MP Air & Sea Lojistik > ICC INCOTERMS

ICC INCOTERMS 2010 Abdurrahman ÖZALP ICC Turkey National Committee Member TEB Foreign Trade Centers Advisor

Summary In this article, information is given about the basic structure, function, importance, and innovations of the Incoterms 2010 rules, as well as the ICC’s work on the subject. Each rule of the Incoterms 2010 has been examined in terms of the obligations of the parties, and a summary is provided.

Abstract In this article information are given about the basic structure of rules of Incoterms 2010, the function, its importance, innovations and the ICC’s works thereon. Each rule of the Incoterms 2010 was examined to the extent of the parties’ obligations and a summary is provided ad hoc.

Key Words (Turkish) Incoterms 2010, EXW, FCA, CPT, CIP, DAT, DAP, DDP, FAS, FOB, CFR, CIF

Key Words Incoterms 2010, EXW, FCA, CPT, CIP, DAT, DAP, DDP, FAS, FOB, CFR, CIF

I. General Works Conducted by the ICC Regarding INCOTERMS

Commercial life was initially governed by simple and unwritten rules, and for this reason, contracts were also very simple and mostly not in writing. Today, however, foreign trade is much more complex and diverse than it used to be. Moreover, technological advancements are dizzying. Naturally, this situation requires commercial contracts to be drafted more comprehensively and tailored to specific needs. The ICC (International Chamber of Commerce), which considers it a duty to facilitate world trade, creates a series of rules for this purpose. For example, UCP, ISP, URC, and URDG are some of these. One of the most popular and successful of these rules, widely used in practice for years, is Incoterms (International Commercial Terms). In order to maintain the success of the Incoterms brochure prepared by the ICC and to meet the needs of the business world, the brochure is periodically revised and updated. Technological and commercial changes are also taken into account during these revisions.

The purpose of Incoterms is to provide an interpretation of the most commonly used terms in the field of foreign trade regarding the delivery of goods, to establish a set of international rules for this, and thus to prevent different interpretations of such terms by the parties involved in foreign trade activities. If there were no uniformly compiled Incoterms rules, it might not always be possible for parties located in different countries with different laws and regulations to interpret the terms in the same way. Different interpretations of commercial terms by parties in foreign trade could inevitably lead to misunderstandings, disputes, litigation, and consequently, a loss of time and money for the parties. In this regard, it can be said that Incoterms make a very significant contribution to the business world.

Recognizing this need, the ICC first published a set of international rules for the interpretation of commercial terms in 1936. These initially published rules were named “Incoterms 1936.” These rules were later revised in 1953, 1967, 1976, 1980, 1990, 2000, and most recently in 2010, based on developments and emerging needs in the trade sector. In each revision, some rules and terms were added while others were removed depending on the situation and needs. For example, the delivery terms FOR (Free on Rail), FOT (Free on Truck), and FOA (Free on Airport) included in the 1980 ICC brochure were removed with the 1990 revision because they were considered to be encompassed by the FCA (Free Carrier) delivery term. Similarly, in the 2010 revision, DAP (Delivered at Place) replaced DAF, DES, and DDU, while DAT (Delivered at Terminal) replaced DEQ (Delivered Ex Quay).

The highly successful and widespread use of Incoterms has also brought about some misunderstandings and misapplications. In particular, it is mistakenly believed that they can apply to contracts of carriage and provide a complete contract including payment—meaning they would cover all obligations that should be in a contract—which is an incorrect interpretation. To eliminate such misunderstandings and misapplications, the introduction section of the new Incoterms contains detailed explanations, and there are explanatory guidance notes before each rule. In the introduction of the 2010 revision, Incoterms are defined as follows: “The Incoterms rules explain three-letter trade terms reflecting business-to-business practice in contracts for the sale of goods. The Incoterms rules describe mainly the tasks, costs, and risks involved in the delivery of goods from sellers to buyers.”

As can be seen from this definition, the rules only regulate the tasks, costs, and risks associated with the delivery of the goods by the seller to the buyer. The information in the introduction and guidance notes is not a part of the rules like EXW, FCA, or FOB, but is intended for informational and guiding purposes for the correct use of the rules.

