Analysis of INCOTERMS 2010 Rules

Introduction:

When you sell a product to a foreign customer, it is essential to determine the terms of sale as part of your export pricing strategy. Many businesses use INCOTERMS, which are internationally recognized commercial terms, they defined some key responsibilities of sellers and buyers in the international sale of goods issued by the International Chamber of Commerce, INCOTERMS in 2020 is the latest version. Each Incoterm is expressed as a three-letter acronym with the place of delivery. 

INCOTERMS are a tool to specify who is responsible for paying for and managing various elements of the shipping process, including transportation of the shipment, including loading, unloading, and terminal charges;  cargo insurance; export clearance including export and security documentation and if required, an export license; export formalities, such as packing and pre-shipment inspections; customs clearance and import documentation, including an import license if required; import duties and taxes; and cargo unloading and delivery to the agreed-upon place.[1]

INCOTERMS also define when the risk of loss or damage to goods transfers from the seller to the buyer. There are other risks to consider in an export transaction, including liability for export compliance obligations and the cost of a potential customs delay. The choice of one of the 11 INCOTERMS depends on whether the shipment uses any mode of transport or only seas and or inland waterway transport.

INCOTERMS 2010

INCOTERMS of the commonly used trade terms relating to international sales arrangements published by the International Chamber of Commerce, essentially they set out by and seller responsibilities and aims to avoid misunderstandings which may arise during the delivery of goods. If your company trades on an international basis or either ships or receives shipments of goods from an overseas market, then you should be aware of these terms and their application. The main aim of INCOTERMS is to avoid any misunderstandings which may arise between different trading practices in different countries, for example, DDP delivered duty paid may mean an entirely different thing to a US Company than it does for a UK company, however, it is important to ensure that the INCOTERMS are effectively incorporated.

 It should be noted that certain countries stipulate to which specific INCOTERMS must be used. Other countries specify which INCOTERMS are preferred, to consider how this affects you. We must look to the country of the buyer.  The basic aim of INCOTERMS is to govern the delivery of goods between parties engaging in international trade. Each incoterm will clarify how the functions risks and costs are to be split between the parties.

 INCOTERMS 2010 came into force on the 1st of January 2011, this brought about significant changes when compared with INCOTERMS 2000. The main changes are;

• There are now  11 rules rather than 13
• The rules are split into two distinct classes relating to the mode of transport used
• Changes now deal with cargo security
• They are generally regarded as being more user friendly and reflect modern trade language.

The Current Regime

Notwithstanding the changes that have been made to the INCOTERMS in their most recent incarnation, a number of the terms have remained largely the same.

 FirstGroup often referred to as the E terms applies to a situation where the seller makes available the goods at its premises for the buyer to collect. it represents the minimum obligation for the seller, whilst it is the only one of this category it is perhaps the most well-known

 EXW all three current INCOTERMS falling under F namely

1. FCA free carrier
2. FAS  free alongside ship
3. FOB  free onboard

 Applies to situations where the seller must deliver the goods to a carrier appointed by the buyer, the seller will arrange and pay for delivering goods to the carrier, but the buyer pays for the carriage from that point forwards. The FCA incoterm can be used within any mode of transport whilst FAS and FOB are used only for sea or inland waterway transport.

The C term state that the seller has to contract for carriage, but does not assume the risk of loss damage to the goods or any additional cost due to events occurring after shipment. Of the four INCOTERMS falling under this category

1. CFR cost and freight
2. CIF cost insurance and freight can only be used for goods shipped by sea or inland waterways.
3. Whereas carriage paid to CPT in carriage and insurance paid to CIP can be used for any form of transport.

Delivery Rules

The main change brought about by INCOTERMS 2010 relates to the new rules for delivery.

 DAT Delivered at terminal and DAP delivered at place are the new rules which replace DAF DES DEQ and DDU. DDP delivered duty paid is the only incoterm that remains unchanged since the new publication. The following rules of delivery apply regardless of the mode of transport used.

 DAT delivery takes place when the seller puts the goods at the disposal of the buyer at a named terminal. The seller bears all risk involved in bringing goods to and unloading them at the terminal including clearing goods for export.

DAP delivered a place means that delivery takes place when the goods are placed at the disposal of the buyer at a named place ready for unloading, that is the buyer has to unload. If using this incoterm a seller should ensure that any contracts for carriage reflect this term, if the seller inadvertently pays its carrier for unloading it will not be entitled to recover this cost from the buyer unless the parties expressly agree that this is to be the case. Where under INCOTERMS 2000 DAF DES or DDU were used, DAP should now be used where DEQ was previously used, DAT should now be used.

