Friday, October 29, 2010

The evolution of trade terms in International Trade - the proposed Incoterms 2010

Dear (s)

The attraction of Marine is its International character and that it is ever changing with the times.   Come January 2011, there is going tobe another revision to Incoterms.  ICC Incoterms are global rules that clarify the costs, risks, and responsibilities of both buyers and sellers. Developed by ICC and used by companies to move goods around the world, ICC Incoterms® have become the standard in international business rules setting.

Marine insurance is insurance of goods in transit – mostly from seller to buyer, often across boundaries of Nations.  In the interests of international trade, it desirable that merchants of different countries agree on a common interpretation of various terms and abbreviations they use in their foreign trade contracts.  If there is mismatch of the agreement, one of the parties would suffer beyond his perception and would end up in litigation.  There could be difficulties arising out of lack of adequate information and lack of uniformity of interpretation. 

These days, all International contracts of sale contain standard shipping and delivery terms.  However, even the most common terms such as FOB or CIF do not necessarily have the same meaning in different Ports or centres of Trade or to those people between whom the contract was concluded cordially.  One could well imagine those olden days, when International trade had evolved but lacked these clear codified interpretations.   

Incoterms or international commerce terms are a series of international sales terms, published by International Chamber of Commerce (ICC) and widely used in international commercial transactions. These are accepted by governments, legal authorities and practitioners worldwide for the interpretation of most commonly used terms in  international trade. This reduces or remove altogether uncertainties arising from different interpretation of such terms in different countries. Scope of this is limited to matters relating to right and obligations of the parties to the contract of sale with respect to the delivery of goods sold. They are used to divide transaction costs and responsibilities between buyer and seller and reflect state-of-the-art transportation practices. They closely correspond to the U.N. Convention on Contracts for the International Sale of Goods.     The purpose of the Incoterms is to:   provide a set of international rules for the interpretation of the most commonly used trade terms in foreign trade”

The first version was introduced in 1936 – amendments and additions were later made in 1953, 1967, 1976, 1980, 1990, and presently the 2000 version in vogue, which is sought to be amended by the present 2010 version.  

Way back in 1936 when they were first adopted, there were 10 codified terms.  They were “1) Ex works 2) FOR 3) FAS 4) FOB 5) C & F 6) CIF 7) Freight or Carriage paid to 8) Free or Free delivered 9) Ex-ship and 10) Ex-Quay”.   Clearly these Incoterms referred to the relationship between the Seller and buyer and none of the provisions affect, either directly or indirectly the relationship between the consignor and carrier as defined in the contract of carriage.    In any international trade, the two parties (buyer and seller) have agree and document a sale contract aimed at sharing the expenses and risks between them.  There are conventions which have a bearing on contract of sale between the parties.  

Going by the well codification between the Seller and Buyer the following are to be complied with : “Provision of goods in conformity with the contract, payment of the price,  obtaining licenses, authorizations and formalities, arranging contract of carriage and contract of insurance, taking delivery, transfer of risks, division of costs, providing notice to buyer on movement of goods, providing proof of delivery, inspection of goods and any other obligation”.

All these aspects of international trade are taken care of by Incoterms (International Commercial Terms).  Incoterms is an acronym meaning International Commercial terms.   These definitions are published by the International Chamber of Commerce.  These  in effect regulate : the distribution of documents, the conditions for delivery of goods, cost of transporting and insurance & the responsibility of risk in shipping the goods.     Incoterms would not cover : the conditions of sale, the condition of goods, warranty of the goods, payment or nonpayment of goods, intangible products such as computer software.

The 1990 version had 13 terms broadly classified as :  E – Departure (ExW); F – Main carriage unpaid :  FCA, FAS, FOB; C –  Main carriage Paid : CFR, CIF, CPT, CIP and D – Arrival : DAF, DES, DEQ DDU and DDP.

These were further reviewed in 2000 and no. of changes in the terms of previous versions were made.  For example the customs clearance and payment of duty were codified in FAS & DEQ – so also in FCA – loading and unloading obligations were specified.   In contrast to the previous four classes, E,F,C and D, Incoterms were separated into 2 groups : 

 Any mode of Transport  :
Group E :  ExW
Group F :  FCA
Group C:  CPT, CIP,
Group D:  DAF, DDU, DDP

II  Maritime and Inland waterway transport Only : 
Group F:    FAS, FOB
Group C:   CFR, CIF
Group D:   DES, DEQ


Now the eighth revision of Incoterm rules is contemplated.  The rules takes care of the growth of customs free areas.  Even after exemplary codifications, there could still be disputes due to usage of wrong terms being selected.  The new set stresses the need to use them in accordance with the goods as also to the chosen mode of transport and whether the parties to contract intend to impose additional obligations or not. 

