New Incoterms Rules in effect January 1, 2011 / Adv. Dan Zaum*

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1 New Incoterms Rules in effect January 1, 2011 / Adv. Dan Zaum* Export transactions generally involve international sales contracts, whose clarity of terms is crucial to avoiding disputes between parties. To ensure consistent interpretation, the International Chamber of Commerce created a set of standard trade "Incoterms" in 1936, whose terms have been adopted as the language of international trade and are periodically revised to reflect developments in international trade. Incoterms 2000 were drafted using legal language, were approved by the UN Committee for International Trade Law as a global Rules. Although they are not a law or regulation, the Incoterms have been recognised in most countries and have been adopted by courts of law as if it was a binding law. The Incoterms Rules assist traders and prevent disputes over the rights and obligations relating to shipping goods, as well as cost and risk allocation and delivery obligation. The respective Rules are chosen according to the kind of goods shipped and the method of shipment. On January 1, 2011, the International Chamber of Commerce (ICC)'s Incoterms 2010 will replace Incoterms 2000 as the authoritative text for determining the allocation of risks and responsibilities in the sale of goods. It should be noted that the Incoterms Rules are binding in so far as the parties to a transaction have explicitly agreed and referred to the Rules. Parties may decide not to include them in the sale agreement however they risk possible dispute and disagreement on interpretation of the obligations of each of them. A. The Basics What do Incoterms cover? Who does what / who pays for what / when risk in the goods passes from seller to buyer/when delivery occurs, as well as issues such as insurance, export and import clearance and the division of other costs pertaining to the delivery of goods. What do Incoterms not cover? There is nothing on ownership/title to the goods, nothing in detail on payment obligations (when/how/what security/against what documents) nothing on detailed vessel requirements, force majeure, termination, insolvency. In short Incoterms do not constitute a complete contract of sale, but rather provide convenient, internationally recognised rules for the sale of goods. How are they used? They are incorporated into many contracts by express reference (e.g. "DAP one safe berth Rotterdam, Incoterms 2010") or are referred to in standard contracts (eg. SCoTA - "FOB means free on board as defined by Incoterms 2000"). They may also provide some guidance as to the generally accepted meaning of trade terms such as CIF/FOB/DES1 but you must expressly refer to them if you want them to apply. Why are they changing?

2 To take account of the spread of customs-free zones, the increase in use of electronic communications, concerns about security following 9/11 and latest developments in trade since the 2000 version. When are they changing? Publication date for Incoterms 2010 was 27 September 2010, with the new rules coming into force from 1 January What about contracts already entered into? For existing contracts, Incoterms 2000 will continue to apply even if performance of the contract will be made in For contracts entered into between September January 2011, parties should expressly say which set of Incoterms is to apply. After 1 January 2011, it will be assumed any reference to "INCOTERMS" in new contracts is a reference to Incoterms Do I really need to bother about Incoterms 2010? It depends on your usual contract terms. GAFTA/FOSFA/Sugar (SAL/RSA) contracts do not incorporate Incoterms at all, so you can ignore the change! Standard petroleum product contracts (BP/Exon Mobil) refer to Incoterms, as do many Ethanol, coal and metals contracts, so you will need to: check your standard contract forms; consider changes in 2010 Incoterms; make any necessary consequent changes (for example changing DES to DAP) to your standard forms for new contracts; and publicise the changes to your counterparties and to your traders/execution people. B. What are the main changes in Incoterms 2010 that you should be aware of? 1. Removal of terms and introduction of new terms. The rules were reduced from 13 to 11, by removal of 4 terms and introduction of 2 new terms: 1.1. Delivered At Place (DAP) which should be used in place of DAF, DES and DDU; and 1.2. Delivered At Terminal (DAT) which replaces DEQ. 2. Creation of two, rather than four categories of terms 2.1. deliveries by any mode of transport (sea, road, air, rail): EXW Ex Works FCA Free Carrier CPT Carriage Paid To CIP Carriage and Insurance Paid DAT Delivered At Terminal DAP Delivered At Place DDP Delivered Duty Paid 2.2. Deliveries only by sea/inland waterway, where goods are carried to and from ports. Incoterms 2010 reiterate that the following terms (in particular FOB and CIF) are for