In the Turkish Commercial Code (TTK), CIF and FOB delivery terms are regulated between articles 1138-1149. It should be noted that, other than these two delivery methods, no other delivery terms are included in the TTK. FOB and CIF are the most frequently used delivery terms in sales contracts for goods to be transported by sea. The new Turkish Commercial Code No. 6102, which will enter into force on July 1, 2012, does not contain provisions regarding delivery terms. However, even after the TTK No. 6102 comes into effect, there is no obstacle to applying the ICC Incoterms as a provision of the contract between the parties.

Certain points should be considered when using the Incoterms 2010 rules:

  • Choosing the appropriate Incoterm: For example, the FOB rule should not be chosen for a transaction involving road transport; FCA can be used instead. When choosing an Incoterm, the nature of the goods, the mode of transport, and other relevant factors must be considered. The ICC “Guidance Notes,” which explain each term and show its application method, should also be utilized. The Guidance Notes contain information that helps in selecting the delivery term.

  • Referencing Incoterms 2010 rules in the sales contract: When referencing an Incoterm in a sales contract, the year (revision/version) must also be specified. This is because the latest Incoterms do not invalidate the previously enacted ones. If the parties wish, they can use Incoterms rules prepared by the ICC in previous years (e.g., Incoterms 1990 or 2000). Therefore, to avoid ambiguity and confusion, it is necessary to state which year’s Incoterms are being used. Unless specified otherwise in the contract, contracts referencing Incoterms signed after January 1, 2011, without specifying the year will be considered subject to Incoterms 2010. For instance, using a format like “FCA, Yıldız Posta Cad. No: 54 Gayrettepe-Istanbul, as per Incoterms 2010” is correct and recommended.

  • Specifying the port or place of delivery in detail and clearly: The more detailed and clear the port or place of delivery is specified, the more uncertainty and unexpected situations are minimized. While “FCA, Yıldız Posta Cad. No: 54 Gayrettepe–Istanbul, as per Incoterms 2010” is a detailed and clear specification, simply saying “FCA Istanbul, as per Incoterms 2010” is not. In Incoterms beginning with ‘C’ (CPT, CIP, CFR, and CIF), the named place is the destination where carriage is paid, whereas in the other Incoterms rules (EXW, FCA, DAT, DAP, DDP, FAS, FOB), the named place is where delivery occurs and risk transfers from seller to buyer.

  • Knowing that Incoterms rules do not constitute a complete sales contract: Incoterms rules only determine which party is responsible for carriage and insurance, and which costs each party will bear at the time the seller delivers the goods to the buyer. Beyond this, they do not provide any regulation regarding the payment of the goods, the method of payment, the transfer of ownership of the goods, or the consequences of a breach of contract. These matters must be explicitly written into the contract. It should also be considered that Incoterms rules and contract conditions can always be overridden by the mandatory provisions of the applicable national law governing the contract.

II. Innovations and Basic Features of INCOTERMS 2010

The number of rules has been reduced from 13 to 11. Two new rules, DAT and DAP, have replaced the DAF, DES, DEQ, and DDU rules. These two new rules can be used for any mode of transport. Under these two new rules, delivery occurs at the named destination specified in the contract. Under the DAT rule, delivery takes place when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer. DAT generally shares the same features as DEQ in Incoterms 2000. In DAP, delivery occurs when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading, meaning this rule achieves delivery just like the DAF, DES, and DDU terms in Incoterms 2000. While the substitution of DAT and DAP for DES and DEQ (which seemed linked only to sea transport) might initially seem like an omission, the terminal specified in the DAT term can be an area within a port, allowing DAT to be used in situations where DEQ was previously used. Similarly, the means of transport in the DAP term can be a ship and the destination a port. Thus, DAT can be safely used where DEQ was previously used, and DAP where DES was previously used. Like their predecessors, these new rules ensure that the seller delivers the goods bearing all costs (except for necessary import customs clearances) and risks arising from bringing the goods to the named destination.

