The ICC Incoterms® rules are an internationally recognised standard which have become an essential part of the daily language of trade. Published by the International Chamber of Commerce, the Incoterms Rules allow buyers and sellers to transact business with the certainty that each understands all obligations concerning the tasks, costs and risks involved in the delivery of goods.
Why ICC Incoterms are important
The Incoterms® rules have been incorporated in contracts for the sale of goods worldwide and provide rules and guidance to importers, exporters, lawyers, transporters, insurers and students of international trade.
In particular, the Incoterms© 2010 rules, which their revision initiated in late 2016 by ICC, clarify:
- 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.
These rules are vital for the international trade agreements; the terms chosen for the transfer of risk will have a direct impact on the cargo insurance obligations.
For example, under 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.
Specifically, for CIF / CIP sales the 2010 terms provide that:
“The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIP the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.”
“A3 b) Contract of insurance The seller must obtain at its own expense cargo insurance complying at least with the minimum cover as proved by Clauses (C) of the Institute Cargo Clauses (LMA/IUA) or any similar clauses. The insurance shall be contracted with underwriters or an insurance company of good repute and entitle the buyer, or any other person having an insurable interest in the goods, to claim directly from the insurer.
When required by the buyer, the seller shall, subject to the buyer providing any necessary information requested by the seller, provide at the buyer’s expense any additional cover, if procurable, such as cover as provided by clauses (A) and (B) of the Institute Cargo clauses (LMA/IUA) or any similar clauses, and/or cover complying with the Institute War Clauses and/or Institute Strikes Clauses (LMA/IUA) or any similar clauses.”
Incoterms 2010
ICC released Incoterms 2010 reducing the number of terms from 13 to 11 by inclusion of two new rules for use irrespective of the agreed mode of transport. Other modifications to reflect contemporary trade landscape comprises measures to enhance cooperation among parties and adaptations regarding commodities sales and domestic transactions.
The 11 rules are:
- EXW – Ex Works
- FCA- Free Carrier
- CPT – Carriage Paid To
- CIP – Carriage And Insurance Paid To
- DAT – Delivered At Terminal
- DAP- Delivered At Place
- DDP- Delivered Duty Paid
- FAS – Free Alongside Ship
- FOB – Free On Board
- CFR – Cost and Freight
- CIF – Cost, Insurance and Freight
The main difference with the prior version is that Incoterms 2010 are subdivided into two categories, and not four as before, based only on method of delivery. The last four rules (FAS, FOB, CFR, CIF) apply to sea and inland waterway transport while the remaining refer to any mode or modes of transport. Namely, these four rules are being applicable only to sales that solely involve transportation by water where the condition of the goods can be verified at the point of loading on board ship. They are therefore not to be used for containerized freight, other combined transport methods, or for transport by road, air or rail.
Defined terms
There are certain terms that have special meaning within Incoterms, and some of the more important ones are defined below:
- Delivery: The point in the transaction where the risk of loss or damage to the goods is transferred from the seller to the buyer
- Arrival: The point named in the Incoterm to which carriage has been paid
- Free: Seller has an obligation to deliver the goods to a named place for transfer to a carrier
- Carrier: Any person who, in a contract of carriage, undertakes to perform or to procure the performance of transport by rail, road, air, sea, inland waterway or by a combination of such modes
- Freight forwarder: A firm that makes or assists in the making of shipping arrangements;
- Terminal: Any place, whether covered or not, such as a dock, warehouse, container yard or road, rail or air cargo terminal
- To clear for export: To file Shipper’s Export Declaration and get export permit
The revision of the Incoterms
ICC sought the views from stakeholders as well as national ICC committees as a first step in the revision process. The second round of consultations took place through national ICC committees until 15 June 2017. An International Drafting Group is responsible for drafting of the new Incoterms©, which will come into effect in 2020.
Timeline
- 1923: ICC’s first sounding of commercial trade terms
- 1928: Clarity improved
- 1936: First global guidelines for traders published (incl. FAS, FOB, C&F, CIF, Ex Ship, Ex Quay)
- 1953: Rise of transportation by rail. The first revision of the Incoterms® rules was issued adding DCP, FOR, FOT rules.
- 1967: Misinterpretations corrected
- 1974: Advances in air travel. This edition included the new term FOB Airport (Free on Board Airport) to allay confusion around the term FOB (Free on Board) by signifying the exact “vessel” used.
- 1980: Proliferation of container traffic. This edition introduced the trade term FRC (Free Carrier…Named at Point), which provided for goods not actually received by the ship’s side but at a reception point on shore, such as a container yard.
- 1990: A complete revision
- 2000: Amended customs clearance obligations
- 2010: Reflections on the contemporary trade landscape. Incoterms® 2010 is the most current edition of the rules to date.
- 2020: Looking ahead; The Incoterms® 2020 Drafting Group includes lawyers, traders and company representatives from around the world.
