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38 S U PP LY C H A I N

Incoterms 2010: what


you need to know for
smooth trading Roberto Bergami

T
he delivery terms for goods in international trade remain one of
the most difficult parts of any contract of sale. Different physical
environments, infrastructure availability, and the need for timely
delivery, lead to varying requirements for the transport of goods from origin
to destination across the four modes of transport: road, rail, air and sea.
Choosing the appropriate term of delivery for a particular transaction is
further complicated in the negotiation by the conflicting desires of sellers
and buyers. Sellers wish to maximise their sales, while buyers seek the
cheapest deal possible. Whilst it appears that traders have a strong focus
on price, it does not seem that there is an equally strong focus on the risk
aspects of the transaction, insofar as the physical movement of products is
concerned. Therefore the use of standardised delivery terms ought to be of
assistance to trading parties.

Figure 1: Possible subsidiary contracts arising from the contract of sale.


The scope of Incoterms 2010
The internationally recognised delivery terms are known as Incoterms. Incoterms 2010 provides a standard set of rules, enabling sellers and
These terms were devised in 1936 by the International Chamber of buyers worldwide to agree on a common set of terms, regardless of the
Commerce (ICC) and have regularly been updated during the course of mode of transport chosen or the transport routing.
their existence. The latest edition of these terms becomes effective on 1 Incoterms 2010, for the first time, is now referred to as a set of rules
January 2011 and is referred to as Incoterms 2010. and can equally apply to domestic as well as international sales contracts.
Incoterms 2010 outlines, on a mutually exclusive basis, the rights, In this article, the focus will be limited to international sales contracts.
duties, obligations and responsibilities of sellers and buyers in a contract
of sale, on matters related to the transport of goods and their related Limitations of Incoterms 2010
activities, such as entering into subsidiary contracts for barrier clearance The scope of Incoterms 2010 does not include the following:
(export and import); carriage and insurance, as shown in Figure 1. Transfer of title (ownership of goods at law). This issue needs to be dealt

38 MHD Supply Chain Solutions — january / february 2011


S U PP LY C H A I N 39

within a specific clause within the contract of sale. red) and two new terms introduced in the Incoterms 2010 (shown in green).
The price paid for the goods, the currency and the method of payment. The Incoterms 2010 DAT replaces DEQ, and DAP replaces DAF, DES
These are matters for negotiation between the contracting parties. and DDU.
Breach of contract and product liability. These are matters beyond the Incoterms 2010 continues to use the ‘mirror’ format introduced in 1990,
delivery of goods and, therefore, outside the purview of Incoterms 2010. that is, the seller’s responsibility is matched by the buyer’s responsibility
Stowage of packaged goods within a container or other means of transport. on the opposite page. For example, seller’s clause A4 ‘Delivery’ is matched
Incoterms 2010 limits its application to packaging in relation to compliance by buyer’s clause B4 ‘Taking Delivery’. The clauses are consistently used
with the requirements of the contract of sale and fitness for transportation. against the eleven terms, making it easy to compare the terms against each
other. This is particularly useful from a risk profile comparison perspective.
The changes between Incoterms 2000
and Incoterms 2010 Major changes
As shown in Figure 2., Incoterms 2010 comprises of eleven terms, reduced Incoterms 2010 has replaced the notion of ship’s rail with that of loaded on
from the thirteen terms of Incoterms 2000. However, the changes are board for sea and inland waterways traffic. As this is a new concept, no prec-
significant, with four terms removed from the Incoterms 2000 (shown in edent currently exists for a definition. It is currently understood that ‘loaded
on board’ means that the whole consignment must be successfully loaded on
Incoterms 2000 Incoterms 2010 board the vessel, although this does not mean stowed and lashed.
The incorrect application of terms used in container traffic has been
4 groups: 2 groups:
addressed in Incoterms 2010 by comments in the guidance notes for each
E (departure) a) any mode of transport
term and also by the classification of terms, according to their transport
F (main carriage unpaid) b) sea and inland waterways only
mode applicability, as shown in Figure 1.
C (main carriage paid)
The terms FAS, FOB, CFR and CIF are not meant to be used for
D (delivered)
container traffic, rather, they are confined to sea and inland waterways
13 terms 11 terms
only, and used for loose (break-bulk) cargo and bulk trades. It must be
EXW, FAS, FCA, FOB, a) EXW, FCA, CPT, CIP,
remembered that container usage only began in the 1960s, but the use
CFR, CIF, CPT, CIP, DAT, DAP,
of the term FOB dates back centuries beforehand. It seems that FOB
DAF, DES, DEQ, DDU, DDP
was adopted into container traffic for convenience, as it also happens to
DDP b) FAS FOB, CFR, CIF
coincide with the customs valuation terminology, however, convenience is
Figure 2: Summary of changes between Incoterms 200 and Incoterms 2010. a poor excuse in this context.

QUALITY
MAKES THE
DIFFERENCE

www.mlaholdings.com.au

MHD Supply Chain Solutions — JANUARY / FEBRUARY 2011 39


40 S U PP LY C H A I N

Firstly, the term FOB in the context of customs refers to valuation only.
Customs authorities are not concerned with the transfer of risk and the
responsibility for entering into contracts of carriage and insurance or
payment of other charges, as their focus is on classification of product for
determination of duties and taxes payable on importation.
Secondly, the delivery of containers and the loading on board of cargo
in practice do not easily coincide with container traffic. The delivery of the
product, that is, the handover of the goods from the care of the seller to
a third party (e.g. freight forwarder) in container traffic often happens at a
location remote from the wharf. It is most usual for the consignment to be
either collected from the exporter’s premises, or delivered to a freight for-
warder for subsequent delivery to the wharf. In fact, as many as ten lift-on
and lift-off events may take place from the time the consignment leaves into a contract of carriage, charges payable at destination for unloading
the seller’s premises until it is finally loaded on the vessel. If the seller uses etc. will only accrue to the seller to the extent these were already part of
FOB, the risk in transit is retained until the consignment is finally loaded the contract of carriage. This means, in practice, that sellers need to com-
on board, yet the seller loses physical control once it relinquishes the municate to buyers the charges incorporated into the contract of carriage
consignment to the first third party involved in the movement of the goods. during the contract negotiations.
Under these circumstances, the seller retained a greater risk profile. Incoterms 2010 also makes it clear as to who is responsible and bears
Therefore the most appropriate terms to use in container traffic are FCA, the risk for loading and unloading operations. At times, pragmatic view is
CPT and CIP, where the risk transfers from seller to buyer at the agreed expressed that reflects the practicalities of physical movement of goods,
handover point. such as in the case of EXW. The loading operation of the goods on the
Delivery points are important and this has been stressed, once again. collecting vehicle is the responsibility of the buyer, however, Incoterms
Incoterms 2010 recommends that exact postal delivery addressees be 2010 recognises that sellers may be in a better position to load the goods
used, to avoid ambiguity and also to be certain about risk transfer points as the collecting vehicle may not have the required equipment on board.
and costs. Therefore, under EXW the seller may elect to load the goods, but this is
The potential for double-charging by carriers and their agents is done at the buyer’s risk and cost.
addressed by Incoterms 2010 through the addition of clauses A6 and B6, Roberto Bergami is senior lecturer at the School of Economics and Finance,
‘Allocation of costs’. These clauses specify that where the seller enters Victoria University, Melbourne.

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