New rules for International Trade Arrangements

The International Chamber of Commerce (ICC) launched a revised set of Incoterms and accompanying guidance in September 2010, which came into force on 1 January 2011.

Incoterms are a series of internationally recognised terms which govern the costs, risks and practical arrangements relating to the sale and delivery of goods and services. Therefore, the new rules are relevant for anyone involved in contracts of sale used in relation to imports or exports, and also for some domestic transactions.

Old Incoterms 2000

Deliberately or otherwise, the old terms are likely to continue in use for a considerable period, as they are often part of pre-printed sales and transport documentation, and tie in with standard trade finance and insurance documents. Parties should be careful to specify whether they are using the old or new Incoterms.

Incoterms 2000 contain 13 rules which each have a three-letter abbreviation. The rules provide a choice for the parties in allocating the scale and scope of each party's obligations. There are four categories:

• Group E - EXW: most readers will be familiar with the concept of 'ex works' sales.
• Group F - FCO, FAS and FOB: main carriage costs not paid by the seller.
• Group C - CFR, CIF, CPT and CIP: main carriage costs paid by the seller.
• Group D - DAF, DES, DEQ, DDU and DDP: deal with clearance to a specified delivery point, usually after the main journey.

New Incoterms 2010

The number of Incoterms has been reduced from 13 to 11. DAF, DES, DEQ and DDU have been replaced by "DAT" (Delivered at Terminal) and "DAP" (Delivered at Place). The rules have been split into two classes in order to help traders chose the most suitable rule in relation to the mode of transport. One class can be used for any mode of transport and the other is reserved solely for maritime transport.

Security and Insurance

Incoterms 2010 place more emphasis on security than the old rules. Mandatory security checks have been introduced by many countries and the new rules acknowledge that these checks are now a requirement for most exports and imports. The new rules also provide that both sellers and buyers must provide more information in order to obtain import/export clearance.

Terminal handling charges

Under some of the Incoterms 2000, the seller had to arrange and pay for the carriage of goods to the agreed destination, but the seller may have passed the costs of unloading and handling at the terminal or port onto the buyer as part of the cost of goods. Some buyers were also charged for this service by the terminal or port (known as double charging).  The new rules try to address this problem by ensuring that there is a clear allocation of costs between the parties.

Additional changes

The new rules are accompanied by extensive guidance notes and user-friendly diagrams.  They also acknowledge the increased use of electronic communication by providing that electronic records have the same validity as paper documents.

Transition

The Incoterms 2000 will continue to govern the performance of pre-existing contracts, even if actual performance occurs after 1 January 2011. Any contracts which are entered into on or after 1 January 2011 which incorporate Incoterms will be assumed to refer to Incoterms 2010, unless 2000 is specified.

Recommendations

• Ensure Incoterms are specifically referenced in any contract using one of the abbreviated expressions, unless you intend to adopt a non-standard arrangement (which should be spelled out). Also specify 2000 or 2010.
• Choose the right Incoterm. Make sure you understand the rules and what they mean to ensure you choose the appropriate allocation of risk, costs and responsibilities.
• Be specific when using the rules; for example use the full name and address of the delivery location.
• Ensure that there is sufficient contractual protection for the parties - these rules are not an alternative to contractual arrangements, they are designed to supplement the agreed terms between the parties.

Ian Holyoak is a partner within the Commercial Team at Michelmores and advises regularly on domestic and international trade. For further information, contact Ian at ian.holyoak@michelmores.com or on 01392 688688.