The 11 delivery terms in Incoterms 2010 are divided into two groups: “Rules for Any Mode or Modes of Transport” and “Rules for Sea and Inland Waterway Transport”:

Rules for Any Mode or Modes of Transport

  • EXW: Ex Works

  • FCA: Free Carrier

  • CPT: Carriage Paid To

  • CIP: Carriage and Insurance Paid To

  • DAT: Delivered at Terminal

  • DAP: Delivered at Place

  • DDP: Delivered Duty Paid

Rules for Sea and Inland Waterway Transport

  • FAS: Free Alongside Ship

  • FOB: Free On Board

  • CFR: Cost and Freight

  • CIF: Cost, Insurance and Freight

The rules in the first category (EXW, FCA, CPT, CIP, DAT, DAP, and DDP) can be used across all transport modes, whether a sea leg is included or not. In the rules belonging to the second category (FAS, FOB, CFR, and CIF), the point of loading and the point of discharge are seaports. These rules should be used for sea transport. For the FOB, CFR, and CIF rules, all phrases from previous Incoterms versions indicating delivery as passing the “ship’s rail” have been removed and replaced with phrases indicating the goods are delivered “on board” the vessel. Thus, in Incoterms 2010, the phrase “ship’s rail” has been abandoned in favor of “delivered on board.”

The terms specified in Incoterms 2010 (EXW, FCA, FAS, etc.) are formally recognized as suitable for both domestic and international sales contracts. Previously, they were traditionally accepted as being used in international sales contracts where goods crossed national borders. However, the Incoterms 2010 rules explicitly state in various places that the obligation to comply with export/import formalities exists only where applicable (in international sales), thus emphasizing that these rules can be used in domestic sales contracts. A major reason for this is that trade blocs like the European Union have rendered customs formalities between member countries obsolete, and there is a growing will in the United States to use Incoterms instead of the shipment and delivery terms contained in the Uniform Commercial Code.

One of the significant features of the new Incoterms is that it provides written and illustrated explanations and guidance before each rule regarding its use. The “Guidance Notes” placed before each rule explain essential issues to practitioners, such as when each rule should be used, at what stage risk transfers, and how costs are to be allocated between the seller and the buyer. Guidance Notes are not a part of the actual Incoterms rules; they merely aim to help practitioners use the most appropriate Incoterm fully and effectively. The status of the “Introduction” at the beginning of the Incoterms 2010 rulebook is the same. The “Introduction” provides general information on the use and interpretation of the Incoterms 2010 rules but does not form a part of the rules themselves.

While electronic documents were acknowledged in the previous version, Incoterms 2010 specifies that electronic means of communication have the same effect as paper communication documents, provided the parties have agreed to it or it is a customary practice. This allows the rules to accommodate the advancement of electronic communication.

Incoterms 2010 provides detailed content regarding insurance coverage and takes into account the Institute Cargo Clauses. Under the CIF and CIP rules, where the seller has the obligation to insure, the seller must obtain, at their own expense, cargo insurance complying at least with the minimum cover provided by Clause C of the Institute Cargo Clauses (LMA/IUA) or similar clauses. The insurance contract must be made with underwriters or an insurance company of good repute and entitle the buyer, or any other person having an insurable interest in the goods, to claim directly from the insurer. If requested by the buyer, the seller must, subject to the buyer providing any necessary information requested by the seller, provide at the buyer’s expense any additional cover, if procurable, such as cover provided by Clauses A or B of the Institute Cargo Clauses or similar clauses, and/or cover complying with the Institute War Clauses and/or Institute Strikes Clauses. The insurance shall cover, at a minimum, the price provided in the contract plus 10% (i.e., 110%) and shall be in the currency of the contract. The insurance must cover the goods from the point of delivery set out in the relevant rule to at least the named place of destination. The seller must provide the buyer with the insurance policy or other evidence of insurance cover. The seller must also, at the buyer’s request, risk, and expense (if any), provide the buyer with the information needed to obtain any additional insurance.

Incoterms 2010 imposes obligations to assist in obtaining, or to provide, the documents or information required for security-related customs clearances.

