What are incoterms?

Incoterms are widely used in international commercial transactions
and accepted by legal authorities, practitioners and governments worldwide. We have
all heard of the better known ‘ExWorks’, ’FOB’, ‘C&F’ and ‘CIF’, but not everyone
knows what they mean.

To put it another way, when asked to define any one of those
well-known terms, it is always of interest to me to see just how many different
definitions are provided. That in itself is the justification for Incoterms as a
series of standard definitions. Such standardisation reduces, or removes altogether,
uncertainties arising from different interpretation of such terms in different countries.
However, the scope is limited to matters relating to the rights and obligations
of the parties to a contract of sale with respect to the delivery of goods sold.

Incoterms are often used as a method of defining risk in transactions
where goods are sold – that is, at which point does the risk of damage to the goods
pass from the seller to the buyer. Just because title has transferred to the buyer
– for example, in the case of payment against shipping documents (bills of lading)
– it does not necessarily follow that, although title has passed to the buyer, the
risk of damage has also passed to the buyer; that risk will only pass at the agreed
point of delivery of the goods, which may be some time and some distance later.
Incoterms, due to their standardised definitions, provide the parties to the contract
clarity as to when risk passes from one party to the other.

Included in the changes made in Incoterms 2010 is the removal
of the five terms in Section D of Incoterms 2000, i.e. DAF = Delivered at Frontier
(named place); DES = Delivered Ex Ship; DEQ = Delivered Ex Quay (named port of destination);
DDU = Delivered Duty Unpaid, and DDP = Delivered Duty Paid (named place of destination).
These five terms are replaced with three new ones, namely DAT (Delivered at Terminal),
DAP (Delivered at Place), and DDP (Delivered Duty Paid). It is important to note
that these three new terms apply to all modes of transport.

In contrast to the four classes in the 2000 version (E = Departure;
F = Main Carriage Unpaid; C = Main Carriage Paid, and D = Arrival) Incoterms 2010
now separates the terms into two groups, those applicable to all modes of transport
and those only applicable to sea and inland waterway transport. Incoterms 2010 has
11 terms (in contrast to 13 terms in Incoterms 2000), of which 7 are for all forms
of transport.

Incoterms 2010 are expressly stated as being for both domestic
as well as international trade, which is a departure from their use to date being
‘international commercial terms’, from which the term ‘Incoterms’ was derived. Usage
for domestic purposes is achieved because of the statement that the obligation to
comply with import/export formalities only exists where they are applicable.

With regard to insurance, where Incoterms 2010 requires that
one party arrange insurance, the insurance requirements of Incoterms 2000 have been
amended, and the parties’ obligations with regard to insurance generally have been
put in simplified terms, allowing less room for ambiguity or dispute.

Reflecting the growing use of e-commerce in commercial transactions,
Incoterms 2010, now includes specific provision for the use of electronic communications
and records if agreed between the parties or is customary.

Security is another aspect that has been addressed in Incoterms
2010 which, given the current focus on global security generally, can only be considered
a good thing. The parties are now required to provide all necessary information
in order to obtain import/export approvals and clearance.

As of 1 January 2011, there are now two versions of Incoterms
in use, namely 2000 and 2010. Of course, if the parties to a commercial transaction
choose to refer to either DAT (Delivered at Terminal) or DAP (Delivered at Place),
then clearly, as these are two new terms included in Incoterms 2010, there is no
possibility of a misunderstanding as to which version of Incoterms is to apply.

However, what if the parties select a term for inclusion in their
contract which might appear as having been modified? In such a case, it is important
that the parties state in their contract not just the Incoterm which they wish to
apply to their specific contract, but which relevant version. In any event, it is
good practice that, where any term is used, even the more well-know terms, as mentioned
above, the contract clearly states that the terms are in accordance with ICC Incoterms
and with the year of the applicable version. [email protected]