Should Shipping Lawyers Care about Incoterms 2010?

Professor Charles Debattista

This article by Prof Charles Debattista first appeared in Lloyd's List on 2 February 2011.

On 1 January 2011, the International Chamber of Commerce made available for incorporation into sale contracts the latest version of Incoterms, Incoterms 2010.

Commodities and international trade lawyers in private practice or in-house will be familiar with the purpose and structure of Incoterms, a series of standard terms ranging from EXW (ex works) imposing on the seller little more than having the goods available for collection by the buyer, all the way to DDP (delivered duty paid), where the seller undertakes the cost and risk of actually delivering the goods to the buyer at destination.

In between these extremes lie the well known F and C terms, traditional pride of place reserved for FOB and CIF sales, with risk passing at loadport but costs to destination borne by the buyer in the first and the seller in the second.

These details are daily fare for international trade lawyers.  There are, however, special reasons why the new version of Incoterms may be of interest not only to trade and commodity lawyers, but also to the wider shipping community at large.

The most obvious difference between Incoterms 2000 and Incoterms 2010 is that the former contained thirteen terms, the latter only eleven, the two main casualties being two traditional maritime terms, namely DES (delivered ex ship) and DEQ (delivered ex quay).

These two terms were not, of course, invented by the ICC when Incoterms were first drafted in the early twentieth century.  They were the original maritime delivered terms, where sellers bore both the risk and cost of the transport of the goods all the way to the buyer’s port, in DES on board the ship at the discharge port, in DEQ landed on a quay in the same port.

After considerable discussion within and outside the drafting group charged with the task of drafting the 2010 version of the rules, it was considered that the new terms DAP (delivered at point) and DAT (delivered at terminal) were drawn widely enough to cater for contracts where the parties intend delivery to occur on a ship at discharge port (where the agreed point of delivery could be a vessel) or at a terminal (where the a quay is likely to be a terminal at the discharge port rather than a quay immediately alongside the vessel.  For these reasons, the form, but not the substance, of the old maritime delivered terms has vanished.

Two consequences would seem to follow.  First, it is to be hoped that the market will respond by using DAP and DAT for DES and DEQ respectively.  Second, where the old forms are used in contracts incorporating Incoterms 2010, it is anticipated that the parties will be assumed to have intended that the new terms, DAP and DAT, were intended to apply.

From a maritime perspective, the second most obvious change since 2000 is that the structure of the terms has changed.  Incoterms 2000 followed a sequence starting with EXW, going then to the F terms and the C terms, and ending with the D terms.  Within each of those three families of terms, the maritime terms appeared first, doubtless reflecting the simple fact that FOB, for example, was developed earlier than the more recent FCA (free carrier named point).

It became clear in the consultation exercise which preceded Incoterms 2010 that the main concern among users was the mis-use of Incoterms, in particular the choice of maritime terms where the intended point of delivery or the eventual destination were at an inland point.  Thus, for example, a sale contract expressed as FOB Manchester or CIF Frankfurt would inevitably cause mismatches between the sale contract and the carriage or insurance contracts spawned by that sale contract.

With a view to steering users away from such mis-use, Incoterms 2010 cluster the eleven terms under two headings, namely first “rules for any mode of carriage” and then “rules for sea and inland waterway transport.”  The first are intended to be used where either the intended point of delivery or the intended destination (or both) is an inland point rather than a port; the second are intended to be used where either the intended point of delivery or the intended destination (or both) is a port.

Thus it is not so much the mode of transport as the points of delivery and destination which should determine the choice between, say, CIF and CIP.  Both terms can be used where goods sold are transported by sea from South America to Europe.

However, where the seller organises the carriage and insurance of the goods to Southampton, the CIF term is appropriate; on the other hand, where the seller organises the carriage and  insurance of the goods to Manchester, then the CIP term is appropriate.  The introduction to Incoterms 2010 and – a new development – the guidance notes to each of the eleven terms in Incoterms 2010 make clear recommendations for the appropriate use of the “maritime” and “omni-modal” terms.

A third development which will catch the eye of maritime lawyers is a new sentence in article A1 of each Incoterm which accepts the functional equivalence of paper and electronic documents.  This does not mean, of course, that electronic bills of lading are now automatically provided for where the sale contract is governed by English law: regulations under the Carriage of Goods by Sea Act 1992 are still awaited to bring about that all-embracing result.  It does mean, however, that where Incoterms 2010 are incorporated, the parties will be precluded from objecting as against each other that a document has been tendered in electronic rather than paper form.

This was intended to be the case under Incoterms 2000.  The drafting technique there was, however, quite different: references to various types of electronic documents were strewn across Incoterms 2000; the method adopted in Incoterms 2010 was to state the principle of functional equivalence boldly at the start of each rule.

A fourth change to Incoterms 2000 of interest to shipping lawyers is that Incoterms 2010 now make it clear that the rules can be adopted where a sale contract forms part of a string.  It is well-known that the main trade associations operating in the dry commodities markets exclude Incoterms from their standard forms.  It is equally true that commodities traders have over the past few years, regardless of such standard exclusions, expressly incorporated Incoterms into their contracts.

Such incorporation did, however, cause a problem: a CIF seller in the middle of a string could not meaningfully be said to be under a duty to ship goods already shipped by another seller upstream or to make a contract of carriage already concluded by another seller upstream.  Incoterms 2010 now cater for these possibilities: rather than ship goods and make a contract of carriage, a a seller in string can procure goods shipped and procure a contract of carriage in performance of his duties towards his buyer downstream.  It is hoped that a possible obstruction to the incorporation of Incoterms in commodities sales has thus been removed.

One final change which will doubtless attract the attention of – and possibly cause controversy among – shipping lawyers is that the ship’s rail as the point at which risk passes in FOB, CFR (c&f) and CIF sales has been replaced by the simple rule that risk passes when the goods are placed on board the ship. 

A nostalgic glance may be forgiven towards the somewhat curious image of risk passing to and fro across a notional perpendicular drawn above a ship’s rail,  a vision  associated in the international maritime fraternity with the English case of Pyrene v Scindia.  That image was not favoured even by the court which gave it currency in the English common law; indeed the case itself was not even one which turned on the transfer of risk between seller and buyer: it was a maritime case relating to the applicability to a cargo claim of the Hague Rules. 

In the detailed discussions which accompanied the replacement of the ship’s rail by “placed on board”, it was difficult to escape from the logic of the argument that the FOB term, even in the English common law, was indeed “free on board” not “free across rail.”  It is hoped that this change, which attracted little attention in the consultation process leading to the revision of the rules, will cause little difficulty in practice.

Incoterms 2010 are now out, available from ICC UK (www.iccbookshop.com) and currently in use.  Trade and energy lawyers will doubtless have attended or given seminars on the new rules in the last few weeks. 

Given the contiguity between trade and maritime law, and for the reasons given briefly above, maritime lawyers, whose shipper and receiver clients are also, more often than not, also sellers and buyers, could do worse than cast a sidelong but timely glance towards this new product from the ICC.

* Charles Debattista was co-Chair of the International Drafting Group which drafted Incoterms 2010 and Chair of the Drafting Group which drafted Incoterms 2000.  He is an Arbitrator and Associate Member at Stone Chambers, a specialist set practising in international trade and shipping law, and is also Professor of Commercial Law at the University of Southampton and a member of that University’s Institute of Maritime Law. He can be contacted at charles.debattista@stonechambers.com