3 use only when goods are transported by sea or inland waterway. The terms should not be used where there is any form of road/rail/air transport involved, or where goods are handed over to the carrier before they are on board the vessel, for example goods in containers which may well be delivered at a terminal. FAX Free Alongside Ship FOB Free On Board CFR Cost and Freight CIF Cost, Insurance and Freight. It is also worth noting that the concept of "ship's rail" has been replaced with "on board." Thus, for FOB, CFR and CIF sales, goods are deemed delivered when they are on board the vessel. This eliminates past concerns of risk passing arbitrarily back and forth between the buyer and seller across an invisible line extending upward from the ship's rail. 3. Domestic and international trade. The new Incoterms are expressly stated to be for "both domestic and international trade". This is achieved by statements within the rules that the obligation to comply with export/import formalities only exists where applicable. For trade blocs (e.g. the EU) where "border" formalities have largely disappeared and in the US, where there has been an increasing willingness to use Incoterms rather than the former Uniform Commercial Code shipment and delivery, the new terms are now easier to apply. 4. Electronic records., The buyer's and seller's obligations to provide contractual documentation may now be by "electronic record if agreed between the parties or customary", reflecting recognition by the ICC of the increasing importance and contractual certainty (owing to speed of transfer) provided by electronic communication. 5. Insurance. Where an Incoterms requires that one party obtain insurance, the insurance requirements have been amended to reflect the changes to the Institute Cargo clauses. The parties' obligations regarding insurance have also been clarified. This is mainly use in CIP and CIF terms, and these terms generally follow the current requirements under Incoterms Security. The issue of security of goods / vessels, etc, is now at the front of most people's minds when considering international trade. Given that many countries now require heightened security checks, the rules now require that both parties are obliged to provide all necessary information (e.g. chain of custody information) in order to obtain import/export clearance. 7. Terminal handling charges. Where the seller is required to arrange and pay for the carriage of the goods to an agreed destination (CIP, CPT, CFR, CIF, DAT, DAP and CCP) it may be the case that terminal handling charges are passed on to the buyer as part of the contractual price for the goods. However, historically, in some cases, the buyer also had to pay the terminal for this service (i.e. a double charge). 8. String Sales. In contracts for the sale of "commodities", as opposed to manufactured goods, it is often the case that a cargo is on-sold a number of times during transit (i.e. a string sale). In such situations, sellers in the middle of the string do not ship the goods, as the goods have already been shipped by the seller at the top of the string. As such, the obligation on sellers in the middle of the string is to procure goods that have been shipped. The new Incoterms clarify this by including an obligation to "procure goods shipped" as an alternative to the obligation to ship goods.

4 C. Major Changes in Incoterms FOB 1.1 Contracts of Carriage and Insurance (A3/B3) The seller owes no obligation to the buyer to make a contract of carriage, as this is normally the responsibility of the buyer. However, the new Incoterms provide that if requested by the buyer or if it is commercial practice and the buyer does not give a timely instruction to the contrary, the seller "may" contract for carriage on usual terms at the buyer's risk and expense. Equally, the seller may decline to do so but "shall promptly notify" the buyer. Therefore the new FOB Incoterms requires a notice from the seller in trades where it may be "commercial practice" for the seller to arrange carriage. Logically, we think that it is preferable for the seller to exclude this unless the seller wishes to have an option to ship e.g. "buyer to arrange carriage in all circumstances". The alternative that you see in many contracts is, if the buyer does not tender a vessel, the seller has a right to store at load port and be paid against warehouse receipts - this requires express wording in the sale contract. As with Incoterms 2000, neither party is obliged to the other to arrange insurance for the benefit of the other party. The new terms however place an express obligation on the seller to provide any information that the buyer needs to obtain insurance. 1.2 Delivery (A4)/Taking Delivery (B4) The delivery provisions are similar to Incoterms 2000, however, the seller's obligation is now to place the goods "on board the vessel," rather than over the ship's rail at the loading port indicated by the buyer. The "ship's rail" as the point of delivery has been omitted in preference for the goods being delivered on board the vessel in order to more closely reflect modern commercial reality and to avoid costly disputes over when exactly the goods pass the "ship's rail". If no specific loading point has been indicated by the buyer, the new Terms make it clear that the seller may select the point that best suits the seller's purpose. In practice, it would be sensible to include an express provision enabling the seller to chose the loading point if that is what is agreed. Finally the new Terms clarify that the seller may now perform its delivery obligation by procuring delivered goods as opposed to deliver goods itself. This simply reflects the current accepted practice in string sales. 1.3 Risk (A5/B5) The transfer of risk provision remains the same, aside from the clarification that risk passes when the goods are on board the vessel, not when they pass over the ship's rail. 1.4 Checking/Packaging/Marking (A9) Incoterms 2010 provide that the seller must actually pack the goods; under the previous Terms the obligation was only to provide packaging. In relation to the costs of "checking operations", the new Terms now provide that the cost of any pre-shipment inspection required by the authority of the export country is part of the costs that the seller must bear. Express terms should be used if the parties wish to allocate costs differently. The corollary of