By detailing costs under headings A6 and B6 regarding the obligations of the buyer and seller, Incoterms 2010 has prevented the double payment of “Terminal Handling Charges” (THC). As is known, under CPT, CIP, CFR, CIF, DAT, DAP, and DDP rules, the seller is obliged to arrange the carriage of the goods to the agreed destination. When making this arrangement, the seller pays the freight by including it in the total sale price, meaning they are actually making this payment on behalf of the buyer. Despite this, sometimes the carriage terms on the transport document may include the costs of handling the goods, moving them within the port or between container terminals, and these costs may be demanded from the buyer by the carrier or terminal operators. In such cases, the buyer could be forced to pay for the same service twice—once to the seller within the total sales price and once separately to the carrier or terminal operator. In these instances, Incoterms 2010 prevents the double charging of “Terminal Handling Charges” by detailing sections A6 and B6. As an example, the original text of A6 and B6 for the CPT rule in Incoterms 2010 is provided below:

A6 Allocation of costs – The seller must pay: a) all costs relating to the goods until they have been delivered in accordance with A4, other than those payable by the buyer as envisaged in B6; b) the freight and all other costs resulting from A3 a), including the costs of loading the goods and any charges for unloading at the place of destination that were for the seller’s account under the contract of carriage; and c) where applicable, the costs of customs formalities necessary for export, as well as all duties, taxes and other charges payable upon export, and the costs for their transit through any country that were for the seller’s account under the contract of carriage.

B6 Allocation of costs – The buyer must pay: subject to the provisions of A3 a) a) all costs relating to the goods from the time they have been delivered as envisaged in A4, except, where applicable, the costs of customs clearance for export, as well as all duties, taxes, and other charges payable upon export as referred to in A6 c); b) all costs and charges relating to the goods whilst in transit until their arrival at the named place of destination, unless such costs and charges were for the seller’s account under the contract of carriage; c) unloading costs, unless such costs were for the seller’s account under the contract of carriage; d) any additional costs incurred if it fails to give notice in accordance with B7, from the agreed date or the expiry date of the agreed period for dispatch, provided that the goods have been clearly identified as the contract goods; e) where applicable, all duties, taxes, and other charges, as well as the costs of carrying out customs formalities payable upon import of the goods, and the costs for their transit through any country unless included within the cost of the contract of carriage.

Incoterms 2010 also permits the phrase “procuring goods shipped” as an alternative to the obligation to ship goods. This phrase provides convenience, particularly in string sales (chain sales). In such sales, unlike manufactured goods, loading might not occur; in bulk commodity sales, the goods may be sold several times (in a chain) while in transit. There is no new loading or shipping involved because the goods were shipped by the first seller; the seller in the middle of the string procures the shipped goods rather than shipping them.

Some rules of Incoterms 2010 can be altered according to needs, but the impact of every alteration must be addressed in the contract. Otherwise, that section will remain blank and ambiguous, which can lead to hazardous situations.

III. Obligations of the Parties in INCOTERMS 2010

The obligations of the parties under Incoterms 2010 Rules are summarized below:

EXW (Ex Works): EXW can be used for any mode of transport. In this Incoterms rule, the seller delivers the goods by placing them at the disposal of the buyer at the seller’s premises or another named place (e.g., works, factory, warehouse, etc.). The seller is not involved in loading or clearing the goods for export. The buyer is responsible for taking delivery of the goods at the named place and bears all costs and risks related to the delivery. EXW represents the minimum obligation for the seller.

  • Inspection, Packaging, Marking: Seller

  • Export customs/licenses, permits: Buyer

  • Loading: Buyer

  • Freight: As per contract

  • Insurance: As per contract

  • Unloading: Buyer

  • Import customs/licenses, permits: Buyer

FCA (Free Carrier): FCA can be used for any mode of transport. In this Incoterms rule, the seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises or another named place. The seller clears the goods for export, where applicable, but has no obligation regarding import clearance.

