The 1st of January 2011 the International Chamber of Commerce (ICC) will release a new version of INCOTERMS under the title, “Incoterms 2010 ICC rules for the use of domestic and international trade terms”. Such version, through a clear and easy understanding wording, encourages the application of the International Commercial Terms (INCOTERMS) not only for international trade but also for domestic.
1.-Use of INCOTERMS.
Companies are increasingly applying INCOTERMS in those transactions that entail goods delivery. INCOTERMS are terms that are well established and worldwide accepted, yet it is always advisable, for those companies, to execute an agreement whereby, besides the application of the INCOTERM, there are other aspects within the transactions that need regulating which the INCOTERM cannot cover. Moreover, such other aspects, in many cases, are directly related to the INCOTERM per se.
It is also important to take into account that the INCOTERMS are not law and therefore new versions shall not overrule previous ones. That is why it is so important that the INCOTERM is written clearly and referring to the version that it applies. The correct formula would be: INCOTERM-delivery place-ICC-version. Regarding the delivery place, the new version 2010 suggests to clearly specify the exact place where the goods are to be delivered in order to know where risk and responsibilities are transferred. Eg: EXW 42, Padwell Road, London SW6 7LZ UK ICC 2010.
The ICC has decided to classify INCOTERMS in two groups, depending on modes of transport: the first group would be comprised by INCOTERMS that apply for more than one mode of transport (EXW, FCA, CPT, CIP, DAT, DAP, DDP) and the second group would be comprised by INCOTERMS that apply only for sea or inland watergate transport (FAS, FOB, CFR, CIF). Therefore, the old classification by groups of letters (E, C, F, D) shall no longer exist.
As an outstanding novelty 4 INCOTERMS (DAF, DES, DEQ y DDU) haven been eliminated and 2 new INCOTERMS (DAT and DAP) have been brought in. Therefore the new version will be comprised by the following INCOTERMS: EXW, FCA, FAS, FOB, CFR, CIF, CPT, CIP, DAT, DAP y DDP.
The ICC being aware of the technology progress within the business world has tried to facilitate the possibility that the parties may “use any electronic record or procedure if agreed between the parties or customary”.
Other relevant novelties are: on one hand, the regulation of the allocation of costs between seller and buyer, which is mainly based on trying to avoid that the costs of terminal handling charges (THC) are borne twice and, on the other hand, the preoccupation for the safety of the goods while transporting them, establishing therefore reciprocated obligations for both parties.
4.-Choosing the appropriate INCOTERM.
In order to choose the appropriate INCOTERM, we should take into consideration some circumstances that in principle may seem irrelevant, but in reality they may entail costs that may have not been budgeted in advance, for example:
- With FOB the obligation of delivery shall not be complied with once the goods have passed the ship’s rail but once the goods have been placed on board. The risk in stowing is borne by the buyer although stowing costs are included within the costs of loading which are borne by the seller;
- With CFR unloading will be borne by the buyer except otherwise agreed by the parties;
- With CIF the moment where the risk is passed on to the buyer will take place when the goods are delivered on board the ship;
- With CPT unloading shall be borne by the buyer except it has to be borne by the seller pursuant the agreement of transport;
- EXW is not advisable for a seller, nor DAP for a buyer, when payment has been set through documentary credit;
- Certain countries do not allow VAT taxes payment by a party other than the local importer, therefore in the event that the parties agree a DDP this shall be “VAT excluded”;
- In those cases where the seller is obliged to hire an insurance to cover the risk during transportation, the seller shall hire such insurance under the name of the buyer not under its own name, otherwise, the INCOTERM’s nature would be diminished.
5.-Two new incorporations.
Finally, a brief summary about the new two INCOTERMS, DAT and DAP, that the ICC has incorporated to this new version 2010:
DAT (Delivered at Terminal) will replace, for sea transportation, the old DES and DEQ. With the INCOTERM DAT the seller bears the costs of transport and the risks until the goods are left unloaded at the terminal that the parties had agreed upon. “Terminal includes any place, whether covered or not, such as a quay, warehouse, container yard or road, rail or air cargo terminal.”
DAP (Delivered at Place), however, will replace the old DAF, DES and DDU. With the INCOTERM DAP the seller shall bear all transport costs and the risk up to delivery which will take place “when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination”.