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Understanding Incoterms 2010 and their usage in sales contracts and letters of credit











Latest incoterms rules are titled with Incoterms 2010 that has been effective since 01.January.2011. Incoterms 2000 was the previous set of rules that was put into action on 1st of January 2000.

On my previous articles I have expained the meaning and general concepts of Incoterms. Please click this link to reach my incoterms page. I have also looked at the incoterms 2000 and answered some key questions such as;

  •     When Incoterms 2000 entered into force? 
  •     Can Incoterms 2000 still be used on the sales contracts? 
  •     How many rules defined in Incoterms 2000?

Want to learn more about incoterms 2000, please follow this link.
What are the main differences between INCOTERMS 2010 and INCOTERMS 2000?
Two new Incoterms rules – DAT and DAP – have replaced the Incoterms 2000 rules DAF, DES, DEQ and DDU. As a result the number of Incoterms rules has been reduced from 13 (INCOTERMS 2000) to 11 (INCOTERMS 2010). There is no more DAF, DES, DEQ and DDU rules defined in INCOTERMS 2010. They have been eliminated.

How INCOTERMS 2010 rules are classified? 

Before looking at how Incoterms 2010 are classified it would be better to understand the classification model of Incoterms 2000. Incoterms 2000 rules are classfied mainly by the responsibility degree of the exporter. For example Group E rules give minimum responsibility to the exporter (exworks) whereas Group D give maximum responsibility to the exporter(DDP). Please look at the table below titled with "INCOTERMS 2000 Classification" to understand the subject in detail.
Table 1 : INCOTERMS 2000 Classification  















We understand from Incoterms 2010 preface that now ICC would like to classify Incoterms based on modes of transport. If you would like to learn more about modes of transport please spare couple of minutes to look at my related page from this link. Please look at the table below titled with "INCOTERMS 2010 Classification" to understand the subject in detail.
Table 2 : INCOTERMS 2010 Classification  
















How to use INCOTERMS 2010 in letter of credit transactions? 
Incoterms are incorparated into sales contracts or proforma invoices. In letter of credit transactions we see incoterms in field 45A - Description of Goods and Services. If issuing banks put incoterms into the field 45-A Description of Goods and Services then beneficiaries should include this exact incoterms pharase in to the commercial invoice. Otherwise banks determine such presentation as discrepant. 
        




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What does Incoterms 2010 mean? 
Incoterms are International Commercial Terms. The Incoterms rules are an internationally recognized standard and are used worldwide in international and domestic contracts for the sale of goods. Incoterms are developed by ICC, International Chamber of Commerce. ICC regularly revised Incoterms to catch the changing market conditions and trade practices.
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INCOTERMS 2000 Classification  

Group E 

EXW EX WORKS (... named place)

Group F 
FCA FREE CARRIER (... named place)
FAS FREE ALONGSIDE SHIP (... named port of shipment)
FOB FREE ON BOARD (... named port of shipment)

Group C 
CFR COST AND FREIGHT (... named port of destination)
CIF COST, INSURANCE AND FREIGHT (... named port of destination)
CPT CARRIAGE PAID TO (... named place of destination)
CIP CARRIAGE AND INSURANCE PAID TO (... named place of destination)

Group D 
DAF DELIVERED AT FRONTIER (... named place)
DES DELIVERED EX SHIP (... named port of destination)
DEQ DELIVERED EX QUAY (... named port of destination)
DDU DELIVERED DUTY UNPAID (... named place of destination)
DDP DELIVERED DUTY PAID (... named place of destination) 

INCOTERMS 2010 Classification  



RULES FOR ANY MODE OR MODES OF TRANSPORT

EXW EX WORKS (... named place)
FCA FREE CARRIER (... named place)
CPT CARRIAGE PAID TO (... named place of destination)
CIP CARRIAGE AND INSURANCE PAID TO (... named place of destination)
DAT DELIVERED AT TERMINAL (new rules)
DAP DELIVERED AT PLACE (new rules)
DDP DELIVERED DUTY PAID (... named place of destination) 



RULES FOR SEA AND INLAND WATERWAY TRANSPORT 

FAS FREE ALONGSIDE SHIP (... named port of shipment)
FOB FREE ON BOARD (... named port of shipment)
CFR COST AND FREIGHT (... named port of destination)
CIF COST, INSURANCE AND FREIGHT (... named port of destination)

Examples : Usage of Incoterms 2010 in a letter of credit
Field 45A: Description of Goods and Services
HYDROLIC PET BOTTLE BALING AND EQUIPMENTS. CONFORM TO PROFORMA INVOICE NUMBER ADG-001 DTD 08.11.2012 CFR ALGIERS PORT-ALGERIA,INCOTERMS 2010 THIS MENTION SHOULD APPEAR ON COMMERCIAL INVOICE.
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