WHAT ARE INCOTERMS? - THE HISTORY OF THE FORMATION OF INCOTERMS® RULES

I. WHAT ARE INCOTERMS?

 

Incoterms (short for International Commercial Terms) are a set of rules that explain the commercial terms reflecting the practical obligations for the delivery of goods between buyers and sellers in international sales contracts. Incoterms closely correspond with the United Nations Convention on Contracts for the International Sale of Goods (CISG). Incoterms are known and implemented by all major trading nations.

 

The Incoterms are only a part of the export contract. They do not address the value of the goods, when payment will be made, or the payment method to be used in the transaction, and they do not replace any national laws.

 

The Incoterms rules describe...:

• Responsibility: Who does what? For example, who arranges transport or insures the goods, who takes care of shipping documents and export or import licenses.
• Risk:When and where the Seller deliver the goods to the buyer, or in other words, when and where the risks transfer from the seller to the buyer.
• Costs: Which party is responsible for paying costs, such as transportation costs, insurance, packaging and handling, loading or unloading, and security-related inspection costs[1].

 

II. THE HISTORY OF THE FORMATION OF INCOTERMS® RULES

 

 

 

Since the end of the 19th century, to clarify the division of responsibilities, costs, and risks related to the delivery of goods, traders have used commercial terms with abbreviations such as FOB and CIF[2]. to incorporate into sales contracts.

 

However, in different market regions and various trading industries, international commercial terms known as Incoterms or Intraterms are explained differently. Generally, parties involved in contracts may not be fully aware of the differences in trading practices in each region or industry, which often leads to misunderstandings and disputes. For this reason, it is necessary to develop commercial terms that parties to sales contracts can agree to apply.

 

1923: ICC’s first sounding of commercial trade terms

 

After ICC’s (International Chamber of Commerce) creation in 1919, one of its first initiatives was to facilitate international trade. ICC set out to understand the commercial trade terms used by merchants through a study of six commonly used terms in 13 countries. The findings were published in 1923, highlighting disparities in interpretation.

 

1928: Clarity improved

 

To examine the discrepancies, a second study was carried out but with an expanded of trade terms used in more than 30 countries.

 

Research through surveys has shown differences in interpreting commercial terms, therefore, it requires the emergence of a unified explanation of commercial rules. In 1928, the ICC provided traders with a set of rules explaining the six most commonly used commercial rules in international trade[3].

 

1936: Global guidelines for traders 

 

First version of the Incoterms® rules was published and included the terms FAS, FOB, C&F, CIF, Ex Ship and Ex Quay.

 

After the ICC was established in 1919, the first version of Incoterms was introduced in 1936 with 7 terms, known as Incoterms 1936, which defines more clearly and comprehensively the obligations of the seller and buyer compared to Incoterms 1928. Incoterms 1936 focused on the trade of raw materials transported by sea and included rules such as the following:

 

- EXW (Ex Works)

- FCA (Free Carrier)

- FOT/FOR (Free on Rail / Free on Truck)

- FAS (Free Alongside Ship)

- FOB (Free On Board)

- C&F (Cost and Freight)

- CIF (Cost, Insurance, Freight)

 

Incoterms 1936 primarily explained the rules applied for road and sea transport. In reality, Incoterms 1936 was not widely recognized and used by business people because it did not fully explain important commercial practices.[4]

 

1953: Rise of transportation by rail

 

Due to World War II, supplementary revisions of the Incoterms® rules did not resume until the 1950s. The first revision of the Incoterms® rules was then issued in 1953, which debuted three new trade terms for non-maritime transport : DCP (Delivered Costs Paid), FOR (Free on Rail) and FOT (Free on Truck). 

 

To meet the demand for rail transport, which was highly developed, and as sellers often deliver goods in a similar way to FOB in maritime transport, Incoterms 1953 (ICC No.166) introduced the terms Free on rail (FOR) and Free on Truck (FOT). A new commercial term for non-maritime transport with delivery at the place of departure but with the seller bearing the cost of transportation was also added in Incoterms 1953 - Delivered Costs Paid CDP[5].

 

1967: Misinterpretations corrected

 

A third revision was launched, which dealt with misinterpretations of the previous version. Two trade terms were added to address delivery at frontier (DAF) and delivery at destination (DDP).

 

In 1967, the Incoterms® 1953 remained unchanged but with modifications to its content as follows: Retaining the 9 delivery rules similar to the Incoterms 1953 and adding 2 new rules:

 

DAF (Delivered At Frontier) - Delivery at the frontier;

 

DDP (Delivered Duty Paid) - Delivery with duty paid, applicable to all modes of transport, including multi-modal transport.[6]

 

1974: Advances in air travel

 

Another version issued due to increased use of air transportation which included the new term FOB Airport (Free on Board Airport) aimed to address confusion around the term FOB (Free on Board) by signifying the exact “vessel” used.

 

1980: Proliferation of container traffic

 

The expansion of carriage of goods in containers and new documentation processes called for another revision, which introduced the trade term FRC (Free Carrier…Named at Point), referring to goods not actually received by the ship’s side but at a reception point on shore, such as a container yard.

