After much fanfare, the text of the Incoterms 2010 has been recently released. The International Chamber of Commerce has done quite a good job of marketing the new rules before they take effect on 1 January, 2011.

 

It must be remembered at the onset that the Incoterms 2010 are a voluntary set of rules requiring specific incorporation into the contract for these to apply. It should also be remembered that Incoterms are one part of the contract and not the whole contract, and in particular, they say nothing about the price to be paid or the method of payment that is used in the transaction. Furthermore, Incoterms 2010 do not deal with the transfer of ownership of the goods, breach of contract, or product liability; all of these issues need to be considered in the contract of sale. It must also be remembered that Incoterms 2010 cannot override any mandatory laws.

 

There are some considerable changes that the new version of Incoterms brings us. We have gone from 13 to 11 terms. However, it has not simply been an exercise of deleting two terms. Gone are DAF, DES, DEQ and DDU; they are replaced by two new terms: DAT (Delivered at Terminal) and DAP (Delivered at Place). There are also changes to the grouping of Incoterms.

 

Incoterms 2000 has four groups, as shown in Table 1.

 

 

Under Incoterms 2010 we will have only two groups as shown in Table 2.

 

 

DAT replaces the current DEQ, and DAP replaces DAF, DES and DDU.

 

As in previous editions, the Incoterms text has been laid out in a mirror-like fashion in a logical order. Each term is preceded by guidance notes that, although not part of the rules as such, provide useful background to the application of a particular term. The seller's obligations are matched by the buyer's obligation, as each party takes on rights, duties, obligations and responsibilities on a mutually exclusive basis. As an example of the mirror-like approach, Clause A4 for the seller concerns "Delivery," and this is matched by Clause B4 for the buyer that concerns itself with "Taking Delivery." It is therefore quite easy to compare the different clauses across each of the 11 terms as they are consistently used.

 

There have been some general additions to the clauses in the Incoterms 2010, and these relate to security clearances instituted in the post 9/11 world. Under the umbrella of "Securing the Supply Chain," a number of initiatives have been, and are being, implemented across the globe that affect procedures relating to the provision of information to border control authorities, such as the 24-hour rule that was initially implemented in the United States and has been followed by China, with others also expected to come onboard with similar border control approaches.

 

Another area that the International Chamber of Commerce focused on was a division of costs. This has always been problematic as there is a real possibility that the buyer may end up unwittingly paying twice for some transport related fees. For example, this could happen when the seller contracts for pre-paid carriage, and the terms of carriage incorporate the movement of a consignment within a port or container terminal facility at destination. Yet the terminal operator or the carrier may charge additional fees to the buyer at destination. Of course, the buyer has already paid for these in the price of the goods and will therefore be double hit where the additional fees are levied at destination. It is therefore important for buyers to be vigilant about the sorts of carriage contracts that they negotiate with the sellers to avoid a doubling of some fees as this goes straight to the bottom line.

 

The DAT term means that the seller retains all risks in the movement of the goods until they are delivered, that is, until the goods are unloaded from the arriving vehicle (road, rail, sea or air), and placed at the disposal of the buyer at the agreed named terminal in the destination country. The seller is also responsible for the transport of the goods through any transit (third countries). The seller therefore must enter into a contract of carriage and is also responsible for export clearance, but the seller is not responsible for import clearance.

 

The DAP term means that the seller retains all the risks in the movement of the goods until they are delivered, but unlike DAT, the unloading of the goods from the arriving vehicle (road, rail, sea or air), is the responsibility of the buyer. The seller must enter into a contract of carriage and is also responsible for export clearance but is not responsible for import clearance.

 

For sea and inland waterway transport, the biggest change has been in the FOB term, and therefore CFR and CIF. The notion of the "ship's rail" is dead. No longer will we have to concern ourselves with the risk-in-transit swinging to and from the seller and the buyer across some imaginary line that extends perpendicularly from the ship's rail into the stratosphere. What we will have is a different notion, and that is the risk passing when the goods are onboard the vessel. This means the whole consignment has been loaded. Should half a consignment be loaded and the ship sinks, then complete loading presumably won't have occurred and risk won't have transferred to the buyer. This is likely to cause buyers to want to insist on shipped onboard notations on maritime transport documents. Where receipt for shipment bills are issued, this is prudent in any case, but when shipped onboard bills are issued, there should be no need for the additional notation. However, it will be interesting to see how buyers perceive the Incoterms 2010 once they become effective. It will be even more interesting to see the reaction of bankers in relation to the change in the risk transfer point under FOB, CFR and CIF, and how they will react to the documentary data requirements under letters of credit.

 

One very important point to note for traders is that sea and inland transport terms—namely FAS, FOB, CFR and CIF—are not recommended for use where container traffic is concerned. This is because the practicalities of container handling are not suitable to the risk transfer point provided by these terms. Actually, I have been crusading for this to be the case for the past 20 years, since the Incoterms 1990 were released. I am sure I am not alone in this crusade, but there are many others who have not yet heeded the call to move away from these terms whilst engaging in container movements. It may well be left to those of us who have an appreciation of what the International Chamber of Commerce is trying to convey with these terms to educate training partners in the correct use of terms that are relevant to container traffic. In some respects the continued use of FOB for containers is probably understandable given that containers didn't come into operation until the 1960's, a mere 50-year lifespan, yet shipping had been going on for several millennia. However, it's time to update, boys and girls, and therefore let's no longer use FAS, FOB, CFR and CIF for container traffic.

 

Evidence of insurance requirements to be provided to the buyer are only applicable in CIP and CIF terms, and they roughly follow the current Incoterms 2000 requirements other than it should be noted that a new set of Institute Cargo Clauses now applies that wasn't in existence when the Incoterms 2000 was released.

 

In summary, sellers and buyers are advised to obtain a copy of the Incoterms 2010 text and study these prior to their effective date of 1 January, 2011, paying particular attention to the obligations that each party has in relation to the delivery, contracting for carriage (and insurance where applicable), and barrier and security clearance formalities. Traders will need to review their current arrangements and follow the recommendations of the International Chamber of Commerce, particularly as these relate to the sea and inland waterways transport, remembering the change in the risk transfer point—the death of the ship's rail—and avoiding FAS, FOB, CFR and CIF for container shipments.

 

No doubt, as the Incoterms 2010 start to be used, issues will arise in their use and interpretation among the parties. It is always better to be prepared and have a meaningful dialogue during the pre-contractual negotiations rather than leaving the problem to be sorted out after the proverbial you-know-what has hit the fan.

 

Good luck and happy Incoterms 2010 reading!