
Group E-Departure Contracts (ExW)	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 Rules for Sea and Inland Waterway Transport Only  CFR - Cost and Freight  CIF - Cost, Insurance and Freight  FAS - Free Alongside Ship
Group F- Main Carriage Unpaid FCA Free Carrier(...Named Place) FAS Free Alongside Ship (..Named Port of Shipment) FOB Free on Board(..Named Port of Shipment)
Group C- Main Carriage Paid CFR (Named port of Destination) CIF (Named port of Destination) CPT (Named port of Destination) CIP (Named port of Destination)
Group D -ARRIVAL DAF Delivered At Frontier(..named place) DES Delivered Ex Ship (..named port of destination) DEQ Delivered Ex Quay (..named port of destination) DDU Deliverred Duty Unpaid (..named place of destination) DDP Delivered Duty  Paid (..named place of destination)

Incoterms 2010-Categories of Obligation

Only in CIF and CIP, insurance by seller is ‘mandatory’.

Again unless otherwise agreed, seller obliged to only provide ICC(C) cover, not ‘all risks’

ICC (A) /War & SRCC covers: needs to be agreed 

Passing of risk of loss or damage 

Explanation of some of the Terms

Ex Works (ExW)

 Risk transfer takes place usually at the Seller's premises (unless otherwise agreed, loading on board the lorry is buyer's responsibility).


Free Alongside Ship (FAS)

The risk transfer takes place when goods are delivered alongside ship -it could be the quay or even onboard a barge at the named port of shipment.

FCA is a better option if goods are containerised

Free on Board (FOB)

To be used only for sea or inland waterway transport

Not suitable for container shipments or where the seller “hands over” goods to a carrier before they are placed on board

Free on board means the seller delivers the goods on board the vessel nominated by the buyer at the port of shipment or procures the goods already so delivered.

The risk of loss or damage passes when goods are on board the vessel, and the buyer bears all costs from that moment

The seller is not required to arrange a contract of  carriage or a contract of insurance.

It appears that unless the entire contracted quantity is not placed on board, the risk would be on the seller. Therefore if few of the goods have been placed on board but the rest is still awaiting loading, the risk has not passed to the buyer even in respect of goods that have been loaded.

Note: But what is “placing the goods on board the vessel’? The default situation according to ICC clarification is when goods first rest on the deck of the ship. However Incoterms also refer to the ‘customary manner’ at the port and if the custom is to consider the goods to be on board when placed under a ship’s tackle, the position is different.

If goods are containerised, FCA should be used

Cost and Freight (CFR)

Same as FOB but vessel nominated by the seller who also arranges contract of carriage.

Remember that in CFR though the named port of destination is mentioned and freight paid accordingly (e.g, CFR London though the seller is in New York), the risk passes upon loading on board the ship

There are thus two critical points-one for passing of risk and another for passing of cost.

If goods are containerised, CPT should be used

Avoid mentioning date of delivery at destination (e.g, CFR London not later than XX/XX/2011). This defeats the purpose of CFR Incoterm which is a shipment contract. Bulk cargo is often carried these days from a point inland. In that case CPT should be used Freight may include loading & unloading charges but bulk cargo are often shipped on chartered vessel which is on FIO (free in /free out) terms i.e, shipment as per liner terms but chartered vessel allowed in contract

Cost Insurance Freight (CIF)

Same as CFR  but  seller also arranges contract of insurance.

There are thus two critical points-one for passing of risk and another for passing of cost. Risk passes as in FOB or CFR i.e, when goods are loaded.

Therefore CIF Antwerp  sale from Singapore does not mean the seller is at risk after loading.

INSURANCE:

CIF and CIP are the only terms where contract of insurance is mandatory

Seller fulfills his obligation by procuring a minimum cover -on ICC ( C) terms

Duration of Cover: must coincide with the carriage and must protect the buyer from the moment he has to bear the risk of loss or damage to the goods (i.e. when they are placed on board) until the goods arrive at the agreed port of destination.

Cover should be for Contract Price plus 10% which is to cover buyer’s profit

Sum Insured should be in the same currency as in the contract

This also means the insurance procured by the seller is for the benefit of the buyer. This raises some complex issues –can the unpaid seller claim from the policy if there is a loss or damage to goods during the transit?

If goods are containerised, CIP should be used

Carriage Paid to
CPT(insert named place of destination)

Same as FCA except in CPT the seller enters into a contract of carriage and pays the freight till destination.

