International Trade and Incoterms
Sales contracts generally incorporate the internationally-recognised terms of sale known as the Incoterms Rules. Published by the International Chamber of Commerce, the Incoterms Rules allow buyers and sellers to transact business with the certainty that each understands:
- various obligations of the seller and the buyer,
- the point at which the risk of loss of or damage to the goods passes from the seller to the buyer, and
- which party bears various costs associated with the shipment.
In particular, under two of the terms – CIF and CIP – insurance is arranged by the seller for the buyer’s benefit during the main carriage. The risk transfer point, also called the delivery point, is important in relation to marine cargo insurance underwriting and claims, because it is a factor in establishing insurable interest. (Another factor is title; but the Incoterms Rules do not deal with payment or the passing of title.)
Letters of Credit
Because banks will only release funds to sellers on presentation of documents that match the applicable terms of sales, where sales are made against letters of credit, care should be taken to ensure that the incorporated Incoterms Rules that are appropriate for the method of carriage. For example, CIF terms are not generally suitable for containerised shipments.
Incoterms Rules 2010
In 2010, the internationally-recognised Incoterms Rules were updated and available for use from 1 January 2011. The main changes from the 2000 rules are:
1) Less Focus on the Port-to-Port Delivery Terms
To reduce the misuse by sellers of the FOB, CFR and CIF delivery terms, which are generally not appropriate for containerised, multi-modal and non-maritime shipments, the delivery terms are now separated into two distinct groups:
|Terms for any method of carriage, including maritime shipments||Terms applicable to port-to-port shipments only|
|EXW Ex works||FAS Free alongside|
|FCA Free carrier||FOB Free on board|
|CPT Carriage paid to||CFR Cost and freight|
|CIP Carriage and insurance paid to||CIF Cost, insurance and freight|
|DAT Delivered at terminal|
|DAP Delivered at place|
|DDP Delivered duty paid|
2) Fewer Delivery Terms
To streamline the delivery terms, and to better cater for the practicalities of multi-modal traffic, the total number of delivery terms reduces from thirteen to eleven: a new term, DAP, replaces DAF, DDU and DES, while DAT replaces DEQ, making an “unloaded” term available for non-maritime shipments for the first time.
3) Demise of the Ship’s Rail
Where the FOB, CFR or CIF delivery terms are used, the rules now specify that risk passes from the seller to the buyer when the goods are “on board”. This replaces previous reference to goods “passing the ship’s rail”, which is not appropriate for many methods of loading.