New Incoterms
Posted by Paul Dungate on 21st June 2011
‘Incoterms’ are the International Chamber of Commerce rules being globally accepted contractual standard terms relating to risk and delivery. They are updated every 10 years or so to keep pace with the development of trading systems. The latest issue, Incoterms 2010, emphasises that Incoterms can apply for domestic goods contracts as well as international ones.
Experience shows that Incoterms are often incorrectly used or referred to by buyers and sellers. As Incoterms 2010 has introduced various new terms and rules, it is even more imperative that correct usage is understood and made of them.
It should be remembered that Incoterms do not give a complete set of contract terms of sale, but instead deal only with:
- i) the obligations to make carriage or insurance arrangements;
- ii) defining the point when goods are legally delivered (and thus deals with when risk passes from the seller to the buyer); and
- iii) what delivery and insurance costs each party is responsible for.
However, Incoterms do not deal in any way with the price to be paid, the method of payment, the transfer of legal ownership, termination or consequences of a breach of contract.
When using the following Incoterms - “Ex-Works” (EXW), “Free Carrier” (FCA) “Delivered at Terminal” (DAT), “Delivered at Place” (DAP), “Delivered Duty Paid” (DDP), “Free Alongside Ship” (FAS) and “Free on Board” (FOB) - then a specifically named place must be stated as to where delivery occurs and/or where risk in damage or loss to the goods will pass from the seller to the buyer.
When using the terms - “Carriage Paid To” (CPT), “Carriage and Insurance Paid To” (CIP), “Cost and Freight” (CFR) and “Cost, Insurance and Freight” (CIF), then the named destination place will be different from the place of legal delivery and passing of risk in the goods to the buyer. Under these terms, the place that is named is the place of destination to which carriage is paid by the seller.
In trying to show that Incoterms can apply for domestic contracts, terms like EXW, FCA, CPT, CIP, DAT, DAP and DDP can be used with or without maritime transport being involved and in domestic contracts, FAS, FOB, CFR and CIF include both the point of delivery and the place to which the goods are carried to the buyer, being both ports, and are known as “sea and inland waterway rules”.
Anyone using Incoterms regularly is well advised to obtain an original copy of the ICC Incoterms 2010 rules. The terms are set out in a logical fashion with a guidance note for each one. The format comprises a set of ‘A’ obligations (the seller’s obligations) and a set of ‘B’ obligations (the buyer’s obligations). Each one mirror image each other, so that A3 for instance will deal with contract of carriage and insurance in relation to what the seller needs to do and condition B3 will state what the buyer has to do for that particular incoterm in relation to carriage and insurance.
Familiarity with Incoterms is useful for all sale of goods, contracts and vital for international ones. There are common misconceptions in their references and use. Proper use and comprehension means easier and proper understanding of your company’s risk and obligations, as well as easier drafting. It is to be recommended.
