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Changes to Incoterms

By Henar Dyson, Senior Associate in Corporate & Commercial. First published in International Trade in March 2011.

Incoterms are internationally recognised trading rules, created by the International Chamber of Commerce (ICC). 

Incoterms are used as shorthand for some common trading terms, particularly, but not exclusively, in relation to the international transportation of goods.  For example, they describe which party is responsible for landing costs and who bears the risk if goods are lost or destroyed in transit.  Their effect is to reduce the uncertainty arising when terms are interpreted by people from different business cultures.

On 1 January 2011, the updated Incoterms 2010 came into force.  The update was necessary to reflect the increased use of technology in trade, greater security concerns and changes in transport practices. 

 

These are some of the main changes:

  • Electronic communication

 The Incoterms now give emails the effect of paper documents “if agreed between the parties or customary”.  Previously, use of email had to be agreed by the parties.

  • Insurance

 Incoterms requiring the seller to arrange insurance for the buyer's benefit have been updated.  However, buyers should be aware that the changes have not imposed any obligation on the seller to obtain more than minimum cover.  If better cover is needed, for example, for goods of greater value, this must be specified in the contract.

  •  Terminal handling costs

 New rules have clarified which party must pay terminal handling costs.  This will help to eliminate unintended instances of double-charging.

  • Delivery

 Two new terms simplify the rules identifying when delivery happens.  This is relevant as this is when the risk of loss or damage to the goods passes to the buyer.  For example, one term places delivery at the terminal, which is useful for goods transported by container.  The other places delivery at a named place, usually the buyer's premises.

  • Security

The increase in international security requirements mean that buyers and sellers are obliged to provide extensive information to obtain export and import clearance.  The new rules recognise this, requiring parties to provide any information needed by the other.

Dealing on Incoterms

It is essential to understand what each rule means in practice.  The ICC recognises that incorrect rules are often used, leading to unintended consequences.  It has tried to address this by giving clearer, but more detailed, guidance in relation to the appropriateness of each term. 

It has also divided the rules according to the form of transport - one set applies to all forms of transport, the other only to maritime transport. 

One significant drawback of using Incoterms (and probably the reason why they are not used more), is that the rules are basic.  There are now only 11 of them.  Although they are helpful in relation to the matters they cover, they cannot create a full contract.  This means that parties will still need to take care when using Incoterms and negotiate special terms such as those that relate to the parties' obligations, financial exposure, payment terms, intellectual property rights and jurisdiction.