Two critical points: One for risk transfer (when goods are handed over to carrier or any other person named by buyer) and another for cost transfer (agreed place of destination.

If FCA replaces FOB, then CPT replaces CFR.

Carriage and Insurance Paid to  CIP (insert named place of destination)

Same as CPT but seller additionally pays for Marine Insurance.

Under both CIP and CPT, if more than one carrier is involved and the parties do not agree on a specific point of delivery, by default the risk passes when goods are handed over to the first carrier.

More appropriate than CIF if containers used

NOTE:The ‘first carrier’  in CPT/CIP is the very first carrier independent of the seller (i.e., not the seller's own vehicle/vessel) with whom the seller has contracted for carriage according to a clarification from ICC

FCA and CPT

FCA	CPT
Seller delivers goods, cleared for export (if required) to carrier or other party nominated by buyer in seller's country	Is used instead of CFR when using containers
Can be seller's premises or another named place in the seller's country	Seller pays main carriage to destination but does not carry transport risk. Risk transfer when goods handed over to main carrier
Recommended for FCL and LCL container shipments	Buyer has main carriage risk though freight is controlled/paid by seller
First transport charges for seller's account. Subsequent transport, if any for buyer's account	If seller has a good marine insurance cover, then CIP can be used
Can be used for any mode of transit	Can be used for any mode of transit
Appropriate term when seller wants to only handle logistics in seller's country	Risk transfer can take place even at LCL or FCL container terminal i.e, once handed over to CFS or CY, the buyer carries the risk
Risk for seller in using L/C: buyer organises the main carriage and any non compliance with shipment date puts the seller at risk	Since seller has control over transportation, he carries less risk in case of L/C with a shipment date
Insurance: Must be clearly specified as Incoterm FCA is silent on this: Recommend proper pre and post shipment risks to be covered apart from main voyage.	Insurance: Must be clearly specified as Incoterm FCA is silent on this: Recommend proper pre and post shipment risks to be covered apart from main voyage.

FCA: the “critical point” that determined passage of risk from seller to buyer now before ship’s rail to an inland point In FCA, this inland point can be within or outside the port area in the country of shipment.

DAT and DAP

DAT	DAP
Replaces DEQ	Replaces DAF, DES and DDU
Terminal "is intended to have a broad meaning including any wharf, quay, warehouse, rail/road/air terminal, container yard. It include any place whether covered or not but a terminal cannot be "simply an open field; there must be some organization of the space for receiving goods" (see ICC website)
Delivery takes places in Buyer’s country-can be the Buyer’s premise also	In Incoterm DAP, the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination (could be a port) This is exactly what the old Incoterm DDU stipulated.
Delivery is complete when the goods are unloaded from the “arriving means of transport” and are placed at the disposal of the buyer at the named terminal or place at named port/place at destination For example, DAT can be useful when containers are unloaded into a Container Yard/Stack at the terminal (as opposed to Buyer's premises) awaiting further transit/shipment.	An appropriate example would be the container on a lorry arrives at the buyer’s warehouse (import cleared) and the buyer can now arrange for its unloading. Similarly the container is unloaded from the carrying vessel  into a port not unloaded or import cleared.
The essential difference between Incoterm DAT and DAP: DAT: goods have to be unloaded by the Seller DAP: Goods are to be unloaded by the Buyer

It is interesting to note:

1.      that Incoterms DAT and DAP are rules that are applicable to any modes of transport and

2.       that these rules replace Incoterms that were exclusive to sea and inland waterway transport.

This is indicative of a trend towards international multi-modal transport, which is reflected in international documents such as the United National Convention on Contracts for the international Carriage of Goods wholly or party by Sea (The Rotterdam Rules).

DDP (Insert name of destination)

Rule can be applied irrespective of mode of transport and can also be used where more than one mode of transit is employed.

DDP means seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport ready for unloading at the place of destination.-same as 

DAP but in DDP seller is responsible for import/customs formalities and pays the duty.

Till the above deliver takes place, goods at seller’s risk

Note: In my book Insuring Cargoes, there is a detailed commentary on appropriate insurance for the seller and buyer respectively under each Term. Since publication of the book, new Incoterms 2010 have come into effect and as part of my consultancy I advise my clients changes to be made to their open cover to reflect new Incoterms 2010. In the various workshops that I conduct, I also provide case studies to determine which Incoterm is appropriate in a given situation besides highlighting several practical problems while interpreting Incoterms.