 

To adapt to the reality of transporting goods in containers by sea, Incoterms 1980 (ICC No.350) introduced the FRC - "Free Carrier" Delivery to the Carrier. Incoterms 1980 also changed the full name of the DCP from "Delivered Cost Paid" to "Freight/Carriage Paid To". The CIP (Freight or Carriage and Insurance Paid to) was added in Incoterms 1980 for non-maritime transport as an equivalent rule to CIF in maritime transport.[7]

 

1990: A complete revision

 

The Incoterms 1990 (ICC No. 460) are presented in a more systematic way than before. The commercial terms are divided into four groups: E, F, C, and D, in order of increasing obligations of the seller. The group name is the first letter of the rules within the group. The DCP condition has been renamed and designated as CPT (Carriage Paid To) to fit into group C. The obligations of the seller and buyer are placed under corresponding headings, making it convenient for users to see the correspondence of the seller's and buyer's obligations. Also, starting from the 1990 version, the commercial terms have been uniformly abbreviated in 3 letters. Therefore, the symbol C&F has been changed to CFR. In addition, the FRC symbol (Free Carrier) has been changed to FCA.

 

In Incoterms 1990, rules applicable to each mode of transport (e.g. FOR-FOT and FOA) were eliminated because the rules FCA could be used for any mode of transport. However, the FOB rule was still kept because it is a traditional rules widely used in sea transport, which has the largest volume of goods in global trade. A new commercial term was added, which is DDU to meet the demand for delivery at the destination like DDP but with goods not yet cleared for import.

 

Due to the development of e-commerce, Incoterms 1990 stipulates that the seller can provide proof of delivery and transport documents through electronic data interchange (EDI) instead of paper documents as agreed by the parties[8].

 

2000: Amended customs clearance obligations

 

The “License, Authorisations and Formalities” section of FAS and DEQ Incoterms® rules were modified to comply with the way most customs authorities address the issues of exporter and importer of record. In particular:

 

FAS (Free Alongside Ship):

 

It means that the seller pays for the domestic transportation fees to the delivery port, while the buyer is responsible for the fees for loading, transportation, insurance, unloading, and domestic transportation from the unloading point to their own storage location. The transfer of risk occurs when the goods are delivered at the delivery port.

 

Under these rules, the seller must: Deliver the goods alongside the buyer's designated vessel; Provide the usual and complete documentation proving that the goods have been actually placed alongside the vessel. Obtain the export license, pay export taxes and fees.

 

The buyer must: Promptly designate a suitable shipping vessel. Sign the contract of carriage and pay the freight. Bear all risks and losses of the goods from the moment they have actually been delivered alongside the ship.[9]

 

This condition differs from the Incoterms 1990 version in that the seller must handle the export formalities for the shipment.[10]

 

 

DEQ (Delivered Ex Quay): This is an Incoterm rule. It is similar to the DES, except that all risks related to the goods are transferred from the seller to the buyer only when the goods have been unloaded from the vessel and placed on the quay. Under the DEQ:

 

The seller must:

 

Place the goods at the disposal of the buyer on the quay of the destination port.

 

Provide the bill of lading or delivery order along with any necessary documents so that the buyer can take delivery of the goods from the quay.

 

Pay for the costs of unloading the goods.

 

Obtain the import license, pay import duties, taxes and fees if the contract specifies "duty paid on quay"

 

The buyer must:

 

Take delivery of the goods on the quay of the destination port.

 

Obtain the import license, pay import duties, taxes, and fees if the contract specifies that the buyer is responsible for payment.

 

Bear all risks for the goods once they have been placed at the buyer's disposal.

 

According to Incoterms 1990, under these rules, the seller must bear the risk and cost to complete the import formalities and related expenses. However, Incoterms 2000 requires the buyer to perform these formalities."

 

2010: Reflections on the contemporary trade landscape

 

Incoterms® 2010 (ICC No. 715) was issued in 2010 and came into effect on January 1, 2011.

 

Although Incoterms 1990 and 2000 provided guidance on the mode of transportation, in practice, traders still had the habit of using traditional maritime rules for non-maritime transport modes. To focus traders on the mode of transportation when selecting the appropriate Incoterms rule, Incoterms® 2010 omits the presentation method according to the four groups E, F, C, D and only presents two groups according to the mode of transportation

 

In the FOB, CFR, and CIF of Incoterms® 2010, the term 'ship's rail,' as a traditional point of risk transfer, has been replaced by the term 'on board the vessel,' which reflects the actual point of delivery and risk transfer.

