Historical Development of Incoterms

By Alan Jervis: Marine, Energy and Liability Insurance Expert

Jervis ICI Ltd

A Universal Language of Trade and Commerce

There are 7,117 languages spoken in the world today. Yet, thanks to developments that took place mainly in the early part of the 20th century, there is one universal, single international trade language. This language allows sellers and buyers to communicate with their trading partners located thousands of miles away in even the remotest parts of the globe and, in spite of the challenges of many local dialects and languages, when it comes to a commercial transaction, buyers and sellers alike have a clear understanding of each other’s rights and responsibilities.

This universal language is known as Incoterms. From a commerce and trade standpoint, this revolutionary way of communicating is perhaps considered one of the miracles of the last hundred years. By employing a single set of terms, all barriers of communication between international buyer and seller are removed. A buyer in one country is able to trade freely with a seller in another country, knowing in advance the rights and responsibilities of the other.

How did this international and universal trade language come about?

It is probably not commonly known that to look for the origins of this international trade language, we must look even beyond the 20th Century and to at least all the way back to the mid 1800’s where the terms CIF and FOB were already being employed both in France and England, for example.

But it was not until after World War One that a group of industrialists, traders and financiers…..a group determined to bring about economic prosperity following the great conflict…that eventually led to the forming of the ICC in 1919.

1920’s

In the 1920’s, the ICC set out to understand the commercial trade terms used by merchants. This culminated in a study based on 6 commonly used terms based on the usage and practice of 13 countries. However, this survey was considered too limited in scope and a second survey was carried out in 1928 based on the trade practices of 30 nations.

In 1936, based on the results of the preceding studies, the first version of the Incoterms rules were published. The principle terms were: FAS, FOB, C&F, CIF, Ex Ship and Ex Quay. Since then, Incoterms have evolved into a codified international standard

However, a further revision of the Rules did not take place until after World War 2.

1950’s

Due to World War II, supplementary revisions of the Incoterms? rules were suspended and did not resume again until the 1950’s. The first revision of the Incoterms? rules was then issued in 1953. This revision brought about three new trade terms for non-maritime transport. The new rules comprised DCP (Delivered Costs Paid), FOR (Free on Rail) and FOT (Free on Truck).

1967: Correction of Prior Rules

It was not until 1967 that the third revision of the Incoterms? rules was launched. These revisions addressed misinterpretations of the previous version. At the same time two new trade terms were introduced in order to respond to transportation and delivery at frontier (DAF) and delivery at destination (DDP).

1974: Advances in air travel

In 1974, as a result of the increased use of air transportation, yet another revision of the terms took place. This edition included the new term FOB Airport (Free on Board Airport). This rule aimed to allay confusion around the term FOB (Free on Board) by signifying the exact “vessel” used.

1980: Era of Containerisation

The 1970’s and 1980’s saw a boom in container traffic, with more and more container vessels being built. With this expansion of carriage of goods in containers and new documentation processes, came the need for another revision. This edition introduced the trade term FRC (Free Carrier…Named at Point), which provided for goods not actually received by the ship’s side but at a reception point on shore, such as a container yard.

1990: A complete revision

In1990, a complete revision of the Rules took places which was also considered as a simplification or consolidation. The fifth revision simplified the Free Carrier term by deleting rules for specific modes of transport (i.e., FOR; Free on Rail, FOT; Free on Truck, and FOB Airport; Free on Board Airport). It was considered sufficient to use the general term FCA (Free Carrier…at Named Point) instead. Other provisions accounted for increased use of electronic messages.

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.

2010: Reflections on the contemporary trade landscape

Incoterms? 2010 consolidated the D-family of rules, removing DAF (Delivered at Frontier), DES (Delivered Ex Ship), DEQ (Delivered Ex Quay) and DDU (Delivered Duty Unpaid) and adding DAT (Delivered at Terminal) and DAP (Delivered at Place). Other modifications included an increased obligation for buyer and seller to cooperate on information sharing.

2020 Rules                                                                                                                                                                 

As with previous versions, Incoterms 2020 cover:

(i) the parties' obligations to arrange for the carriage and insurance of the goods;

(ii) the point at which goods are "delivered", and the point at which risk in the goods for loss or damage is transferred from seller to buyer; and

(iii) the various costs associated with the transportation of the goods.

Summary of Principal Changes Between 2010 and 2020 Rules

A)    The previous Incoterm? DAT (Delivered at Terminal) is now called DPU (Delivered at Place Unloaded. It was decided to change the term to DPU to remove confusion that arose in the past. In the past, DAT required ‘Delivery at Terminal (unloaded)’, however the word “terminal” caused confusion. The new term DPU (Delivery at Place Unloaded) covers ‘any place, whether covered or not’.

B)   CIF and CIP are the only two Incoterms? that require the seller to purchase insurance in the buyer’s name. Under Incoterms? 2010 the insurance cover for both CIF and CIP was required under Institute Cargo Clause C. Under the new Incoterms? 2020, CIP requires insurance cover complying with Institute Cargo Clause A. 

C)   Under Incoterms? 2010 it was assumed that all transport would be undertaken by a third party transport provider. Updates to Incoterms? 2020 allows for the provision for the buyer or seller’s own means of transport. This recognizes that some buyers and sellers are using their own methods of transport, including trucks or planes to get goods delivered.

D)   Therefore provisions have been made to the Incoterms? 2020 to state that the buyer must instruct the carrier to issue a transport document stating that the goods have been loaded – i.e a bill of Lading with an ‘on board’ notation

E)   In recognition of the increase in security-related concerns in the trade and shipping sectors over the past decade, article A4 ("Carriage") of each Incoterm now requires the seller, where applicable, to comply with any transport-related security requirements, up to the point of delivery, and/or to provide the buyer, at the buyer's request, risk and cost, with any information concerning transport-related security requirements, that the buyer needs for arranging carriage.

Conclusion

There is little doubt that as logistics, transportation as well as the way buyers and sellers do business change, so too will Incoterms be subject to an ongoing revision to meet future needs in the field of international trade and commerce.

By Alan Jervis

Marine, Energy and Liability Insurance Expert

Member of the Academy of Experts

https://jervisici.com