Incoterms_® and Commercial Contracts

The Incoterms®¹ rules explain a set of three-letter trade terms reflecting business-to-business practice in contracts for the sale of goods. The Incoterms rules describe mainly the tasks, costs and risks involved in the delivery of goods from sellers to buyers.

How to use the Incoterms® 2010 rules

If you want the Incoterms® 2010 rules to apply to your contract, you should make this clear in the contract, through such words as, “[the chosen Incoterms rule including the named place, followed by] Incoterms® 2010”.

The chosen Incoterms rule needs to be appropriate to the goods, to the means of their transport, and above all to whether the parties intend to put additional obligations, for example such as the obligation to organize carriage or insurance, on the seller or on the buyer. The Guidance Note to each Incoterms rule contains information that is particularly helpful when making this choice. Whichever Incoterms rule is chosen, the parties should be aware that the interpretation of their contract may well be influenced by customs particular to the port or place being used.

The chosen Incoterms rule can work only if the parties name a place or port, and will work best if the parties specify the place or port as precisely as possible.

A good example of such precision would be:

“FCA 38 Cours Albert 1er, Paris, France Incoterms® 2010”.

Under the Incoterms rules 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), the named place is the place where delivery takes place and where risk passes from the seller to the buyer. Under the Incoterms rules Carriage Paid To (CPT), Carriage and Insurance Paid To (CIP), Cost and Freight (CFR) and Cost, Insurance and Freight (CIF), the named place differs from the place of delivery. Under these four Incoterms rules, the named
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place is the place of destination to which carriage is paid. Indications as to place or destination can helpfully be further specified by stating a precise point in that place or destination in order to avoid doubt or argument.

Incoterms rules do say which party to the sale contract has the obligation to make carriage or insurance arrangements, when the seller delivers the goods to the buyer, and which costs each party is responsible for. Incoterms rules, however, say nothing about the price to be paid or the method of its payment. Neither do they deal with the transfer of ownership of the goods, or the consequences of a breach of contract. These matters are normally dealt with through express terms in the contract of sale or in the law governing that contract. The parties should be aware that mandatory local law may override any aspect of the sale contract, including the chosen Incoterms rule.

Main features of the Incoterms® 2010 rules

The number of Incoterms rules has been reduced from 13 to 11. This has been achieved by substituting two new rules that may be used irrespective of the agreed mode of transport – DAT, Delivered at Terminal, and DAP, Delivered at Place – for the Incoterms 2000 rules DAF, DES, DEQ and DDU.

Under both new rules, delivery occurs at a named destination: in DAT, at the buyer’s disposal unloaded from the arriving vehicle (as under the former DEQ rule); in DAP, likewise at the buyer’s disposal, but ready for unloading (as under the former DAF, DES and DDU rules).

The new rules make the Incoterms 2000 rules DES and DEQ superfluous. The named terminal in DAT may well be in a port, and DAT can therefore safely be used in cases where the Incoterms 2000 rule DEQ once was. Likewise, the arriving “vehicle” under DAP may well be a ship and the named place of destination may well be a port: consequently, DAP can safely be used in cases where the Incoterms 2000 rule DES once was. These new rules, like their predecessors, are “delivered”, with the seller bearing all the costs (other than those related to import clearance, where applicable) and risks involved in bringing the goods to the named place of destination.

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The 11 Incoterms® 2010 rules are presented in two distinct classes:

The first class includes the seven Incoterms® 2010 rules that can be used irrespective of the mode of transport selected and irrespective of whether one or more than one mode of transport is employed. EXW, FCA, CPT, CIP, DAT, DAP and DDP belong to this class. They can be used even when there is no maritime transport at all. It is important to remember, however, that these rules can be used in cases where a ship is used for part of the carriage.

In the second class of Incoterms® 2010 rules, the point of delivery and the place to which the goods are carried to the buyer are both ports, hence the label “sea and inland waterway” rules. FAS, FOB, CFR and CIF belong to this class. Under the last three Incoterms rules, all mention of the ship’s rail as the point of delivery has been omitted in preference for the goods being delivered when they are “on board” the vessel. This more closely reflects modern commercial reality and avoids the rather dated image of the risk swinging to and fro across an imaginary perpendicular line.

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Incoterms rules have traditionally been used in international sale contracts where goods pass across national borders. In various areas of the world, however, trade blocs, like the European Union, have made border formalities between different countries less significant. Consequently, the subtitle of the Incoterms® 2010 rules formally recognizes that they are available for application to both international and domestic sale contracts. As a result, the Incoterms® 2010 rules clearly state in a number of places that the obligation to comply with export/import formalities exists only where applicable.

Two developments have persuaded ICC that a movement in this direction is timely. Firstly, traders commonly use Incoterms rules for purely domestic sale contracts. The second reason is the greater willingness in the United States to use Incoterms rules in domestic trade rather than the former Uniform Commercial Code shipment and delivery terms.

Before each Incoterms® 2010 rule you will find a Guidance Note. The Guidance Notes explain the fundamentals of each Incoterms rule, such as when it should be used, when risk passes, and how costs are allocated between seller and buyer. The Guidance Notes are not part of the actual Incoterms® 2010 rules, but are intended to help the user accurately and efficiently steer towards the appropriate Incoterms rule for a particular transaction.

