January 11, 2011

The New Incoterms® 2010

Holland & Knight Alert
John M. Toriello | James Hohenstein | Benjamin R. Wilson

The time is ripe to examine the new Incoterms® 2010 rules promulgated by the International Chamber of Commerce (ICC). Intended to replace Incoterms 2000, Incoterms® 2010 became effective on January 1, 2011.

The Incoterms® 2010 rules reflect the increasing variance in transport practices, the greater number and use of customs-free trade zones, increased concern about security in the transport of goods, as well as the widespread use and reliance on electronic communications in business transactions. The key changes contained in Incoterms® 2010 are highlighted below.1

Deletion of Four Terms and Introduction of Two New Terms

Incoterms® 2010 replaces four trade terms from Incoterms® 2000 – namely, DAF (Delivered at Frontier), DES (Delivered Ex Ship), DEQ (Delivered Ex Quay) and DDU (Delivered Duty Unpaid) – with two new terms: DAT (Delivery at Terminal) and DAP (Delivery at Place). There now will be 11 instead of 13 terms.

DAT and DAP may be used regardless of the agreed-upon method of transport. Under both new rules, delivery occurs at a named destination. DAT directs that delivery occurs when the goods, upon being unloaded from the arriving means of transport, are placed at the buyer’s disposal at a named terminal or a specified place of destination (as under the former DEQ rule). DAP designates delivery to have occurred when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named placed of destination (as under the former DAF, DES and DDU rules). Like their predecessors, DAT and DAP require the seller to bear all the costs (other than import clearance costs, as applicable) and risks associated with bringing the goods to the named terminal or place of destination.

From a practical standpoint, parties should identify as clearly as possible the terminal or the place of destination. A good example of such precision is: “DAP 31 West 52nd Street, New York, New York, Incoterms® 2010 rules.” The designated locations are important because the risks associated with effectuating delivery of the goods to that point, unless otherwise agreed, are the seller’s responsibility.

Classification of the Incoterms® 2010 Rules

The Incoterms® 2010 rules are divided into two distinct categories: deliveries by any mode of transport (sea, road, air, rail) and deliveries by sea/inland waterway.

The first type of rules – EXW, FCA, CPT, CIP, DAT, DAP and DDP – applies regardless of the mode of transportation selected by the parties and whether or not more than one mode of transportation is used. In short, these rules can be used when a ship, truck, aircraft or railcar is used for all or any part of the carriage.

The second type of rules – FAS, FOB, CFR, and CIF – only applies to sea and inland waterway transport. Importantly, with respect to FOB, CFR and CIF, the Incoterms® 2010 rules no longer designate the ship’s rail as the point of delivery. Instead, they instruct that delivery occurs when such goods are simply “on board” the vessel. This change reflects modern commercial reality and disposes of the obviously outdated notion that risk fluctuates back and forth across an imaginary perpendicular line.

Domestic and International Trade

Although the Incoterms® rules have traditionally been used in contracts governing the international sale of goods in cross-border transactions, the Incoterms® 2010 rules account for the growing number of transactions occurring in trade blocs such as the European Union, where border formalities between sovereign nations are less significant or non-existent. Indeed, the subtitle of the 2010 rules states that they are available for both international and domestic sales contracts and that compliance with export and import formalities exist only where applicable. It appears that traders commonly use Incoterms® rules for purely domestic sales contracts, presumably because in the use of trade terms they do not distinguish between domestic and international sales. The ICC indicates that there is growing practice in the United States of using Incoterms instead of the more limited trade terms defined in the Uniform Commercial Code (UCC).

Security Obligations

In light of post-9/11 security concerns in connection with the shipment of goods, the Incoterms® 2010 rules require a higher degree of cooperation between the parties by allocating specific obligations between the buyer and seller to obtain or to render assistance in obtaining security-related clearances, such as chain-of-custody or similar information.

For instance, articles A2/B2 of various Incoterms® rules require both the seller and the buyer to provide any export/import license and other official authorization and complete all customs formalities necessary for the export/import of goods.

Electronic Communication

Articles A1/B1 of the Incoterms® 2010 now equate electronic means of communication with paper communication, so long as the parties agree or where it is customary. Previous versions of the Incoterms rules specified those documents that could be replaced by an EDI (Electronic Data Interchange).

Insurance Cover

The Incoterms® 2010 rules are the first version of the Incoterms that take into account the alterations made to the Institute Cargo Clauses. The Incoterms® 2010 rules part from the generic descriptions of the parties’ obligations with respect to procuring insurance, which were previously found in articles A10/B10 of the Incoterms® 2010 rules. Now, however, under articles A3/B3 of the 2010 rules, the buyers’ and sellers’ respective duties in connection with contracts of carriage and insurance are more carefully articulated. For example, under CPT (Carriage Paid To) articles A3/B3, subsection (b) (“Contract of insurance”), the 2010 rules provide:

      • The seller has no obligation to the buyer to make a contract of insurance. However, the seller must provide the buyer, at the buyer’s request, risk and expense (if any), information the buyer needs for obtaining insurance.
      • The buyer has no obligation to the seller to make a contract of insurance. However, the buyer must provide the seller, upon request, the necessary information for obtaining insurance.

Terminal Handling Charges

To remedy the situation where the buyer pays for the same freight costs twice – once to the seller by way of the sales contract and again to the terminal operator upon receipt of the goods in the port or container terminal – in shipments involving Incoterms CPT, CIP, CFR, CIF, DAT, DAP and DDP, articles A6/B6 of the Incoterms® 2010 rules clearly allocate such costs in the relevant Incoterms® rules.

String Sales

The Incoterms® 2010 rules also seek to clarify the obligations of a seller in a middle of a string sale by recognizing that these obligations are different from the initial seller. Often, in sales involving commodities, the subject cargo is often sold numerous times during transit “down a string” or chain of sales. The seller in the middle of the string does not actually “ship” the goods because this task has already been arranged by the initial seller in the string. The Incoterms® 2010 recognizes this distinction by providing an obligation to “procure goods shipped” as an alternative to “shipping” goods in the relevant Incoterms rules.

Variance of Incoterms Rules

Although the Incoterms® rules do not prohibit altering the rules, commercial parties should be careful in doing so. To alleviate potential ambiguities that may arise, parties should be clear as to the purpose of the changes. For example, if the parties choose to alter the allocations of costs designated in the 2010 Incoterms rules, they should clearly express whether they intend to also change the point at which delivery takes place – i.e., at what point risk passes from seller to buyer. 

 


1 A complete discussion of Incoterms ® 2010 is available online, including the text of the rules and additional information regarding why the changes were made.

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