Brief History of Incoterms

The use of Incoterms in International Trade is widespread today, yet this has not always been the case.  This article studies the history and development of Incoterms during the 20th century and into the 21st.

One of the first initiatives of the International Chamber of Commerce (ICC) to facilitate international trade was to explore the understanding of trade terms in the 1920s and to publish the results of their study in 1923. This first study was limited to six common trade terms used by 13 different countries and was to be followed by a second published study in 1928 expanding the scope to the interpretation of trade terms used in more than 30 countries. The studies demonstrated disparities in the interpretation of the trade terms which required further measures resulting in the first version of Incoterms in 1936.

At that time, trade terms involving carriage of goods focused on carriage by sea and reflected the worldwide use of the terms FAS (Free Alongside Ship), FOB (Free on Board), C&F (Carriage and Freight), CIF (Carriage Insurance and Freight), Ex-Ship and Ex-Quay.

Further revision of Incoterms was suspended during the Second World War and the work was not resumed until the 1950s resulting in the 1953 version. A trade term for non-maritime was added, namely FOR-FOT (Free On Raid-Free On Truck) as well as DCP (Delivered Costs Paid). The words ‘Free On Truck’ were found to be misleading as, semantically, they could refer to any truck regardless of whether it was used in connection with rail or road transport. In fact, the addition FOT only concerned railway transport. At this point, no version of Incoterms ever referred to a trade terms specifically to be used only in connection with road transport.

In 1967, further trade terms were added addressing delivery at frontier (DAF) and delivery in the country of destination (DDP). At this point the ICC decided to actively advertise their interpretation of international sales terms (as opposed to other systems in use worldwide at the time). Therefore, in 1968, at the first session of the Commission of the ICC, Incoterms 1953 were identified as “an instrument of special importance with regards to the harmonization and unification of the law of the international sale of goods.” At it’s second session (in 1969) the Commission requested the Secretary-General to inform the ICC that Incoterms 1953 should be given the widest possible dissemination and to bring the views of the Commission to the attention of the United Nations regional economic commissions.

Amendments to Incoterms continued to be made, with additional terms added in 1976 and 1980. In 1976 a particular term for air transport, FOB Airport, was added. The introduction of this term was a reflection of the confusion relating to the interpretation of FOB. With a sea freight shipment, the passing of the goods over the ship’s rail signified the point where risk passed from the seller to the buyer. However, entry into an aircraft was not equally perceived as a practical risk division point for goods to be carried by air. Instead, handling over the goods to the air carrier was seen as the point where risk transferred. When the terms were amended in 1980, although FOB Airport was not seen as the most useful of terms, it nevertheless remained in the 1980’s version of Incoterms.

However, it was in 1980 that ‘Free Carrier’ term was introduced. The reason for this addition had to do with the growth of the carriage of goods in containers signifying that the goods were not actually received by the maritime carrier at the ship’s side but rather at some reception point ashore. The goods could either move in a container loaded by the seller at his premises and be transported to a port for loading on board a vessel, or be delivered to the carrier at the port, for the carrier to stow in containers and load on board the vessel. Under these conditions defining the point of transfer of risk as arrival onto the ship itself was seen as inaccurate. Instead, the relevant point, as with FOB Airport, would be the point of handling over the goods to the carrier. In order to further support that understanding, the name of the term, when first introduced in the 1980 version, became ‘Free Carrier’ with the acronym FRC.

All these changes were merely amendments to the original Incoterms 1953 and it was only in the late 1980s that the ICC decided to completely revise Incoterms 1953 in order to adapt them to contemporary commercial practice and Incoterms 1990 were introduced.

There were numerous changes. The acronym FCR for “Free Carrier” was changed to FCA. Since FCA could now be used for any form of transport, this meant that the trade terms FOR-FOT and FOB Airport were now obsolete and could be removed. It was also at this point that the concept of electronic documents (EDI) was introduced as part of the seller’s duty to provide proof of delivery and transport documents. The 1990 version of Incoterms had 13 individual terms – Ex-Works (EXW), Free Carrier (FCA), Free Alongside Ship (FAS), Free On Board (FOB), Carriage and Freight (CFR), Carriage Insurance and Freight (CIF), Carriage paid to (CPT), Carriage and Insurance paid to (CIP), Delivered at Frontier (DAF), Delivered Ex-Ship (DES), Delivered Ex-Quay (DEQ), Delivered Duty Unpaid (DDU) and Delivery Duty Paid (DDP).

At its twenty-fifth session in 1992 the Commission considered a request of the Acting Secretary-General of the ICC to endorse Incoterms 1990 for worldwide use. At that session, the Commission was agreed that Incoterms 1990 had succeeded in providing a modern set of international rules for the interpretation of the most commonly used trade terms in international trade and decided to endorse Incoterms 1990. Therefore, Incoterms 1990 was adopted by the ICC with a date of entry into force on 1st July 1990 and became available as ICC publication no. 460.

When Incoterms came up for revision again in the late 1990s, it was difficult to see what could be improved. There was some investigation with the FOB term in trying to find a different point of transfer of risk, other than the ship’s rail (which was growing even more out of date with each passing day), but in the end all attempts failed. There was also the concern that since the risk passed over the ship’s rail, the trade terms FAS meant that the seller escaped the obligation to clear the goods for export. This was changed and under Incoterms 2000 the export obligation became the seller’s responsibility as opposed to the buyer with the FAS term. A corresponding change was made in the clause DEQ, where, due to the fact that the goods had to enter into the country of destination when landed on the quay, the seller according to the previous versions of Incoterms had to arrange for import clearance. This obligation became the buyers.

Another significant difference between Incoterms 2000 and 1990 was that the delivery obligation under the FCA term was simplified. The 1990 version differentiated between the means of transport and the named place of delivery. But under Incoterms 2000 the seller had to always deliver to the carrier. If the agreed upon place of delivery is the sellers premises, the seller was obliged to load the goods, otherwise the seller only had to make the goods available.

Once we look at this history, it is easy to see why the changes between Incoterms 2000 and Incoterms 2010 occurred. For example, the abolition of the ship’s rail as a point of transfer of risk and responsibility had been considered over 10 years previously. Possibly the only difference between the decision to change it being taken at the end of the first decade of the 21st century instead at the end of the last decade of the 20th century was that the concept had become more acceptable in the meantime.

The same can be said of the removal of the phrases DAF, DES and DEQ. The last two date from 1936 effectively and since then the way we do business has changed enormously and both the phraseology and what they stood for is no longer reflected current business practice.

And there is nothing to say that this process of refining and changing will not continue in the future. For example, it will be interesting to see if the sea freight only terms of FAS, FOB, CFR and CIF survive the next round of amendments.

Maria Narancic from Point to Point Export Services is an independent international trade adviser who assists organisations world wide with their international trade projects, documentation, Documentary Credits and import/export training.  She is based in the United Kingdom.  If you require any further assistance with the matters mentioned above, please do contact us by e-mail on info@point-point.com or check out other international trade articles on the Point to Point Export Services website at www.point-point.com

Sources
Ramberg, Jan (Prof Ph.D)
“Incoterms 2000 – The Necessary Link between Contracts of Sale and Contracts of Carriage”

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