  • Inspection, Packaging, Marking: Seller

  • Export customs/official permits: Seller

  • Loading: Buyer [Note 3: If the named place is the seller’s premises, the seller loads the goods onto the vehicle provided by the buyer. If the named place is elsewhere, the seller brings the goods to that place and places them at the buyer’s disposal (not unloaded). The buyer receives them and handles the loading. The buyer is responsible for failure to take delivery or late delivery.]

  • Freight: Buyer

  • Insurance: As per contract

  • Unloading: Buyer

  • Import customs/official permits: Buyer

CPT (Carriage Paid To): CPT can be used for any mode of transport. In this Incoterms rule, the seller contracts for carriage with a carrier of their choice and hands over the goods. The seller pays the freight costs and completes their delivery obligation when they hand the goods over to the carrier, not when the goods reach the destination. The seller clears the goods for export, where applicable, but has no obligation for import clearance.

  • Inspection, Packaging, Marking: Seller

  • Export customs/official permits: Seller

  • Loading: Seller

  • Freight: Seller (1) [Note 4: (1) General costs not borne by the seller under the contract of carriage are paid by the buyer.]

  • Insurance: As per contract

  • Unloading: Buyer (2) [Note 5: (2) Unloading costs not borne by the seller under the contract of carriage are paid by the buyer.]

  • Import customs/official permits: Buyer

CIP (Carriage & Insurance Paid To): CIP can be used for any mode of transport. In this Incoterms rule, the seller contracts for carriage with a carrier of their choice and hands over the goods. The seller pays the transport costs and obtains transport insurance against the risk of loss or damage during carriage. The seller fulfills their delivery obligation when handing the goods to the carrier, not upon arrival. The seller clears the goods for export, where applicable, but has no obligation for import clearance.

  • Inspection, Packaging, Marking: Seller

  • Export customs/official permits: Seller

  • Loading: Seller

  • Freight: Seller (1) [Note 6: (1) General costs not borne by the seller under the contract of carriage are paid by the buyer. Unloading costs not borne by the seller under the contract of carriage are paid by the buyer. Insurance must be procured with a minimum of 110% of the contract value using Clause C. Clause A and B or War/Strike additional coverages can be obtained with costs borne by the buyer.]

  • Insurance: Seller (3)

  • Unloading: Buyer (2)

  • Import customs/official permits: Buyer

DAT (Delivered At Terminal): This delivery term can be used for any mode of transport. In this Incoterms rule, the seller contracts for carriage and hands over the goods. The seller pays for transport and delivers the goods by unloading them from the arriving means of transport at the named terminal at the named port or place of destination. Placing the unloaded goods at the buyer’s disposal constitutes delivery. ‘Terminal’ includes any place, whether covered or not, such as a quay, warehouse, container yard, or road, rail, or air cargo terminal. The seller bears all risks and costs involved in bringing the goods to and unloading them at the terminal. The seller clears the goods for export, but has no obligation regarding import clearance.

  • Inspection, Packaging, Marking: Seller

  • Export customs/licenses, permits: Seller

  • Loading: Seller

  • Freight: Seller

  • Insurance: As per contract

  • Unloading: Seller

  • Import customs/official permits: Buyer (Delivered unloaded at the terminal).

DAP (Delivered at Place): DAP can be used for any mode of transport. In this Incoterms rule, the seller delivers the goods by placing them at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. The seller bears all risks and costs involved in bringing the goods to the named place. The seller clears the goods for export, but has no obligation regarding import clearance.

  • Inspection, Packaging, Marking: Seller

  • Export customs/licenses, permits: Seller

  • Loading: Seller

  • Freight: Seller (1) [Note 7: (1) General costs not borne by the seller under the contract of carriage are paid by the buyer. (2) Unloading costs not borne by the seller under the contract of carriage are paid by the buyer.]

  • Insurance: As per contract

  • Unloading: Buyer (2)

  • Import customs/official permits: Buyer (Delivered on the vehicle, not unloaded).

