Review of the New Incoterms in Trade Finance

The International Chamber of Commerce (ICC) in Paris released a new version of the International Commercial Terms (Incoterms 2010 – ICC 715), effective 1 January 2011. The revision replaces Incoterms 2000. The terms, in vogue since 1936, have seen periodic updates to accommodate changes in the transport industry and to reflect how trade is actually carried out.

Previous Incoterms

Incoterms are standard trade terms that allocate certain obligations, costs and risks between seller and buyer that are inherent to international and domestic trade. These costs include risk of loss or damage to goods, customs clearances, insurance and transport, and loading and unloading charges. Incorporating Incoterms in a contract of sale minimises misunderstandings and uncertainty. Usually the mutually-chosen Incoterms would be part of the commercial invoice, indicating if the price quoted includes or excludes other elements such as freight, insurance and other subsidiary charges. Each term indicates the seller’s responsibility, so what is not mentioned in a chosen Incoterm is the buyer’s responsibility.

Before the current revision, the 13 Incoterms were:

  1. EXW [ex works].
  2. FCA [free carrier].
  3. FAS [free alongside ship].
  4. FOB [free on board].
  5. CFR [cost and freight].
  6. CIF [cost, insurance, freight].
  7. CPT [carriage paid to…].
  8. CIP [carriage and insurance paid to…]
  9. DAF [delivered at frontier].
  10. DES [delivered ex ship].
  11. DEQ [delivered ex quay].
  12. DDU [delivered duty unpaid].
  13. DDP [delivered duty paid].

Incoterms 2010

After revision, Incoterms have been reduced to 11 by deleting DAF, DES, DEQ, DDU and introducing two new terms:

  1. DAT [delivered at terminal].
  2. DAP [delivered at place].

DAT has been introduced due to rapid growth in container shipping, while the all-encompassing DAP – which is transport-mode neutral – will replace DAF, DES, DEQ and DDU. The new set of 11 terms are:

  1. EXW.
  2. FCA.
  3. FAS.
  4. FOB.
  5. CFR.
  6. CIF.
  7. CPT.
  8. CIP.
  9. DAT.
  10. DAP.
  11. DDP.

The new set also divides the terms broadly into two sections, depending on the mode of transport chosen for a trade transaction:

  1. Terms which can be used for any mode of transport (EXW, CPT, CIP, DAT, DAP and DDP).
  2. Terms which can be used only for sea and inland waterway transport (FCA, FAS, FOB, CFR, CIF).

This segregation is welcome, as before it was quite common to quote an inappropriate Incoterm, for example quoting FOB and CIF in cases where transport was by air – the correct terms to use here are FCA and CIP respectively. This often resulted in rejection of documents presented under collections and letters of credit (LCs).

The opportunity to revisit Incoterms has been used by the drafting committee to bring it line with other ICC trade facilitation rules, such as the widely used Uniform Customs and Practices (UCP) for LCs. Hence, there is a section on definitions where key words such as ‘delivery’, ‘carriage’ and ‘packaging’ have been explained. The language is more contemporary, for example ‘ship’s rail’ has been replaced by ‘on board’ to convey completion of delivery obligation under FOB, CFR and CIF terms.

Another welcome addition for trade finance practitioners is the device of giving guidance notes after each term, rather than collecting the notes all together as part of a lengthy introduction – this was the practice with earlier revisions and meant it was rarely read. Now the user is guided to the right term and given help to choose the most appropriate for a given circumstance. Terminal handling charges, which were contentious, have been clarified so it is clear who bears responsibility under the respective Incoterm.

The new terms also bring clarity to ‘string trade’. This is particularly encountered in commodities trading where goods are sold in transit. In this case, the new buyer will inherit the existing Incoterm instead of entering into a new one with the seller.

However, the revision is vague on the issue of who is responsible for obtaining security clearances of cargo, which is a major issue in national jurisdictions. This could be deliberate as national laws would take priority. So the revision merely cautions the buyer and seller to be aware of this aspect and to consult each other before going ahead with a trade contract.

Conclusion

Incoterms were devised to provide a set of standard terms that could be used by trade parties globally without fear of national interpretations. This revision brings the terms up to date with changes in the trade logistics sector over the past decade.

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