The new rules as understood are separated into 2 clauses : : (i) Rules for use in relation to any mode or modes of transport, which can be used where there is no maritime transport at all or where maritime transport is used for only part of the carriage and (ii) Rules for sea and inland waterway transport, where the point of delivery and the place to which the goods are carried to the buyer are both ports.

FAS, FOB, CFR and CIF belong to the second class of Rules. In respect of FOB, CFR and CIF, reference to the “ship’s rail” has now been deleted and this has been replaced with the goods being delivered when they are “on board” the vessel.

Though these are designed for international trade, incoterms traditionally have been used for local trades as well.   As against the existing 13 sets of terms, now there would be only 11.  Two new rules have been introduced which can be used irrespective of the mode of transport and under both the new rules, delivery takes place at a named destination.

Thus D (Delivered) terms under 2000 stands consolidated.  The new ones are DAT (Delivered at Terminal)  and DAP (Delivered at Place).

DAT (Delivered at Terminal) replaces DEQ (Delivered ex Quay). DAT may be used irrespective of the mode of transport selected and may also be used where more than one mode of transport is employed.  "Delivered at Terminal” means that the seller delivers when the goods, having been unloaded from the arriving means of transport, are placed at the buyer’s disposal at a named terminal at the named
port or place of destination. DAT requires the seller to clear the goods for export where applicable but the seller has no obligation to clear the goods for import, pay any import duty or carry out any import customs formalities.

It is thought that  DAT would prove more useful than DEQ in the case of
containers that might be unloaded and then loaded into a container stack at the terminal, awaiting shipment. There was previously no term clearly dealing with containers that were not at the buyer’s premises.

DAP (Delivered at Place) replaces DAF, DES, DEQ and DDU. The arriving “vehicle” under DAP could be a ship and the named place of destination could be a port. Consequently, ICC considers  that DAP could safely be used instead of DES and that it would make the Rules more “user-friendly” if they abolished terms that were fundamentally the same. Again, a seller under DAP bears all the costs (other than any import clearance costs) and risks involved in bringing the goods to the named destination.

Now the 11 terms of Inco 2010 are :

Applicable for all modes of transport:
EXW : ex works
FCA : free carrier
CPT : carriage paid to
CIP : carriage and insurance paid to
DAT : delivered at terminal – NEW!
DAP : delivered at place – NEW!
DDP : delivered duty paid
Applicable for sea and inland waterway transport:
FAS : free alongside ship
FOB : free on board
CFR : cost and freight
CIF : cost, insurance and freight

Going by the present rules 2010, DDP means that seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on arriving means of transport ready for unloading at the named place of destination.   The seller bears all the costs and risks involved in bringing the goods to the place of destination and has an obligation to clear the goods not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities.

Here lies no. of risks and costs that the Seller might never have anticipated at the time of inking the contract.  There could be impediments by Govt rules requiring payment of duty only by those registered in the country.   The most suitable term here would be DAP.

To conclude, Incoterms are not law but are international rules that are accepted by governments,  legal authorities and practitioners worldwide for the interpretation of the most commonly used terms in domestic and international trade.   The contracting parties are at liberty to chose their own terms also but might lose out when it is arbitrated on any dispute.  There are still international trade contracts stating C&F  which is no longer an Incoterm after 1990.

Regards

S Sampathkumar.

10 comments:

  1. Thanks. Feel have understood something though it is complicated - Muralikrishna

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  2. there has always been confusion on Inco and their application to insurance - Bala

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  3. Very elaborative. When this will be available in market - Prasad

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  4. Why dont Indian Insurers detail these to their clients - insuring public and big industries. Also Agents should be trained on these aspects as the marine market is not handled by capable personnel - CS Shas

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  5. For any Marine Insurance practitioner, its very important to understand the implications of Incoterms which are used in all International Trade. This decides the responsibility of the parties to the contracts and hence the corresponding rights and liabilities of buyer and seller. A very good read indeed!!!

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  6. Thank you so much Mr. S Sampathkumar.. You ealborate it in a simple & understanding way.. But as in the current scenario, The insurer are only using four to five inco terms in marine policy. Even I was also not aware about DAP. Even if the Insurer aware about all those inco terms, neither the insurer nor the client will face any problem in case of big claim amount..

    It was very Informative.. Thank you and request you to share such things afterwards..

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  7. I have read the article in its entirety. A very good summation and shows your understanding of the terms so well - Shankar

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  8. Boss, trade terms have always confused me. Do understand the reasons for periodic revisions. If only somebody like you takes a class to explain, it would be fine - Jagan

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  9. We have had some internal discussion within our Team. Not many are even aware of these trade terms. Your understanding and explanations are amazing. Hats off to you - Prakash

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  10. Already Insurers are criticised for looking too much and trying to avoid payment. If you are to speak of so much of terminology and legality, how will any ordinary person get his claim - Trivedi

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