Incoterms® 2010: Avoiding the “Wet Blanket” Syndrome (November 23, 2010)

November 23, 2010

Incoterms^® 2010: Avoiding the “Wet Blanket” Syndrome

Users discover tricks of the trade at USCIB seminars

By Bill Armbruster

The rules of international trade have changed – and even some of the old rules no longer apply the way they used to. Tom Dirmyer, export-import manager for Emerald Performance Materials, found that out when he attended a recent seminar on Incoterms^® 2010, the latest update to rules first introduced by the International Chamber of Commerce (ICC) in the 1930s.

The seminar was led by Frank Reynolds, the U.S. representative on the ICC committee that revised the rules.

“Frank threw a wet blanket over some of our practices,” Mr. Dirmyer said, by casting doubt on the use of CFR (Cost and Freight) and CIF (Cost, Insurance and Freight) for container shipments.

Incoterms^® rules expert Frank Reynolds leads a USCIB seminar in Charleston, South Carolina. New changes to these influential trade rules will have a major impact on company operations.

Mr. Reynolds explained that those terms apply only to port-to-port transport and do not cover multimodal transport, such as vessel and truck or train. “We have to take a long hard look at that because we use those two terms frequently,” according to Mr. Dirmyer.

CFR and CIF are two Incoterms^® rules held over from the previous version, Incoterms^® 2000. ICC, a USCIB affiliate, simplified the rules by dropping four arcane terms and replacing them with two new ones that are more appropriate for 21st-century commerce. That reduced the total number of Incoterms^® rules from 13 to 11.

The Incoterms^® rules are critical because they clarify the responsibilities, costs, and the risks of buyers and sellers in the delivery of goods. Under the Incoterms^®rules, “delivery” is the point at which the seller hands over responsibility for the goods to the buyer. It does not necessarily refer to the arrival of the goods at a specific physical destination.

Failure to understand the Incoterms^® rules can be costly. For example, if you are the buyer and incorrectly assume that the seller is responsible for insurance, you could be stuck with a big loss if the goods are damaged or lost at sea. If you had settled on a more favorable term in your negotiations with your trading partner, you could have averted a major loss. The same goes if there’s a misunderstanding about transportation costs or the payment of import duties. You could be stuck with a big bill.

Now applicable to domestic commerce

Besides reducing the number of Incoterms^® rules, the new version clearly distinguishes between those that are applicable only to maritime transport and those that can be used for all transport modes, including multimodal. The new rules also take into account changes in cargo security rules and the increased use of electronic commerce. But perhaps the biggest benefit for U.S. companies is that the new rules are far more applicable to domestic commerce.

Despite the changes, the fundamental considerations remain the same.

“Companies still have to decide what works for their business,” said Stanley Pfrang, export development manager for the Wisconsin Department of Commerce, who attended a seminar Mr. Reynolds conducted in Brookfield, Wisconsin. “Do they need more control in the transaction? How much can they accept? Are particular terms needed to meet or beat the competition? How comfortable are they doing business with a particular customer?”

Mr. Pfrang, who works one-on-one with Wisconsin exporters, said, “We always discuss the Incoterms^®rules as a way to help structure the deal and make sure that costs and risks are recognized.”

The new Incoterms^® rules were announced on September 16 and take effect on January 1, 2011. Companies may continue to use the old rules afterwards, and Mr. Reynolds suggested companies should do that until both they and their partners fully understand their responsibilities under the new rules.

For many companies, the biggest decision is which of two new terms they should adopt in place of Delivered Duty Unpaid. DDU was very popular but could be confusing because it did not apply to goods that were resold domestically after the original buyer paid the import duties.

The new terms are DAT (Delivered at Terminal) and DAP (Delivered at Place). Both may be used for any mode or modes of transport, with the signal difference being that DAT provides for delivery of the goods unloaded by the seller, whereas DAP provides for delivery of the goods ready for unloading by the buyer.

According to Kathy Bushart, a compliance specialist with Eastman Kodak Co., the new terms are a lot clearer. “DAP removes ambiguity,” she said.

Kodak will most likely use DAP, she said, although some countries may require use of DAT or CPT (Carriage Paid to) for imported goods. For inbound and domestic trade, Kodak will most likely continue to use FCA (Free Carrier) for air, ground and ocean shipments that are less than a full container, and FOB (Free on Board) for full ocean containers, so it can control the transportation chain, Ms. Bushart said.

In cases where it used DDU, Emerald will probably replace it with CIP, but with additional conditions regarding transportation to destination and which party will be responsible for charges on the receiving end, according to Mr. Dirmyer. “Every time we use a new term or a different interpretation of an existing term it will be a learning experience for the person at the other end,” he noted.

Fewer rules for companies to learn

Beata Spuhler, a trade compliance attorney with the law firm Drinker Biddle & Reath LLP, said the Incoterms^®2010 rules will make things simpler for the trade community because there are fewer rules for companies to learn and to distinguish from each other.

Ms. Spuhler suggested that this is a good time for companies to revise all of their contracts and purchase orders. That will ensure that they use the terms that “truly reflect what the parties expect from the transaction, including when the risk of loss will pass from the seller to the buyer, who handles carriage and exactly from what point to what point,” said Ms. Spuhler, who attended a seminar Mr. Reynolds gave in Chicago.

USCIB and Mr. Reynolds spearheaded the drive for revising the Incoterms^®2000 rules for several reasons. The first was that the deletion of the old shipment and delivery terms from the Uniform Commercial Code in 2004 made the Incoterms^® rules an attractive replacement. Secondly, the old Incoterms^® rules did not include a duty-neutral term for domestic sales of pre-imported goods, added Mr. Reynolds, the author of several books on trade, including Incoterms^® for Americans. A third reason for the revisions was a potentially vague area in CPT and CIP.

The new rules clarify that issue by including warnings that the parties should agree to both the delivery point and the place to which the seller pays transportation, according to Mr. Reynolds. He said people should become familiar with all 11 Incoterms^® rules, but that most companies will probably use just four or five.

The new rules are spelled out in an ICC book entitled Incoterms^® 2010. It may be ordered from ICC Books USA. Attendees at Mr. Reynolds’s seminars receive a copy of the book along with other materials, including Incoterms^® for Americans, an updated edition of which will be available for purchase from ICC Books USA in early 2011.

The seminars will continue through mid-March. A partial schedule is available by clicking here. It will be updated as new seminars are added.

Bill Armbruster is a freelance journalist specializing in international trade and shipping. He is the former editor of Shipping Digest.

Incoterms^®is a registered trademark of the International Chamber of Commerce.

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