Security

Events of the past 10 years have led to security being tightened in all walks of life. Obligatory security checks have now been imposed in many countries and both sellers and buyers are now required to provide a lot more information to obtain export and importation clearance. INCOTERMS 2010 house is an obligation on both parties to provide the other party with the information that they need for them to obtain these clearances.

Insurance

INCOTERMS 2010 take into account the amendments made to the Institute of cargo clauses, with regards to those rules which require a party to obtain insurance, that is CIF and CIP, however, that under these rules the seller is only obliged to provide a minimum insurance cover in accordance with clause 2 of the Institute of cargo clauses as this is a low level of insurance buyers should perhaps consider requiring a seller to obtain a higher level of cover.

A Modern Age

INCOTERMS 2010 recognize that there has been a change in the way that parties do business together, especially with regards to the use of electronic documents. The rules now state that a document may be replaced with an electronic communication where the parties agree or where it is customary to do so. Essentially electronic communications have now been given the same effect as paper. Where commodities are the subject of a sale, cargo may be sold several times during transit down a string, in this case, a seller in the middle of the process will not physically ship the goods as they have already been shipped, to clarify this position INCOTERMS 2010 includes an obligation to procure goods shipped as an alternative to the obligation to ship.

In addition to the above INCOTERMS 2010 for the first time recognizes that the rule should be capable of use in both international and domestic trade scenarios,  as a result of this the rules clearly state in several places that the obligations to comply with import and export formalities only exist where applicable.

In deciding which INCOTERMS suits your requirements you need to consider certain key factors such as the form of transport to be used and who is to bear the risk and cost of delivery. It is also important to understand whether any jurisdictional requirements will govern the terms to be used.

Incorporating INCOTERMS into Contracts and Standard Paperwork

The main thing to remember to ensure that you have the protection of INCOTERMS and that they are incorporated is that you must reference them, so you should reference INCOTERMS 2010, a failure to reference the terms or the correct version of them could lead to a dispute as to which version is intended or indeed if INCOTERMS are intended to apply at all. There are two ways to incorporate INCOTERMS by including some wording is a general proviso in the contract states that it is subject to INCOTERMS 2010 or by specific reference in the delivery provisions.

It is important to note that you should also reference the relevant edition of the INCOTERMS in all paperwork linked to the contract, such as invoices statements or delivery notes. Other important points to note when incorporating the INCOTERMS into a contract are that you should always reference the delivery location, for example, if you are in a situation where it is delivery duty paid so one where the seller does everything and you are delivering to a warehouse in Germany you would reference in the contract to DDP delivered duty paid Frankfurt Schmidt GmbH warehouse for INCOTERMS 2010. In another example, if you are free carrying to Kuala Lumpur you would reference FCA free carrier Kuala Lumpur INCOTERMS 2010.

Finally, it is important to ensure that any contract always states which country’s legal system will be used in the case of a dispute the INCOTERMS will then provide the legal backbone to settling such a dispute, as you decide which INCOTERMS to offer your foreign buyer, including the costs, responsibilities, and risks of each option in your pricing. Also, include the name of the port or a full street address for the delivery location; otherwise, the default could be the buyer’s premises. Finally, make sure your insurance coverage is sufficient, even if it’s not mandated, well INCOTERMS define many aspects of the shipping process they do not

1. Address all sale conditions;
2. Identify the goods sold or contract price;
3. Include the payment method or timing ;
4. Specify when title transfers to the buyer;
5. Specified documents the seller provides for the foreign customs clearance process; or
6. Address liability or dispute resolution if goods are not provided according to the sales contract.

When pricing and fulfilling a sale to a foreign buyer using internationally recognized INCOTERMS can help ensure a smooth and transport.

Conclusion

Understanding INCOTERMS is a vital part of international trade. When exporting products overseas, you must agree to sell your goods based on 11 INCOTERMS. INCOTERMS is short for international commercial terms which are published by the International Chamber of Commerce and relate to International Commercial law. They are accepted by the government’s legal authorities around the world. Put simply, INCOTERMS are the selling terms the buyer and seller of goods both agree to before shipping the goods. The INCOTERMS clearly state which tasks, costs, and risks are associated with the buyer and which are associated with the seller. The incoterm states when the seller’s costs and risks are transferred on to the buyer.[2]

---

References:

[1] Know your intercoms, (07, nov.2020) http://www.trade.gov/know-your-intercoms.

[2] IncoTerms 2010 (07, nov.2020) www.indocs.com