Incoterms: Too simple?
Jan 31, 2017 QuickCounsel Download PDF
Established by the International Chamber of Commerce (ICC), the Incoterms aim at providing rules for international sales contracts by allocating tasks, costs and risks between sellers and buyers.
Incoterms are composed of three letters. The most commonly used are: EXW (Ex Works), FOB (Free On Board), CIF (Cost, Insurance and Freight), CIP (Carriage and Insurance Paid to) and DDP (Delivered, Duty Paid).
Even if Incoterms are designed to simplify international transactions, they raise various issues.
Questions encountered while using Incoterms
1. Are Incoterms always appropriate?
Incoterms are limited to international contracts of sale of goods, regardless of the transportation method used, whether by sea, road or air. They are not appropriate for service agreements, or contracts that do both services and sales.
These instruments are appropriate for contracts that are not entirely negotiated nor transcribed in writing. For elaborated contracts, where the questions raised by Incoterms are already agreed upon by the parties, their use becomes less relevant, and even problematic as conflicting rules may appear.
2. Are Incoterms self-sufficient?
Incoterms do not provide a complete regulation of international sales contracts. Issues such as customary operations of carriers, payment of the price, or transfer of ownership do not fall under the scope of Incoterms. The parties will also have to insert a clause concerning the termination of the contract, which is not covered by Incoterms.
Some of them, (such as FOB, EXW, DDP, CIF), require the indication of a specific port, terminal or place of destination for the delivery or shipment of the goods.
Incoterms cannot replace contractual negotiations. In situations where the parties apply a “CIF” provision, the seller will select the carrier at the cheapest rate possible and not specify the place of shipment; thus, the cargo might suffer lack of security and control. Therefore, the buyer should anticipate this risk and pre-define a port of departure.
3. Are Incoterms binding?
3.1 In case of contradiction with a contractual clause
A modification or amendment of the Incoterm used in the contract will imply a certain allocation of the costs and insurance. When parties stipulate a provision that contradicts, with an aspect of the chosen Incoterm, that contradiction is usually intended. Therefore, the contradicting provisions should prevail.
Parties may have agreed on an Incoterm in a sale but derogate from these terms by their behavior. In this situation, one may say that the behavior is more specific and must prevail. The French Cour de Cassation has recently ruled that even though the parties had chosen “EXW”, the behavior of the seller, who had assumed responsibility of the loading operations had to prevail over the provision of the Incoterm. Therefore, the seller was held responsible for consequences resulting from the defective performance of the loading.
3.3 In case of contradiction with usages
The provisions of the Incoterms may collide with usages of trade.
Usages referred to in the Incoterm should prevail. According to the ICC, delivery of goods gives force to usages of each port. For instance, the ICC website indicates for FAS (Free Alongside Ship), that the costs of loading and unloading the goods will be borne by the buyer. However, it warns the parties against usages of the port in question, which are not regulated by the Incoterm. Also, it has been ruled by the Court of Appeal of Versailles that a FOB sale must be interpreted by taking into account the local usages that exist in the port of departure. The choice made by the seller of delivering “FOB Anvers” necessarily refers to the usages of the port of Anvers, which imply that the delivery takes place when the goods are placed in a given perimeter around the ship. Therefore, usages prevail over Incoterms, but only if the parties did not intend to give priority to the latter.
When usages are not expressly referred to, one may argue that they provide a more specific rule that should prevail over a more general one. However, a distinction should be made whether the usage is international and general, or local and specific. If the usage is international and general, it should not necessarily prevail.
4. Are Incoterms unique?
4.1 In comparison to the Uniform Commercial Code
Since its adoption in 1952, the Uniform Commercial Code (UCC) has served to harmonize commercial transactions throughout the United States. The shipping terms defined in the UCC are similar to the Incoterms: three letter composition and purpose. However, there are certain discrepancies that differentiate the UCC’s shipping terms from the Incoterms.
A first example would be Free Alongside Ship (FAS). The Incoterms states that the risk of loss passes when the goods are alongside the ship and from this moment forward, the buyer bears the risk. However, the UCC states that FAS requires the seller to deliver the goods dockside the designated ship and to obtain and tender a receipt for the goods in exchange for the carrier’s bill of lading. Thus, the UCC is much more descriptive than the Incoterms, in regards to exactly what is expected from each party to the transaction.
A second example would be Free On Board (FOB). According to the ICC, it means that the seller must deliver the goods to the buyer at a designated location. The risk of loss is transferred from the seller to the buyer once the goods are in his possession. This definition of delivery was codified in the Incoterms 2010, making the buyer liable for damage to goods during unloading from the transport vessel to loading onto the ship. However, under the UCC, FOB means that the seller must deliver the goods onto the ship at the designated place. The risk of loss passes to the buyer at the aforementioned place. The term “delivery” is then defined in § 2-504, § 2-503, § 2-323, and § 2-319.
This creates an ambiguity when a US company would sell products internationally with FAS or FOB. To clarify these differences, the UCC now defines some of its shipping terms with the definitions of the Incoterms. This being said, some UCC shipping terms such as COD and FOB still do not have the same meaning as Incoterms. One could say that the American Bar Association refers to the Incoterms as a way of giving them authority over the UCC shipping terms.
Another concurrent set of rules is the “Combiterms”, which were initially used in Scandinavian countries. They were created in 1961 and have been revised to take into account each new version of the Incoterms, in order to clarify and precise them. However, they may differ in many aspects. For instance, Combiterms attribute the costs in international sales contracts to which Incoterms apply.
5. Are Incoterms permanent?
The ICC regularly updates Incoterms. Various Incoterms have been modified or suppressed during the 2010 update. DAT (Delivered at Terminal) can replace DEQ (Delivered ex Quay), and DAP (Delivered at Place) may replace DAF, DES, DEQ and DDU.
According to the ICC, “all contracts made under Incoterms 2000 remain valid even after 2011”. It recommends to use Incoterms 2010 after 2011. However, parties can still agree to choose any version of the Incoterms after 2011 and if so, they must specify clearly which one they refer to. Therefore, even without reference to Incoterms 2000, a contract drafted before the last update refers to Incoterms 2000.
Although Incoterms were established to minimize ambiguity in international sales contracts, their simplicity has created complications in their use. It is not because Incoterms are simple that they should be used without legal attention.
A possible solution would be to codify the most popular trade usages in a supplemental text. This supplement could then be incorporated in international sales contracts in order to clarify the gaps of the Incoterms.
- Droit du commerce international, Droit international de l’entreprise, J.-M. Mousseron, J. Raynard, R. Fabre, J.-L. Pierre, 4th Ed. Lexis Nexis, p. 261
- Les Incoterms, Etude d’une norme du commerce international, E. Jolivet, Préface de D. Ferrier, Coll. Bibliothèque de droit de l’entreprise, volume 62, Ed. Litec, 2003, para. 308
- Dénonciation comportementale de l’Incoterm, P. Mousseron
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