Incoterms 2000: What the changes mean to you

Several important changes, which take effect this month, make these international terms of sale easier for shippers to use.

By Toby B. Gooley -- Logistics Management, 1/1/2000

If you're involved in international business, they should be part of your daily vocabulary. But mention "Incoterms" to a colleague or acquaintance and the response you're likely to get is "Inco-WHATS?"

Unfortunately, the Incoterms--a set of internationally recognized terms of sale--are not as well known or widely used in North America as they should be, considering the benefits they offer to companies engaged in world trade.

The Incoterms were created in 1936 by the Paris-based International Chamber of Commerce (ICC). Today, they continue to facilitate international trade by providing voluntary rules for interpreting the rights and obligations of buyers and sellers under international sales contracts.

The Incoterms represent 13 different international trade scenarios (see accompanying box). Each term specifies whether the buyer or the seller is responsible for arranging such necessities as export licenses, customs clearance, insurance, inspections, and other obligations. They specify at which point the risk of loss and/or damage passes from seller to buyer as well as which party pays for specific activities. A buyer and seller who conduct their purchase and sale under one of the Incoterms, therefore, will have a mutual understanding of their rights, costs, and obligations regardless of differences in language and local business practices.

Because the business of international trade is ever changing, the ICC updates and amends the Incoterms whenever necessary. This year's revision--Incoterms 2000--promises to make the terms easier for exporters and importers to understand and use.

Clear and Simple

The Incoterms 2000 revision took nearly two years to complete and included input from international traders, academics, and legal experts from more than 100 countries, says trade expert Frank Reynolds. Reynolds is author of the book Incoterms for Americans and was a member of the five-person working group that drafted the revision.

Clarification and accessibility, Reynolds says, are the hallmarks of this year's revision. "There is a greater consistency in language ... For example, we tried to use the same words rather than similar ones ... while taking into account linguistic differences in British and American English that could affect the meaning," he notes. The writing style is simpler and more straightforward than in previous versions. These improvements are designed to make the terms more easily understood worldwide. To make them even more accessible, the Incoterms--for the first time--will be translated into 20 languages, in addition to the official English.

Incoterms 2000 also tries to instill clarity by defining the meaning and usage of such terms as "shipper" and "customs clearance," a feature that was absent from earlier versions.

Another improvement is that the authors used the same expressions that appeared in the 1980 United Nations Convention on Contracts for the International Sale of Goods. That harmonizes the two most important standards for international contracts and establishes a clear relationship between the Incoterms and U.N.-approved practices.

Three Major Changes

Most important to exporters and importers are the changes in three of the Incoterms: the clarification of loading and unloading obligations under FCA (Free Carrier), and the reversal of responsibility for customs clearance and payment of duties under FAS (Free Alongside Ship) and DEQ (Delivered Ex Quay).

FCA--When conducting business under this term, the seller is obligated to deliver the goods, cleared for export, to the carrier nominated by the buyer at the named location. In the Incoterms 1990, FCA offered instructions for seven different transportation modes and specific circumstances within those modes. This made the terms needlessly complicated and unclear, says Reynolds. As a result, shippers also had trouble understanding terms that were continuations of FCA, such as CPT (Carriage Paid To) and CIP (Carriage and Insurance Paid To), he notes.

In Incoterms 2000, by contrast, the point of delivery, not the mode of transport, is the key to applying the term FCA. Delivery is considered completed when one of two conditions or "events" occurs. The first event is that the specified point of delivery is the seller's premises and the goods have been loaded there on the means of transport provided by the carrier nominated by the buyer or a person acting on its behalf. The second event is that the specified point of delivery is other than the seller's premises and the goods have been "placed at the disposal of" the carrier or other person (such as a freight forwarder) nominated by the buyer. The revision also clarifies a point that has been the source of many international disputes: If delivery occurs at the seller's premises, the seller is responsible for loading. If delivery occurs elsewhere, the seller is not responsible. "Under the 1990 Incoterms ... people argued about who was responsible [for loading]," says Dr. James Giermanski, professor of international trade at Texas A&M International University in Laredo, Texas, and a Logistics Management columnist. "Now it makes sense, and there's some logic behind it."

FAS and DEQ--FAS (Free Alongside Ship) considers delivery to have been accomplished when the goods have been cleared for export and placed alongside the exporting ship. Under DEQ (Delivered Ex Quay), delivery obligations are fulfilled when the goods have been "placed at the disposal of the buyer, not cleared for import on the quay [wharf] at the named port of destination."

Changes in these two terms represent a reversal of some responsibilities for both buyer and seller. Under FAS in Incoterms 1990, the buyer was required to clear a shipment for export. Similarly, DEQ required the seller to clear the goods for import at destination. Now, those roles have been reversed, so that both buyer and seller are responsible for clearance and compliance with government regulations in their home countries. That is a more reasonable approach, says Giermanski. "If the goods are in Miami and the buyer is in Bolivia, how can the buyer clear for export? He'd have to get a U.S. freight forwarder in Miami to make sure he didn't violate U.S. law. But if the seller is responsible and he's in Miami, he can do everything much more easily."