5 this in B9 is that the buyer is to bear the costs of any other mandatory pre-shipment inspection. Again additional terms would still be useful to avoid arguments as to the nature of any pre-shipment inspection. 2. CIF 2.1 Contracts of Carriage/Insurance (A3/B3) The seller is required to obtain cargo insurance complying at least with the minimum cover provided by Clauses (C) of the Institute Cargo Clauses. Note, however, that this is the minimum level of insurance and covers only major casualties, such as total loss of cargo. The buyer also has the option of requiring that the seller provides, at the buyer's expense and where procurable, any additional cover, for example, cover provided by Clauses (A) or (B) of the Institute Cargo Clauses or any similar clauses and/or cover complying with the Institute War Clauses and/or Institute Strikes Clauses or any similar set of clauses. This acts as sort insurance "bolt-on", but the buyer will be required to pay more for this. If the buyer wishes for the seller to arrange for this "bolt-on" insurance, it is recommended that this is included in the sale contract. In Incoterms 2000, there were no specific references to Institute Cargo Clauses (A), (B) and (C), as well as the references to the Institute War Clauses and Institute Strikes Clauses. The buyer must now provide the seller (upon request), with any information necessary for the seller to procure any additional insurance as request by the buyer and the seller must provide the buyer with the insurance policy or other evidence of insurance cover, as well as any information that the buyer needs to procure any additional insurance. 2.2 Delivery (A4/B4) The seller may now deliver (in lieu of placing the goods onboard the vessel) by procuring the goods so delivered, provided that the goods are delivered on the agreed date or within the agreed period and in the manner customary at the port. 2.3 Risk (A5/B5) The seller has to bear all risks of loss of or damage to the goods until they have been delivered on board the vessel. The concept of the "ship's rail" has been abandoned, given the uncertainty of when goods actually pass the ship's rail. 2.4 Allocation of Costs (B6) In addition to those costs for which the buyer was responsible as detailed in Incoterms 2000, the buyer is now also responsible for the costs of any "bolt-on" insurance that it has requested. This is a formalisation of the previous arrangements made between parties. 2.5 Checking/Packaging/Marking (A9) The seller is obliged to package the goods (as opposed to simply providing packaging), unless it is usual for the particular trade to transport the type of goods sold unpackaged. 2.6 Inspection (B9)

6 The buyer is to bear the costs of any mandatory pre-shipment inspection, except when such inspection is mandated by the country of export. FOB/CIF Variants Incoterms 2010 has not made any provision for "refined" FOB/CIF terms, for example CIFFO, CIF Liner Terms or FOB stowed/trimmed. If a party wishes to contract on these terms, it must explicitly provide for this in the sale contract. 3. FAS The provisions of FAS are largely identical to FOB, with the exception that goods are delivered, and risk passes, once the goods are placed alongside the vessel, as opposed to when they are placed on-board the vessel. You may wish to expressly provide for what exactly constitutes the goods being "alongside" the vessel. 4. CFR Similarly, the provisions of CFR are largely identical to CIF, with the exception that the seller is not obliged to procure insurance. 5. DAP: Delivered at Place DAP replaces what were DAF, DES and DDU and can be used in any situation where such terms were used previously. The rationale for this consolidation was that the Incoterms 2010 drafting committee felt that DAF, DES and DDU were all similar in scope and that there was often confusion about the appropriate D-term to use. Of the legacy terms, DDU is most similar to the new DAP which is to be used when goods are delivered on the arriving means of transport, ready for unloading by the buyer, at the named place of destination, but not import cleared. 5.1 Contracts of carriage and insurance (A2/B2) Is the same except that there are now obligations on both buyer and seller to provide information (at the other's request) to allow the other to contract for insurance. 5.2 Delivery (A3/B3) now provides for an "agreed point" for unloading within the place of destination. Additionally, the option to provide for delivery to a person named by the buyer has been removed. If such provision is required, it should be included as an express term. 5.3 Risk (A5/B5) Is materially the same. 5.4 Allocation of costs (A6/B6) Now makes it explicit that the seller must pay any costs of unloading specified in the contract of carriage. If a seller wishes to recover those costs from the buyer, the seller should include an express term to that effect. Otherwise, the buyer is to pay any costs of unloading.

