How do you spell trade?
Every 10 years international buyers and sellers of goods are faced with a new learning curve when it comes to their lingua franca.
That's because a revised set of Incoterms ' short for International Commercial Terms ' are released roughly every decade. Incoterms, devised and published by the Paris-based International Chamber of Commerce, are standard trade definitions most commonly used in international sales contracts.
| ' Reduces the number of terms from 13 to 11. ' Does away with 'ship's rail' for FOB terms. ' Advises buyers and sellers to clearly define cargo security and insurance issues. |
In essence, they are to the language of international trade what the Oxford Dictionary is to English.
In September, the ICC released its latest version, called Incoterms 2010. The new terms go into effect Jan. 1.
Among the less obvious changes are attempts by the ICC to better reconcile the issue of cargo security in international trade contracts. The ICC has also set out to better delineate which of the terms apply strictly to ocean-oriented trade and which are to be used for multimodal transactions.
But a key theme in Incoterms 2010 is that the ICC has placed a broader responsibility on buyers and sellers of goods to clearly define troublesome aspects of international transactions, and not to rely simply on the terms as a panacea.
'Incoterms are not intended to dictate trade practice,' Frank Reynolds, the U.S. delegate to the ICC's Incoterms Committee, said in a September interview with American Shipper. 'They're made to reflect business practices. What we have now more accurately reflects the way trade has evolved.'
This One Goes To 11. The most noticeable change in Incoterms 2010 is there are now only 11 terms instead of 13.
Gone are:
' DAF (delivered at frontier).
' DES (delivered ex ship).
' DEQ (delivered ex quay).
' DDU (delivered duty unpaid).
They are replaced by:
' DAT (delivered at terminal) is intended to replace DEQ.
' DAP (delivered at place) is intended to replace the other three deleted terms.
The clear inference is the four deleted terms were not much in use anymore and needed to be updated. Also, by reducing the number of terms, the ICC can be said to fulfill its goal of making Incoterms more user-friendly and simpler with each revision.
This round of revisions is the seventh such update since Incoterms were first introduced in 1936, and the first since 2000.
Reynolds said the ICC made the decision to revise Incoterms in 2007, holding 10 subsequent meetings before the final revised version was released in late September. The group that drafted the new Incoterms consisted of eight people and one moderator. The process included four revisions.
The panel, as Reynolds put it, 'took a stab at the first revision,' then sought input from ICC representation in more than 130 countries and made a second draft and then third, before finalizing the fourth and official revisions.
'There's input from every part of the globe,' he said.
On a global basis, the biggest change to occur since 2000 was the terrorist attacks of 9/11. That instantly placed a cargo security burden on international trade that largely didn't previously exist, outside of provisions for theft.
'The most obvious change is that 9/11 hadn't happened yet,' Reynolds said. 'There were no provisions for cargo security (in the previous versions). What Incoterms do is assign tasks to sellers and buyers. It tells a seller and buyer what his responsibility is in the contract. So we had to task sellers and buyers with cargo security.'
Incoterms 2010 doesn't prescribe exact measures that buyers and sellers need to take. Rather it speaks more broadly in terms of responsibility.
'Cargo security regimes are changing so fast, if we made it too specific, we'd be revising these every six months,' Reynolds said.
A corollary to cargo security is insurance, and though only two terms deal explicitly with insurance ' CIF (cost, insurance, and freight) and CIP (carriage and insurance paid) ' Incoterms 2010 essentially warns that buyers and sellers ought to clearly spell out insurance issues in their contracts.
'For the others (aside from CIF and CIP) we recommend insurance,' Reynolds said. 'Both CIF and CIP make insurance an obligation, but they only require the seller to provide minimum coverage, which is usually not sufficient, so they are a little flawed.'
The revised Incoterms also attempt to clean up some confusion about certain phrases within the terms. For example, the word 'delivery' has a different meaning in everyday speech than it does in trade parlance.
'If you say 'the mail was delivered,' or 'UPS delivered the package,' that's not the meaning 'delivery' carries in contract law,' Reynolds said. 'It is that place where a seller's responsibility for the condition of the contract goods ceases. We had to make that distinction.'
Another definition that needed clarification, Reynolds said, was 'packaging.'
'We specifically excluded container stowage when we defined packaging,' he said. 'It's one thing to toss a few boxes on a truck. It's quite another thing to correctly stow a 40-foot container. So we're advising buyers and sellers to clearly define who is properly stowing this cargo.'