A Truly Global Standard

This time around, many countries that were not involved in earlier revisions played an important role in developing recommendations for change. With countries like South Africa, China, India, and even Peru getting on board, says Reynolds, it seems clear that worldwide usage of the terms is increasing.

There may not be any legal obligation to use the Incoterms, says Giermanski, but if a dispute should ever arise between buyer and seller, the terms provide legal authorities and arbitrators with a neutral framework for finding a remedy. That's an enormous benefit for any company that does business globally, because it takes much of the guesswork and localization out of international sales transactions. Says Giermanski: "There's no rule anywhere in the world that you have to use Incoterms, but not using them isn't smart. It's smarter and safer to use them [because] everyone knows what they mean."

THE 13 INCOTERMS

The International Chamber of Commerce's Incoterms 2000 include 13 trade terms that specify the buyer's and seller's rights, costs, and obligations when they use those terms in an international sales contract.

Here's a brief look at the terms and what they mean. For a full explanation, consult Incoterms 2000, ICC Official Rules for Interpretation of Trade Terms, published by the International Chamber of Commerce (ICC). (See Editor's Note.)

Keep in mind that risk of loss and damage passes to the buyer after the seller effects delivery as specified in the term of sale. Also, the parties must specify which version of the terms they will use as well as the relevant destination--i.e., up to which point the seller bears an obligation. An example of a correctly stated Incoterm is DDU Frankfurt Schmidt GmbH Warehouse Incoterms 2000.

- EXW EX WORKS (named place): any mode of transport; seller makes goods available to buyer at seller's premises or other location, not cleared for export and not loaded on a vehicle. The buyer bears all risks and costs involved in taking the goods from the seller's premises and thereafter.

- FCA FREE CARRIER (named place): any mode of transport; seller delivers goods, cleared for export, to the carrier named by the buyer at the specified place. If delivery occurs at the seller's premises, the seller is responsible for loading; if delivery occurs elsewhere, the seller must load the conveyance but is not responsible for unloading.

- FAS FREE ALONGSIDE SHIP (named port of shipment): maritime and inland waterway only; seller delivers when the goods are placed alongside the vessel at the named port of shipment. The seller also clears the goods for export.

- FOB FREE ON BOARD (named port of shipment): maritime and inland waterway only; seller delivers when the goods pass the ship's rail at the named port. The seller clears the goods for export.

- CFR COST AND FREIGHT (named port of destination): maritime and inland waterway only; seller delivers when the goods pass the ship's rail at the port of export. The seller pays cost and freight for bringing the goods to the foreign port and clears the goods for export.

- CIF COST, INSURANCE, AND FREIGHT (named port of destination): maritime and inland waterway only; seller delivers when the goods pass the ship's rail at the port of export. The seller pays cost and freight for bringing the goods to the foreign port, obtains insurance against the buyer's risk of loss or damage, and clears the goods for export.

- CIP CARRIAGE AND INSURANCE PAID TO (named place of destination): any mode of transport; seller delivers the goods to a carrier it nominates but also pays the cost of bringing the goods to the named destination. The seller also obtains insurance against the buyer's risk of loss or damage during carriage and clears the goods for export.

- CPT CARRIAGE PAID TO (named place of destination): any mode of transport; seller delivers goods to carrier it nominates and pays costs of bringing goods to the named destination. The seller also clears the goods for export.

- DAF DELIVERED AT FRONTIER (named place): any mode of transport to a land frontier; seller delivers when goods are placed at the buyer's disposal on the "arriving means of transport" (not unloaded), cleared for export but not cleared for import before the customs border of the destination country.

- DES DELIVERED EX SHIP (named port of destination): maritime and inland waterway only; seller delivers when goods are at the buyer's disposal on board the ship not cleared for import. The buyer pays discharging costs.

- DEQ DELIVERED EX QUAY (named port of destination): maritime and inland waterway only; seller delivers when the goods are placed at the buyer's disposal, not cleared for import, on the dock (quay) at the named port of destination. The seller pays discharging costs, but the buyer pays for import clearance.

- DDU DELIVERED DUTY UNPAID (named place of destination): any mode of transport; seller delivers the goods to the buyer not cleared for import and not unloaded from the arriving means of transport at the named destination, but the buyer is responsible for all import clearance formalities and costs.

- DDP DELIVERED DUTY PAID (named place of destination): any mode of transport; seller delivers goods to the buyer, cleared for import (including import license, duties, and taxes) but not unloaded from the means of transport.

Editor's Note: The following resources will be helpful for anyone who wants to learn more about the Incoterms.

The International Chamber of Commerce publishes Incoterms 2000, the official text and definitions; ICC Guide to Incoterms 2000, a detailed commentary on the Incoterms; and an Incoterms 2000 wall chart. They can be ordered online at www.iccwbo.org or by calling (212) 206-1150.

Frank Reynolds is teaching seminars about the new Incoterms throughout the United States on behalf of the ICC. Reynolds also publishes a book, Incoterms for Americans. For more information, contact him by telephone at (419) 865-6201 or by e-mail at USincoterm@aol.com.