Previous versions of Incoterms rules have specified those documents that could be replaced by EDI messages. Articles A1/B1 of the Incoterms® 2010 rules, however, now give electronic means of communication the same effect as paper communication, as long as the parties so agree or where customary. This formulation facilitates the evolution of new electronic procedures throughout the lifetime of the Incoterms® 2010 rules.

The Incoterms® 2010 rules are the first version of the Incoterms rules since the revision of the Institute Cargo Clauses and take account of alterations made to those clauses. The Incoterms® 2010 rules place information duties relating to insurance in articles A3/B3, which deal with contracts of carriage and insurance. These provisions have been moved from the more generic articles found in articles A10/B10 of the Incoterms 2000 rules. The language in articles A3/B3 relating to insurance has also been altered with a view to clarifying the parties’ obligations in this regard.

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There is heightened concern nowadays about security in the movement of goods, requiring verification that the goods do not pose a threat to life or property for reasons other than their inherent nature. Therefore, the Incoterms® 2010 rules have allocated obligations between the buyer and seller to obtain or to render assistance in obtaining security-related clearances, such as chain-of-custody information, in articles A2/B2 and A10/B10 of various Incoterms rules.

Under Incoterms rules CPT, CIP, CFR, CIF, DAT, DAP, and DDP, the seller must make arrangements for the carriage of the goods to the agreed destination. While the freight is paid by the seller, it is actually paid for by the buyer as freight costs are normally included by the seller in the total selling price. The carriage costs will sometimes include the costs of handling and moving the goods within port or container terminal facilities and the carrier or terminal operator may well charge these costs to the buyer who receives the goods. In these circumstances, the buyer will want to avoid paying for the same service twice: once to the seller as part of the total selling price and once independently to the carrier or the terminal operator. The Incoterms® 2010 rules seek to avoid this happening by clearly allocating such costs in articles A6/B6 of the relevant Incoterms rules.

In the sale of commodities, as opposed to the sale of manufactured goods, cargo is frequently sold several times during transit “down a string”. When this happens, a seller in the middle of the string does not “ship” the goods because these have already been shipped by the first seller in the string. The seller in the middle of the string therefore performs its obligations towards its buyer not by shipping the goods, but by “procuring” goods that have been shipped. For clarification purposes, Incoterms® 2010 rules include the obligation to “procure goods shipped” as an alternative to the obligation to ship goods in the relevant Incoterms rules.

Variants of Incoterms rules

Sometimes the parties want to alter an Incoterms rule. The Incoterms® 2010 rules do not prohibit such alteration, but there are dangers in so doing. In order to avoid any unwelcome surprises, the parties would need to make the intended effect of such alterations extremely clear in their contract. Thus, for example, if the allocation of costs in the Incoterms® 2010 rules is altered in the contract, the parties should also clearly state whether they intend to vary the point at which the risk passes from seller to buyer.

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Status of this introduction

This introduction gives general information on the use and interpretation of the Incoterms® 2010 rules, but does not form part of those rules.

Explanation of terms used in the Incoterms® 2010 rules

As in the Incoterms 2000 rules, the seller’s and buyer’s obligations are presented in mirror fashion, reflecting under column A the seller’s obligations and under column B the buyer’s obligations. These obligations can be carried out personally by the seller or the buyer or sometimes, subject to terms in the contract or the applicable law, through intermediaries such as carriers, freight forwarders or other persons nominated by the seller or the buyer for a specific purpose.

The text of the Incoterms® 2010 rules is meant to be self-explanatory. However, in order to assist users the following text sets out guidance as to the sense in which selected terms are used throughout the document.

Carrier: For the purposes of the Incoterms® 2010 rules, the carrier is the party with whom carriage is contracted.

Customs formalities: These are requirements to be met in order to comply with any applicable customs regulations and may include documentary, security, information or physical inspection obligations.

Delivery: This concept has multiple meanings in trade law and practice, but in the Incoterms® 2010 rules, it is used to indicate where the risk of loss of or damage to the goods passes from the seller to the buyer.

Delivery document: This phrase is now used as the heading to article A8. It means a document used to prove that delivery has occurred. For many of the Incoterms® 2010 rules, the delivery document is a transport document or corresponding electronic record. However, with EXW, FCA, FAS and FOB, the delivery document may simply be a receipt. A delivery document may also have other functions, for example as part of the mechanism for payment.

Electronic record or procedure: A set of information constituted of one or more electronic messages and, where applicable, being functionally equivalent with the corresponding paper document.

Packaging: This word is used for different purposes:

1. The packaging of the goods to comply with any requirements under the contract of sale.
2. The packaging of the goods so that they are fit for transportation.
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3. The stowage of the packaged goods within a container or other means of transport.

In the Incoterms® 2010 rules, packaging means both the first and second of the above. The Incoterms® 2010 rules do not deal with the parties’ obligations for stowage within a container and therefore, where relevant, the parties should deal with this in the sale contract.

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