Incoterms ® 2010 are rules published by the International Chamber of Commerce (ICC publication 715E) for the interpretation of the most commonly used trade terms in international trade – International Commercial Terms.
The main purpose of the Incoterms ® rules is to clearly set out the obligations of the seller and the buyer in relation to the delivery of the goods and the division of costs, risks and obligations related to the delivery as required by the sales / purchase contract.
Each rule clearly specifies the responsibilities of the seller and the buyer. The terms range from a situation in which everything is fundamentally the responsibility of the buyer to the other extreme where everything is fundamentally the responsibility of the seller.
Use of Incoterms ® 2010
It is important to ensure that where the protection of the Incoterms ® rules is intended to be incorporated into a contract of sale that as full an address as possible identifies the ‘named place’ and an express reference to the current edition of the rules is always made. For example it is not enough to quote just
“FCA Birmingham, United Kingdom” but instead
“FCA Seller’s Warehouse (full address), Birmingham, United Kingdom, Incoterms ® 2010” should be used.
Failure to incorporate the correct version of Incoterms could result in ambiguity or a dispute as to which version is intended or indeed if Incoterms were intended to be incorporated into the contract at all.
Also, the Incoterms ® 2010 rules are not “law”, but are intended as a reference in the event of a dispute arising from delivery between seller and buyer. Traders should consider the risk implications of selecting an inappropriate or ‘unsafe’ Incoterms ® rule.
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Organization of the Incoterms ® Rules
There are four categories into which Incoterms are grouped:
- The “E” rule (EXW) – Often referred to as the ‘Lazy Exporter’s Term’ where the seller makes the goods available unloaded at his or her own premises to the buyer, who then takes responsibility for all subsequent costs, risk and other obligations relating to the transit. As the buyer is responsible for export clearance and documentation in the country of shipment, the ICC recommends that EXW is appropriate for domestic trade only and should not be used for international shipments.
- The “F” rules (FCA, FAS and FOB) – Rules where the seller is responsible to deliver the goods to a carrier named by the buyer free of export formalities.The ICC recommends that FAS and FOB (applicable for sea and inland waterway transport only) should not be used where goods are handed to a carrier for loading into a container prior to reaching the sea vessel. FCA (named place) is intended to replace FAS and FOB in such instances.
- The “C” rules (CPT, CIP, CFR and CIF) – Rules where the seller is responsible for contracting and paying for carriage of the goods, but not responsible for risk of loss or damage to the goods once they have been delivered to the carrier in the country of export. The ICC recommends that CFR and CIF (applicable for sea and inland waterway transport only) should not be used where goods are handed to a carrier for loading into a container prior to reaching the sea vessel. CPT and CIP are intended to replace CFR and CIF in such instances. Delivery and transfer of risk occurs when the seller hands the goods to the first international carrier (typically the same delivery point as FCA or FOB, depending on the mode of transport – see above).
- The “D” rules (DAT, DAP and DDP) – Rules where the seller/exporter/manufacturer is responsible for all costs and risks associated with bringing the goods to the place of destination.
Mode of Transport
As stated above, not all Incoterms ® rules are appropriate for all modes of transport. Some rules were designed with sea vessels in mind while others were designed to be applicable to all modes.
In the latest version – Incoterms ® 2010, the rules have been classified as follows:
- Rules for any mode or modes of transport
- Rules for sea and inland waterway transport
Incoterms ® 2010 and Letters of Credit
Sellers should be wary of selecting EXW, FCA or FOB when being paid under a Letter of Credit. The buyer’s agent will be controlling the production of certain documents required to be presented to the bank. What if these documents fail to arrive in time or contain discrepancies?
It may be more beneficial to consider rules such as CPT / CIP, CFR / CIF whereby the seller will be engaging the services of a carrier or freight forwarder acting on his / her behalf. This will provide the seller with greater control over timing and production of L/C documents to the bank.
A buyer will generally be reluctant to select DAT, DAP or DDP when the seller is able to present documents / claim payment following shipment. Assuming documents comply with the L/C terms, it is possible that the seller will be paid by the bank whilst goods are still in transit and delivery obligations have not been completed. That said, it must be remembered that under UCP 600, banks concern themselves with documents only and not the underlying contract (Article 4) or the goods to which the documents relate (Article 5).
This brief introductory guide has been produced by MJ Hayward Associates Ltd and is not intended as a substitute for Incoterms ® 2010 itself. It is strongly recommended that traders familiarise themselves with the full legal text of Incoterms ® 2010 available from www.iccwbo.uk/collections/incoterms or www.storeiccwbo.org/incoterms-2010.