The ICC reviews INCOTERMS from time to time to ensure that they reflect and respond to current trade practices and trends. INCOTERMS 2010 will be the eighth revision of INCOTERMS since their inception in 1936.

This client alert looks at what you need to know about INCOTERMS 2010 and what you need to do next. We will follow this alert with a detailed review of changes within the next two weeks.

The Basics

What is INCOTERMS?

A series of internationally recognised standardised trade terms published by the International Chamber of Commerce (ICC) and widely used in international sales.

What do INCOTERMS cover?

Who does what/who pays for what/when risk in the goods passes from seller to buyer/when delivery occurs, as well as issues such as insurance, export and import clearance and the division of other costs pertaining to the delivery of goods.

There is nothing on ownership/title to the goods, nothing in detail on payment obligations (when/how/what security/against what documents) nothing on detailed vessel requirements, force majeure, termination, insolvency...In short INCOTERMS do not constitute a complete contract of sale, but rather provide convenient, internationally recognised rules for the sale of goods.

How are they used?

They are incorporated into many contracts by express reference (e.g. "DAP one safe berth Rotterdam, INCOTERMS 2010") or are referred to in standard contracts (eg SCoTA - "FOB means free on board as defined by INCOTERMS 2000"). They may also provide some guidance as to the generally accepted meaning of trade terms such as CIF/FOB/DES¹ but you must expressly refer to them if you want them to apply.

Why are they changing?

To take account of the spread of customs-free zones, the increase in use of electronic communications, concerns about security following 9/11 and latest developments in trade since the 2000 version.

When are they changing?

Publication date for INCOTERMS 2010 was 27 September 2010, with the new rules coming into force from 1 January 2011.

What about contracts already entered into?

For existing contracts, INCOTERMS 2000 will continue to apply even if performance of the contract will be made in 2011.

For contracts entered into between September 2010 - January 2011, parties should expressly say which set of INCOTERMS is to apply.

After 1 January 2011, it will be assumed any reference to "INCOTERMS" in new contracts is a reference to INCOTERMS 2010.

Do I really need to bother about INCOTERMS 2010?

It depends on your usual contract terms. GAFTA/FOSFA/Sugar (SAL/RSA) contracts do not incorporate INCOTERMS at all, so you can ignore the change! Standard petroleum product contracts (BP/Exon Mobil) refer to INCOTERMS, as do many Ethanol, coal and metals contracts, so you will need to:

• check your standard contract forms;
• consider changes in 2010 INCOTERMS;
• make any necessary consequent changes (for example changing DES to DAP) to your standard forms for new contracts; and
• publicise the changes to your counterparties and to your traders/execution people.

1.  Removal of four terms (DAF, DES, DEQ and DDU) and introduction of 2 new terms (DAP - Delivered at Place and DAT - Delivered at Terminal).
2.  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).
3.  Rules which are able to serve both domestic and international trade.
4.  Express reference to the use of "equivalent electronic records", if the parties agree or it is customary.
5.  Amended insurance cover to reflect the alterations made to the Institute Cargo Clauses.
6.  Allocation of parties' respective obligations to obtain or to provide information in order to obtain security-related clearances.
7.  Responsibility for Terminal handling charges expressly allocated.
8.  Including an obligation to "procure" goods to reflect current practices in string sales.

1.  Removal of four terms from INCOTERMS 2000

The onward march of containerisation and point-to-point deliveries appear to have persuaded the ICC to introduce two new "Delivered" terms:

• 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.

2.  Creation of two, rather than four categories of terms

The 11 terms have been categorised 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.

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.

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. This will also "future-proof" INCOTERMS 2010 as electronic procedures/communications develop over time.

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.

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.

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.

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.

Conclusion

We expect INCOTERMS 2010 to be well received by the trade. However, as with any change, work will be required within trading companies to make sure that they are ready for this change and have made the necessary amendments to their standard contracts going forward. If this work is not done, this is a potential recipe for disputes.

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1. N.B. INCOTERMS 2010 replaces DES with DAP. This is explained further in this alert.