On January 1, 2011, INCOTERMS 2010 will replace INCOTERMS 2000, the current version of the ICC's International Commercial Terms. Since the introduction of INCOTERMS by the International Chamber of Commerce in 1939, the rules have undergone eight revisions in an effort to keep pace with the rapid expansion in global trade.

What are INCOTERMS?

INCOTERMS (International Commercial Terms) are widely accepted international rules applying to the tasks, costs, and risks involved in the delivery of goods.

According to Emmanuel Jolivet, General Counsel of the International Court of Arbitration:

"The INCOTERMS are a perfect example of an efficient standardization of an international business tool. Their day-to-day use in international sales contracts brings legal certainty to business transactions while simplifying the drafting of international contracts.”

INCOTERMS were devised to facilitate global trade by providing clear definitions of each party’s obligations, thus reducing the potential for legal complications.

INCOTERMS cover the "who, what, and when" of international goods sales and delivery, including:

Who does what
Who pays for what
When does risk pass from seller to buyer
When does delivery occur

In addition, the rules address insurance, export and import clearance, and the division of other costs pertaining to the delivery of goods between buyer and seller.

INCOTERMS do not cover ownership or title to goods, details of payment obligations, vessel requirements, termination, insolvency, etc. They do not constitute a complete contract of sale. Yet they are incorporated by express reference, or referred to in most international and many domestic sales contracts.

INCOTERMS are primarily relevant for companies involved in buying and selling goods (not services) internationally. The rules, however, are beginning to be incorporated into many domestic sales contracts as well.

Types of businesses which utilize INCOTERMS include:

Trading companies, especially exporters and importers
Marine and multimodal transport firms
Logistics companies
Financial services providing funding for trading companies

INCOTERMS 2010

An international committee of eight legal and international business experts appointed by the ICC, drafted the revisions to the current rules represented in INCOTERMS 2010. During the 2.5 year revision process, the committee considered more than two thousand recommendations from 130+ ICC member countries.

As a result, INCOTERMS 2010 was published on September 27, 2010 and will take effect on January 1, 2011.

The goal of the new INCOTERMS is to simplify the drafting of sales contracts by clearly defining some of the obligations of both buyers and sellers, thus avoiding misunderstandings, which might otherwise occur.

The 2010 revision recognizes the significant changes that have occurred in global trade since 2000, including:

Post 9/11 cargo security regulations
2004 revision of the U.S. Uniform Commercial Code
New Institute Cargo Clauses
Increase in electronic communications
Delivery, with respect to revenue recognition compliance
Spread of customs free zones
Increasing development of trade blocs (e.g. the European Union) where border formalities have largely disappeared

When INCOTERMS 2010 Applies

Existing sales contracts: INCOTERMS 2000 will continue to apply, even if performance of the contract will be made in 2011.
Sales contracts entered into between September and December 2010: Either the 2000 or 2010 versions can be used. The version the parties agree to utilize, however, should be expressly stated in the sales contract.
Sales contracts drafted after January 1, 2011: Any reference to “INCOTERMS” will be assumed to mean INCOTERMS 2010.

Key Changes Addressed in INCOTERMS 2010

The new INCOTERMS expressly state (on the front page) that they can be used for “both domestic and international trade.” The previous version did not refer directly to domestic sales.

The 2000 version of INCOTERMS had four classes: E, F, C, and D. INCOTERMS 2010 separates the terms into two groups: those that apply to all modes of transportation and those applying only to sea and inland waterway transport.

The 2010 version adds two new INCOTERMS – DAP (delivered at place) and DAT (delivered at terminal) to replace DEQ (delivered ex quay - duty paid). These were introduced to take into account new practices in containerization and point-to-point deliveries. The two new terms can be used for any agreed mode of transportation including sea, air, road, and rail.

Four INCOTERMS were deleted: DAF (delivered at frontier), DES (delivered ex ship), DEQ (delivered ex quay) and DDU (delivery duty unpaid).

Some other key changes:

Express reference made to the use of “equivalent electronic records”, instead of assuming only hard copies would be utilized.
Amendment to insurance cover to reflect changes in Institute Cargo Clauses.
Allocation of each party’s obligations regarding information required to obtain security-related clearances.
Expressly allocated responsibility for terminal handling charges.

Two categories of INCOTERMS 2010

The definitions of the terms (below) are paraphrased from various sources and are not intended as complete, legal or binding definitions. There are a number of organizations offering courses and/or books on INCOTERMS 2010. Before making any changes to your sales contracts, please contact a lawyer or other professional with experience in international trade and INCOTERMS.

INCOTERMS 2010 applicable to all modes of transport:

EXW ex works: The seller fulfills his obligation to deliver when the goods are made available at the seller's premises. The buyer bears all costs and risks involved in taking the goods from the seller's premises to his destination.
FCA free carrier (named place): Seller's obligation to deliver occurs when he has handed over the goods, cleared for export, into the charge of the carrier named by the buyer at the named place.
CPT carriage paid to: the seller pays the freight for the carriage of the goods to the named destination. The risk of loss or damage is transferred to the buyer when the goods have been delivered into the custody of the carrier.
CIP carriage and insurance paid to (named destination): Seller's responsibility is the same as under CPT except that he also must obtain and pay for insurance against the buyer's risk of loss or damage.
DAT delivered at terminal: Transfer to the buyer of responsibility for loss or damage occur when the goods are placed at the disposal of buyer in a named terminal at the place of destination.
DAP delivered at place: Replaces DES, DAF, and DDU. Delivery and transfer of risk occur when the goods are placed at the disposal of the buyer on the arriving means of transport.
DDP delivered duty paid: Seller is responsible for delivering the goods to the named place in the country of importation, including paying all duties, taxes, customs.

INCOTERMS 2010 applicable only to sea and inland waterway transport

FAS free alongside ship: Seller has fulfilled his obligations when goods have been placed alongside the vessel at the port of shipment. From that moment, the buyer is responsible for all costs and risks.
FOB free on board: Buyer is responsible for all costs and risks once the goods have passed over the ship's rail at the port of export.
CFR cost and freight: Seller must pay the costs and freight necessary to take the goods to the named port of destination. The risks of loss or damage transfer to the buyer when the goods pass over the ship's rail in the port of shipment.
CIF cost, insurance and freight: Seller has the same obligations as under CFR, but is also required to provide insurance against the buyer's risk of loss or damage to the goods during transit.

Conclusion

INCOTERMS 2010 is expected to be well received by those firms with previous experience with INCOTERMS. As with any revisions to “standard” practice, however, each firm that is impacted by these changes must embrace them and assure that the necessary amendments are made to their future sales contracts.

Sources for More Detailed Information on INCOTERMS 2010

INCOTERMS 2010: Standard Trade Definitions Used in International Freignt Transactions, Kalgin International Freight Services

Note: The following are not “free” resources.

ICC Books USA
United States Council for International Business

The New INCOTERMS 2010 Rules
International Chamber of Commerce (ICC)

The New INCOTERMS® 2010 Rules and Definitions Webinar
International Business Training, Monday, January 10, 2011

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