7 5.5 Delivery document (A8/B8) is now simplified so that the seller need only provide the buyer (at the seller's expense) with a document enabling the buyer to take delivery. This can be any kind of document. 5.6 Checking - packaging marking (A9) Is changed so that the seller must now actually package (as opposed to providing packaging for) the goods, unless it is usual to transport such goods unpackaged. If the buyer notified the seller of any special packaging requirements prior to the contract of sale, the seller must comply. 5.7 Inspection (B9) Is now explicit that the seller must pay the costs of any pre-shipment inspection mandated by the authorities of the country of export. 5.8 Assistance (A10/B10) Now provides that the buyer must assist the seller (at the seller's request, risk and expense) to obtain documents and information necessary for the transport and export of the goods. The buyer must (in a timely manner) advise the seller of any security information requirements. The seller's obligations are expanded to cover documents and information that the buyer needs for the transport of the goods to the final destination. 6. DAT - Delivered at Terminal DAT replaces DEQ and should be used where DEQ would have been used previously. DAT is primarily for use in the sale of containerised goods, which are delivered by unloading them from the arriving means of transport and placing them at the disposal of the buyer at the named port or place of destination. Note that "terminal" replaces "quay" as a global change and includes any place, whether covered or not, such as quay, warehouse, container yard or road, rail or air cargo terminal. Both DAP and DAT may be used irrespective of the mode of transport employed. The general provision for electronic versions of documents noted in Part 1 of the Client Alert also applies. Although DAP and DAT are new terms, they can be compared usefully to DDU and DEQ, respectively. This Alert now sets out such a comparison. 6.1 Contracts of carriage and insurance (A2/B2) Is the same except that there are now obligations on both buyer and seller to provide information (at the other's request) to allow the other to contract for insurance. 6.2 Delivery (A3/B3) makes explicit the obligation of the seller to unload as well as placing the goods at the disposal of the buyer. 6.3 Risk is (A5/B5) Now explicit that the risk is with the buyer if the buyer fails to obtain import authorisation.

8 6.4 Allocation of costs (A6/B6) Makes it explicit that the buyer is liable for the seller's additional costs if the buyer fails to obtain import authorisation. There is no longer a stipulation that the buyer is responsible for the costs of transportation of the goods from the time of delivery, though this is still implicit. 6.5 Delivery document (A8/B8) Is now simplified so that the seller need only provide the buyer (at the seller's expense) with a document enabling the buyer to take delivery. This can be any kind of document. 6.6 Checking - packaging - marking (A9) is changed so that the seller must now actually package (as opposed to providing packaging for) the goods, unless it is usual to transport such goods unpackaged. If the buyer notified the seller of any special packaging requirements prior to the contract of sale, the seller must comply. 6.7 Inspection (B9) Is now explicit that the seller must pay the costs of any pre-shipment inspection mandated by the authorities of the country of export. 6.8 Assistance (A10/B10) Now provides that the buyer must assist the seller (at the seller's request, risk and expense) to obtain documents and information necessary for the transport and export of the goods. The buyer must (in a timely manner) advise the seller of any security information requirements. The seller's obligations are expanded to cover documents and information that the buyer needs for the transport of the goods to the final destination For further information on this topic please contact Dan Zaum at Zaum & Partners by telephone ( ) or fax ( ) or by (DZ@zaum.be) Disclaimer: This Article is for general information purposes only. Readers should take specific advice from a qualified professional when dealing with specific situations.