Applied Business Law

17 Mar 2011

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New Incoterms for 21st Century Business

DDP, CIP, FAS and FOB...These terms sound, to the uninitiated, a lot like trying to relearn your ABCs. However, they are just some examples of internationally-accepted standard trade terms, definitions and rules of interpretation used for international (and, increasingly, domestic) sales contracts. The terms are commonly referred to as "Incoterms".

What are Incoterms 2010?

Incoterms were created by the International Chamber of Commerce (ICC) to help standardise the terms of contracts and avoid misunderstandings, by clarifying the costs, risks, responsibilities and practical arrangements between parties contracting for the delivery of goods, generally cross-border.

Incoterms were originally released in 1936, and have been consistently updated since that time. The 10th update (Incoterms 2010) came into force on 1 January 2011. Incoterms 2010 replace Incoterms 2000, with the aim of establishing an improved and more user-friendly set of Incoterms, tailored to the needs of international and domestic commerce.

What are the changes?

Incoterms 2010 update, consolidate and improve some previous Incoterms, to make the Incoterms easier to use. They reflect changes in international trade since 2000, with the increased use of electronic communication and changes to security requirements following 9/11.

Some previous terms are gone: DAF (Delivered at Frontier), DES (Delivered Ex Ship), DEQ (Delivered Ex Quay) and DDU (Delivered Duty Unpaid).

Two new terms are introduced: DAT (Delivered at Terminal) and DAP (Delivered at Place).

There is now no distinction between Group E, F, C and D terms. Incoterms are now divided into two groups: terms that apply to all modes of transport, and terms that apply only to sea and inland waterway transport.

Incoterms that apply to all modes of transport are EXW (Ex Works), FCA (Free Carrier), CPT (Carriage Paid To), CIP (Carriage and Insurance Paid To), DDP (Delivery Duty Paid), DAT (Delivery at Terminal) and DAP (Delivery at Place).

Incoterms that apply only to sea and inland waterway transport are FAS (Free Alongside Ship), FOB (Free on Board), CFR (Cost and Freight) and CIF (Cost, Insurance and Freight).

What are the new Incoterms - DAP and DAT?

The new term DAP replaces DAF, DES and DDU to provide that delivery occurs when the seller puts the goods at the disposal of the buyer at a named place, on a vehicle ready to be (but not yet) unloaded.

The new DAT term replaces DEQ to provide that delivery will take place when the seller puts the goods at the disposal of the buyer, after unloading at the named terminal.

There are now three Incoterms options where goods are sold on a "delivered" basis:

• DAT (named terminal) for delivery to a designated port or terminal;
• DAP (buyer's premises) for delivery to the buyer's premises, but where the delivery has not been cleared for import; and
• DDP (buyer's premises) where delivery is to the buyer's premises and has been cleared for import.

What other changes?

Further changes reflect life in the 21st century.

Each party must provide all the information required by the other party to get export or import clearance.

The seller will now only be required to obtain the minimum insurance cover required under the ICC's cargo clauses, where the seller is required to obtain insurance for the goods under CIP or CIF rules.

The CPT, CIP, CFR, CIF, DAT, DAP and DDP terms state more clearly exactly which party is responsible for the terminal handling costs.

The FOB, CFR and CIF terms have been updated to refer to "loading" on board the vessel, as opposed to delivery occurring when the goods go "across the ships rail".

Electronic documents now have the same validity as written documents. Electronic means of communication now have the same effect as paper communication, as long as the parties agree. The meaning will remain relevant as forms of electronic communication continue to evolve.

What does it all mean for you?

The updated Incoterms 2010 may be relevant for anyone involved in buying, selling or supplying goods (in particular internationally). Existing contractual terms that incorporate Incoterms 2000 need not be updated but, if those agreements are due to be revised, it may be appropriate to consider updating to the new Incoterms 2010.

The right Incoterm must be chosen and applied correctly. Parties need to be clear as to what is covered by a chosen Incoterm and what still needs to be covered by the agreement. Incoterms deal with supply, but they do not describe the goods, price and payment, warranties, intellectual property or the applicable law.

Authors

Simon Vannini

Partner - Corporate & Commercial

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Andrew Tetzlaff

Senior Associate - Corporate & Commercial

DDI: +64 9 977 5179

Mobile: +64 21 918 310

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