DDP (Delivered Duty Paid): DDP can be used for any mode of transport. In this Incoterms rule, the seller delivers the goods cleared for import to the buyer, on the arriving means of transport, ready for unloading at the named place of destination. The buyer is responsible for failure to take delivery. The seller bears all costs and risks involved in bringing the goods to the destination. Under this rule, the seller is obligated not only to clear the goods for export but also for import, pay any duty for both export and import, and carry out all customs formalities. The seller assumes the maximum level of obligation under this term. Unless agreed otherwise in the sales contract, VAT and all other taxes payable upon import are for the seller’s account.

  • Inspection, Packaging, Marking: Seller

  • Export customs/official permits: Seller

  • Loading: Seller

  • Freight: Seller (1) [Note 8: (1) General costs not borne by the seller under the contract of carriage are paid by the buyer.]

  • Insurance: As per contract

  • Unloading: Buyer (2) [Note 9: (2) Unloading costs not borne by the seller under the contract of carriage are paid by the buyer.]

  • Import customs/official permits: Seller (Delivered on the vehicle, not unloaded).

FAS (Free Alongside Ship): FAS can only be used for sea transport. In this Incoterms rule, the seller delivers the goods by placing them alongside the vessel (e.g., on a quay or a barge) nominated by the buyer at the named port of shipment. The risk of loss or damage to the goods passes when the goods are alongside the ship, and the buyer bears all costs from that moment onwards. Costs up to that point, including unloading (if applicable), are borne by the seller. The seller clears the goods for export, but has no obligation for import clearance.

  • Inspection, Packaging, Marking: Seller

  • Export customs/official permits: Seller

  • Loading: Buyer

  • Freight: Buyer

  • Insurance: As per contract

  • Unloading: Buyer

  • Import customs/official permits: Buyer

FOB (Free On Board): FOB can only be used for sea transport. In this Incoterms rule, the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment onwards. Costs prior to this are for the seller’s account. The seller clears the goods for export, but has no obligation for import clearance.

  • Inspection, Packaging, Marking: Seller

  • Export customs/official permits: Seller

  • Loading: Seller

  • Freight: Buyer

  • Insurance: As per contract

  • Unloading: Buyer

  • Import customs/official permits: Buyer

CFR (Cost & Freight): CFR can only be used for sea transport. In this Incoterms rule, the seller delivers the goods on board the vessel they have selected and contracted, or procures the goods already so delivered. Under this rule, the seller must contract for carriage and pay the costs and freight. The risk of loss or damage to the goods passes when the goods are on board the vessel. The seller fulfills their delivery obligation when they deliver the goods on board, not when the goods reach the destination. The seller clears the goods for export, but has no obligation for import clearance.

  • Inspection, Packaging, Marking: Seller

  • Export customs/official permits: Seller

  • Loading: Seller

  • Freight: Seller (1) [Note 10: (1) General costs not borne by the seller under the contract of carriage are paid by the buyer. Unloading costs not borne by the seller under the contract of carriage are paid by the buyer.]

  • Insurance: As per contract

  • Unloading: Buyer (2)

  • Import customs/official permits: Buyer

CIF (Cost, Insurance & Freight): CIF can only be used for sea transport. In this Incoterms rule, the seller delivers the goods on board the vessel they have selected and contracted, or procures the goods already so delivered. Under this rule, the seller contracts for carriage, obtains insurance against the buyer’s risk of loss of or damage to the goods during carriage, and pays the insurance premium along with costs and freight. The risk of loss or damage passes to the buyer when the goods are on board the vessel. The seller fulfills their delivery obligation when they deliver the goods on board, not when the goods reach the destination. The seller clears the goods for export, but has no obligation for import clearance.

  • Inspection, Packaging, Marking: Seller

  • Export customs/official permits: Seller

  • Loading: Seller

  • Freight: Seller (1) [Note 11: (1) General costs not borne by the seller under the contract of carriage are paid by the buyer. Unloading costs not borne by the seller under the contract of carriage are paid by the buyer. Insurance must be procured with a minimum of 110% of the contract value using Clause C. Clause A and B or War/Strike additional coverages can be obtained with costs borne by the buyer.]

  • Insurance: Seller (3)

  • Unloading: Buyer (2)

  • Import customs/official permits: Buyer