In one of the more critical changes, the ICC has also done away with the idea of the 'ship's rail' as a determining point for the transfer of responsibility.
'We're just saying the seller is responsible for vessel loading FOB (free on board), CIF and CFR (cost and freight),' Reynolds said. 'We're advising sellers and buyers to define what they mean by vessel loading. Incoterms is not going to go there. No more 'once cargo crosses that magic line.' We're leaving it up to the parties to define vessel loading. In terms of bulk or project cargo, vessel loading can mean lots of different things depending on what commodity is being moved.'
Reynolds said the ICC also is attempting to clearly define which Incoterms apply to only marine-based trade.
'Some people try to use ocean-oriented Incoterms for air freight or intermodal,' he said. 'In Incoterms 2010, we have separated the omnimodal Incoterms and marine-restricted Incoterms. We will discourage people from applying marine-only terms to an intermodal or air freight exchange.'
Continuing the theme of Incoterms being advisory and not all-encompassing, Reynolds also hit upon the problems buyers and sellers may encounter when using the multimodal terms CPT (carriage paid to) and CIP.
'Under those terms, the seller delivers once goods are handed over to the first carrier,' Reynolds said. 'That probably will be the seller's front door. If you have a door-to-door contract, it's no problem, as there's only one carrier. But what if you have an independent trucker? How is the buyer going to claim on a little trucking company in a foreign country? We can't change this situation, but we did warn people to be aware of it.'
The authors of Incoterms 2010 also encouraged trade parties to explicitly specify who will pay terminal handling charges (THCs) assessed by ocean carriers.
'There's no consistency about how THCs are handled at the arrival port,' Reynolds said. 'In some cases, the THC was charged to seller and buyer. Often buyers were getting charged twice for the same thing ' the seller would bill the buyer for the charges as part of the freight cost and then the carrier would bill the buyer again for the same charge. It's not necessarily the seller's fault or the carrier's fault. What we're saying is that the seller and buyer should agree about the point where the THC charges start to be for the buyer's account, and that sellers should contract for carriage accordingly.'
Reynolds said that to help readers better understand how to use Incoterms, the ICC has included guidance notes at the beginning of the chapters on each specific term. Previously the introduction was found in its entirety at the beginning of the Incoterms, and was often passed over by readers.
'In the introduction of previous versions, you'd find important bits, like Incoterms doesn't answer who owns the goods, or what happens if the contract is breached,' Reynolds said. 'The thing is most people don't read the introduction and so they were asking Incoterms to do more than they were designed to do.
'We're pointing out situations that have existed all along. Incoterms was never supposed to be a diktat. We're not the law and we never were meant to be. That's why we have these guidance notes.'
Where Incoterms 2010 might have a long-term impact is in domestic trade. In the United States, that could be significant, given the problems companies encounter in dealing with different sets of terms.
'In the United States, contract law is state law, not federal law,' Reynolds said. 'Most states haven't updated to the new uniform commercial code revision (a federal measure that attempts to harmonize contract law on commercial transactions across all 50 states). Large companies are tired of two sets of terms. Some of these terms have the same abbreviations (as Incoterms) but entirely different meanings. They don't want to wait for the laws to change.
'There's a heightened awareness and willingness to use Incoterms domestically, and there's no reason why you can't use them domestically. The same situation is found in the EU, which is becoming like a country, but using Incoterms in a domestic nature, with no export or import clearings. We've made the terms more user-friendly for domestic trade and that could be the most significant change long-term in these revisions.'
Reynolds said he envisions industry leaders being the first ones to employ Incoterms more widely on a domestic level, since 'they have the largest volumes, and also have the largest problems translating international terms into domestic ones.'
The Incoterms 2010 revision process was a closely guarded one, and Reynolds said that was out of necessity for the ICC to protect its intellectually property.
'If the changes came out prematurely, everybody would be releasing their own version of the terms,' he said. 'ICC has to recover its costs, because these terms have been knocked off so often.'
Reynolds is on a barnstorming U.S. tour of 25 to 30 cities over the next couple months, leading seminars about the revisions. The official Incoterms 2010 book is available at www.iccincoterms2010.org.
The seminars will provide an overview of Incoterms rules and the revision process, definitions, their role in sales/purchasing contracts, analysis of the various Incoterms rules and their relation to payment terms. Each attendee will receive a copy of the official ICC Incoterms 2010 book as well as a companion book, Incoterms for Americans, along with comprehensive seminar notes.