January 1, 2011 marks the entry into force of the last version of the International Commercial Terms (Incoterms), Incoterms 2010. From that date, it is recommended to refer to “Incoterms 2010” in your international sales contracts and distribution to clarify the obligations related to the delivery of goods.
Since the first version published in 1936, the Incoterms have given a series of interpretive rules to which parties to commercial sales contracts may refer to distribute the obligations and responsibilities of the seller and the buyer.
This eighth version of the Incoterms was issued by the International Chamber of Commerce (ICC) after taking into account the most recent developments in international trade practices.
Responsibilities of the seller and the buyer
The terms specify the respective responsibility of the buyer and seller as to:
- The moment the seller performs his obligation of delivery;
- The time when the risk of loss or damages to the goods passes from the seller to the buyer;
- The distribution of the costs (eg. transport costs, verification, packaging, insurance) and;
- The responsibility of carrying out customs formalities for export and / or import.
For a better understanding and use of the terms, they are now grouped into two categories, according to the type(s) of transportation(s). We have:
- The terms for any transportation mode: EXW (Ex works), FCA (Free Carrie), CPT (Carriage paid to), CIP (Carriage and insurance paid to), DAT (Delivered at Terminal), DAP (Delivered at Place), and DDP (Delivered Duty Paid).
- The terms for transportation by sea and inland waterway: FAS (Free alongside ship), FOB (Free on Board), CFR (cost and freight), and CIF (Cost insurance and freight).
In addition to this new classification of Incoterms, the most significant change introduced by the new version is the replacement of Incoterms DAF, DES, DEQ and DDU of the 2000 version by the Incoterms DAT and DAP.
The new Incoterms
DAT: The seller is considered to have fulfilled his obligation when the goods are unloaded from the means of transport and placed at the disposal of the buyer at the named terminal or at the place of destination. The seller assumes all risks associated with the transportation and the unloading of the goods at the terminal of the port of shipment or at the place of destination.
DAP: The seller is considered to have fulfilled his obligation when the goods are placed at the disposal of the buyer, ready for the unloading at the named place of destination. The seller is responsible for all risks associated with the transportation of the goods to the place of destination. The buyer is in charge of the unloading of the goods, performance of the import formalities and payment of duties and taxes for the importation.
Compared to the 2000 version, the other Incoterms 2010 contain only few modifications.
The other Incoterms
EXW: The seller is considered to have fulfilled his obligation when the goods are made available to the buyer at the seller’s premises. The seller does not have to load the goods on a removal vehicle and does not have to accomplish the customs export formalities. The buyer bears all costs and risks related to the transportation of the goods from the premises to the destination. This Incoterm is of limited application and doesn’t suit for international trade.
FCA: The seller makes arrangement for the transportation at the risks and expenses of the buyer and is considered to have fulfilled his obligation to deliver when the goods are remitted to the carrier at the agreed place. The buyer pays the principal transportation. The payments of the clearance and the formalities, for the exportation are the responsibility of the seller. The transfer of risks occurs when the carrier takes over the goods.
CPT: The seller chooses the mean of carriage of the goods, pays the freight to the designated destination and clears the goods for export. The risks are transferred to the buyer when the goods are delivered to the first carrier. The buyer is responsible for the insurance, the clearance and the formalities for the importation of the goods.
CIP: The obligations of the seller are quite similar to the ones related to Incoterm CPT. The only difference consists in the seller obligation to provide the insurance of the goods against the risk of loss or damages during the carriage.
DDP: The seller is considered to have fulfilled his obligation to deliver when the goods are made available to the buyer at the agreed place, after the seller had paid the customs, duties and taxes due for exportation and importation. The transfer of costs and risks occurs when the goods are ready for unloading at the named place of destination. The unloading expenses and the risks lie with the buyer.
FAS: The seller is considered to have fulfilled his obligation to deliver when the goods are placed alongside the vessel on the quay at the named port of shipment. The seller is responsible for the formalities and the payment of duties and taxes due for exportation. When the goods are alongside the ship, the buyer bears all costs and risks of loss or damages to the goods.
FOB: The seller is considered to have fulfilled his obligation to deliver when the goods are placed on board the vessel at the named port of shipment. The buyer chooses the ship and pays the ocean freight. The seller has to clear the goods for export and the transfer of costs and risks occurs when the goods are loaded on board.
CFR: The seller is considered to have fulfilled his obligation to deliver when the goods are placed on board the vessel. The transfer of risk occurs at the same time. The seller has to pay the costs and freight necessary to ensure delivery of the goods to the named port of destination. The buyer is in charge of the customs, duties and taxes due for import.
CIF: The obligations of the seller are quite similar to the ones related to Incoterm CFR. The only difference consists in the seller obligation to provide the insurance of the goods against the risk of loss or damages during the carriage.
The Incoterms 2010 includes new features also important to mention.
The new features
Internal Trade: The new terms take into account the growth of economic zones and the desire to make use of the Incoterms in the United States. As a consequence, these terms do not only apply to international trade; the export or import formalities shall be referred to only when applicable.
Terminal handling charges: The new terms take into account the issue of double payment made previously by the buyer to the seller and to the carrier or terminal operator. Now Articles A6/B6 provides a better allocation of transportation costs and handling.
Electronic communication: The new terms take into account the development of the communication technologies. Articles A1/B1 allows parties to agree on using electronic media with the same effect as paper format.
Insurance Coverage: The new terms take into account the review of the Institute Cargo Clauses. Articles A3/B3 allocates the obligations related to contracts of carriage and insurance between the seller and the buyer.
Security: The new terms take into account the security issues arisen in the wake of September 11, 2001 in order to ensure the goods do not present any danger. Articles A2/B2 and A10/B10 allocate the duties and responsibilities related to the authorizations to obtain.
String sales: The new terms take into account the practice of string sales and set some clarifications. The seller in the middle of a string sale has an obligation to “procure goods shipped” and not to “ship” the goods. The obligation of the seller to contract for the carriage of goods has been amended. He may now procure a contract of carriage.
For more information, please do not hesitate to contact us.
This article has also been published on the website of the Quebec Law Network [http://www.avocat.qc.ca/affaires/iiicotermes-fra.htm]