 

The DES, DEQ, DAF, and DDU have also been eliminated and replaced with two new rules, DAT and DAP, which are more comprehensive and flexible in practice. In DAT, the terminal corresponds to the quay in DEQ, where goods are unloaded from the means of transport or vessel, while delivery on the means of transport to the destination in DAP corresponds to delivery on the means of transport or vessel at the border of the port of arrival to the destination in DAF/DES/DDU. DAT replaces DEQ to meet the increasing demand for container use. Accordingly, goods are unloaded from the container when sending LCL cargo to many different consignees, and the place of delivery is no longer the dock at the port of discharge but usually the CFS of the carrier. This change makes Incoterms simpler and more concise, reducing the 13 rules in Incoterms 2000 to 11 rules in Incoterms® 2010

 

Incoterms^® 2010 còn có những sửa đổi khác bao gồm nghĩa vụ cung cấp thông tin liên quan đến an ninh và nghĩa vụ phù hợp với việc “mua bán theo Incoterms® 2010 also contains other amendments including the obligation to provide security-related information, and the obligation to comply with “chain trading”[11].

 

2020: Revision

 

To keep pace with the ever-evolving global trade landscape, the latest update to the trade terms was launched in September 2019[12].

 

The Incoterms® 2010 rules, which came into effect on January 1, 2011, are considered a version with many practical changes compared to previous versions. However, during the application of Incoterms 2010, along with the fluctuations of the global business environment, some issues have been identified, such as disputes related to the seller's obligation to provide delivery evidence in the rules belonging to group F (FAS, FOB, FCA); increasing risks in the transportation process involving multiple modes of transport; cases where the transportation journey begins before the delivery point or ends after the delivery point, and the need to expand basic obligations for parties to choose according to new and modern international business transaction methods.

 

The Incoterms 2020 version was created to meet the demands that are suitable for commercial practices and became effective from 01/01/2020. Incoterms 2020 includes 11 rules: EXW, FCA, FAS, FOB, CPT, CFR, CIP, CIF, DAP, DPU, DDP[13].

 

Table: Changes in Incoterms® conditions through versions

 

The first introduction of Incoterms was in 1936 with the main objective of establishing and unifying rules related to the supply of goods in international trade. The ICC reviews and revises Incoterms regularly, updating every ten years over the past forty years. The updates mainly reflect changes in international trade and supply rules. In 1953, the ICC responded to the increase in railway transportation, in 1976 to the development of air transportation, and in 1980 to the expansion of container transportation. In 1990, the rules were adjusted to fit the explosion of information and flexibility - the ability to combine transportation. In 2000, the rules were adapted to fit the business reality and changes in customs procedures. Similarly, subsequent revisions have been made to adjust the rules for modes of transportation and divide them into rules for all modes of transportation and maritime transport. In the most recent ninth edition, the ICC also adjusted the presentation and design to make the rules more user-friendly. As can be seen from the latest revisions, emphasis on compliance with business reality is prominent and aimed at increasing usage[14].

 

As logistics activities change and become more important in international trade, the relationship between the two main parties in international trade (exporters and importers) will continue to evolve. Each revision of Incoterms® is based on changes in international trade to address and meet practical business rules. These changes are aimed at avoiding disputes between parties, preventing misunderstandings, making implementation easier, and better understanding, thereby making transactions easier. The latest version, Incoterms® 2020, provides clear and specific provisions that are easy to understand regarding the rights and obligations of parties for each condition, so that parties can choose the most suitable method to optimize their interests in trade.

 

III. ROLES AND APPLICATIONS OF INCOTERMS^®[15]

 

In today's global economy, goods are traded between parties in more countries, with greater quantities and a wider variety of types. When the volume and diversity of commercial transactions increase, the likelihood of misunderstandings and costly disputes also increases if the purchase contracts are not properly drafted.

 

For almost a century, Incoterms have provided favorable rules for carrying out commercial transactions. The purpose of Incoterms is to provide a complete system of rules to explain the most widely used commercial terms. Therefore, it can avoid or at least significantly reduce the inconsistency in interpreting these terms in different countries. Referring to Incoterms in a sales contract clearly defines the obligations of the parties to minimize and conveniently resolve disputes arising from the sales contract, especially between parties from different countries.

 

Incoterms have various rules suitable for different modes of transport, different ways of dividing risks and costs between the seller and the buyer. Therefore, the parties can choose the most appropriate rule that fits their ability and desire in a specific transaction.

 

Since ICC introduced Incoterms in 1936, this widely recognized standard for contracts has been regularly updated to keep up with the development of international trade. In addition, each time a new Incoterms is published, ICC always releases a "Guide to Using Incoterms" document to make it easier to understand and use. Furthermore, the terminology and content of Incoterms are consistent with each other and compliant with the United Nations Convention on Contracts for the International Sale of Goods (CISG) and other ICC publications such as UCP 600.

 

Incoterms also provide significant support for new traders who are inexperienced in international trade. By using Incoterms for the contract, the responsibilities of the seller and buyer will be established to minimize risks and disadvantages. In addition, Incoterms ensure a reasonable balance between the rights and obligations of the parties to prevent disputes. Even if disputes, Incoterms also help parties as well as mediators and arbitrators significantly reduce time and effort to clarify issues. Therefore, standardizing commercial terms can create advantages for businesses by reducing transaction costs and trade risks.

 

 

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