Talk of the Trade
Incoterms 2010 simplify the rules
by Bill Armbruster
Incoterms are a vitally important component of international trade. They are an internationally recognized set of terms that define which party in a transaction is responsible for arranging transportation and insurance, the point at which the seller delivers the goods to the buyer, and the costs that each party is responsible for.
“Delivery” means the point at which the seller hands over responsibility for the goods to the buyer. It does not necessarily refer to the arrival of the goods at a specific physical destination.
It’s essential that you or the person in your company responsible for negotiating a contract understand Incoterms. If not, you could be stuck with a horrible loss.
But understanding Incoterms – short for International Commercial Terms – and deciding which term should be incorporated into a contract of sale, isn’t always easy.
Now, however, it’s a simpler task, thanks to an updated version known as Incoterms 2010, just announced by the International Chamber of Commerce, which has the exclusive right to issue and define Incoterms. The new rules are spelled out in “Incoterms 2010,” a book that can be ordered from ICC Books USA. It has a separate chapter explaining the provisions of each Incoterm. The seller’s obligations are listed on left-hand pages, and the buyer’s obligations are listed on the right side. That makes it easy to compare each side’s responsibilities.
The biggest change with the new Incoterms, which take effect on January 1, 2011, is that the number has been reduced from 13 to 11, thanks to the replacement of four old terms with two new ones. Also, the ICC has grouped Incoterms 2010 into two distinct classes: seven that apply to any mode or modes or transportation, including multimodal, and four that apply only to maritime transportation. In the past, Incoterms were listed in order of responsibility for the seller and the buyer. Another important change is that Incoterms 2010 includes provisions for cargo security and electronic exchange of information. Perhaps most important for U.S. business people, the new Incoterms can be applied more easily to domestic transactions.
The new terms are DAT, standing for Delivery at Terminal, and DAP, Delivery at Place.
I’ll explain them and the other Incoterms below, but first I want to emphasize that Incoterms are not a contract of sale. For example, they do not specify the price of the goods or the method of payment. Nor do they deal with the transfer of actual ownership of the goods, or the consequences of a breach of contract.
Here is a list of Incoterms 2010. Those listed at the top place the least responsibility on the seller and the most responsibility on the buyer, while those listed below them place increasing responsibility on the seller and lower the responsibility of the buyer.
APPLICABLE TO ALL TRANSPORT MODES:
EXW – Ex Works. The buyer assumes all responsibility for the goods at the seller’s factory or warehouse. This term puts the least responsibility on the seller and is most suitable for domestic transactions.
FCA – Free Carrier. It requires the seller to deliver the goods to the carrier or another person nominated by the buyer at the seller’s premises or another place. It also requires the seller to clear the goods for export, if it’s an international transaction.
CPT – Carrier Paid To. It is similar to FCA, except that the seller must pay for transportation.
CIP – Carriage and Insurance Paid to. This is similar to CPT, except that it also requires the seller to pay for insurance covering loss or damage to the goods while they are being transported.
DAT – Delivery at Terminal. This is one of the two new terms. It means that the seller has accomplished the delivery when the goods, once unloaded from the arriving means of transport – whether vessel, aircraft, truck, train or pipeline – are placed at the disposal of the buyer at the specified terminal at the port or destination specified in the contract of sale.
DAP – Delivery at Place. This is the other new term. It is similar to DAT, except that delivery can be accomplished at any place mutually agreed upon.
DDP – Delivered Duty Paid. It is similar to DAP and DAT except that if it’s an international sale, the seller is required to arrange import clearance and pay any Customs duties.
APPLICABLE ONLY TO SEA OR INLAND WATERWAY TRANSPORT:
FAS – Free Alongside Ship. The seller completes its responsibility to the buyer once the goods are placed alongside a vessel at a port named by the buyer.
FOB – Free on board. This is similar to FAS, except that the seller is responsible for the loading of the goods.
CFR – Cost and Freight. This gives the seller the additional responsibility of paying for the waterborne transportation. However, it does not necessarily designate the port from which the goods are to be shipped, so the buyer has to negotiate that with the seller if it wants to include the port.
CIF – Cost Insurance and Freight. This is similar to CFR, except that the seller is also responsible for buying insurance. It’s also similar CIP, except that CIF only applies to marine transportation.
The four terms that have been dropped are DAF – Delivered at Frontier; DES – Delivered Ex Ship, DEQ – Delivered Ex Quay; and DDU — Delivered Duty Unpaid. DEQ was replaced by DAT; the others were replaced by DAP.
Frank Reynolds, the U.S. representative on the 9-member ICC commission that drafted Incoterms 2010, points out that the old rules – Incoterms 2000 – can still be used after January 1. He advises buyers and sellers to stick with the old rules until you and your partner are up to speed on the changes.
Reynolds will be conducting seminars on Incoterms around the country over the next few months. Information about the seminars, including the schedule, is available here.
The International Chamber of Commerce, based in Paris, represents business groups from more than 130 countries. Its U.S. affiliate is the United States Council for International Business.
About Bill Armbruster
Bill Armbruster, the anchor for the Datamyne Blog has covered shipping and trade for 30 years as a reporter and editor with The Journal of Commerce and Shipping Digest. “I’ll be blogging on headline news and current issues in oceangoing commerce, trying to shed some light on the backstories and, wherever I can, supply some sound advice for shippers.” Write to [email protected]
The opinions expressed in this article are those of its author and do not purport to reflect the opinions or views or Descartes Datamyne. In addition, this article is for general information purposes only and it’s not intended to provide legal advice or opinions of any kind and my not be used for professional or commercial purposes. No one should act, or refrain from acting, based solely on this article without first seeking appropriate legal or other professional advice.
Date posted: October 6, 2010