Incoterms

From Max-EuP 2012

byUlrich Magnus

1. Subject and aims

The Incoterms (International Commercial Terms) are a set of rules created by the International Chamber of Commerce (ICC) with the aim of fixing the contents of certain widely used commercial terms in contracts for the sale and delivery of goods, in order to enable a globally uniform application of the contractual terms. Such delivery terms developed long ago in the context of overseas trade and had effectively become standard conditions. In the mid 19th century, when the British Empire dominated overseas trade, abbreviations like CIF (cost, insurance, freight) and FOB (free on board) were already in frequent use. These abbreviations described a contractual system which specifically allocated risks and burdens in reference to the international sale of goods. These abbreviations are still used in commercial practice today, and serve the aim of rationalization. Just three letters (such as CIF or FOB) can circumscribe a comprehensive set of rules, which provide solutions for several important and problematic aspects of overseas trade, in particular regarding the questions of when risk passes from the seller to the buyer and which party has to bear the respective costs and liabilities of insuring and transporting the goods. Since each Incoterm regulates these aspects differently, the Incoterms as a whole offer a broad variety of alternative possibilities to tailor the contract according to the parties’ choice. By choosing an Incoterm and incorporating it into their contract, the parties avoid the need to negotiate and precisely formulate all the aspects regulated by the Incoterm in question.

Rationalization, however, is not the only aim of the Incoterms. Their predominant objective is the facilitation of international trade. The establishment of an internationally uniform understanding of specific contractual terms, which are frequently used in practice, is a significant step in this direction. Although the Incoterms are not binding, and constitute only so-called soft law, they add considerably to the factual unification of international commercial law and form part of a modern lex mercatoria. Created by commercial practice, they are a part of what has been termed the ‘self-created law of commerce’ (Hans Großmann-Doerth).

2. Creation and development of the Incoterms

The Incoterms were first formulated in 1936. They consisted of 13 abbreviated clauses, which by that time had long since been the norm in international trade, and still form part of the Incoterms today. However, courts in different countries did not always interpret the meaning of the clauses in the same way. As a consequence, a different national understanding of the meaning of these internationally used abbreviations developed on a number of points. This led the ICC in Paris to consult with its national member-organizations as to how the courts in their countries understood the most frequently used trade terms. Based on the answers, the ICC prepared a uniform definition of the contents of the most important trade terms for the international sale of goods. Since 1936, the Incoterms have undergone a number of revisions (1953, 1967, 1976, 1980, 1990, 2000 and 2010) in a process of constant adaption of changes in commercial practice. The revisions have, however, added or modified isolated points only, with the basic structure consistently left intact. At present, the seventh revision—the Incoterms 2010—has been in force since 1 January 2011. This revision introduced two new clauses (DAT, Delivered at Terminal, and DAP, Delivered at Place) while reducing the total number of rules from 13 to 11. It further presents the terms in a new order distinguishing between terms apt for all kinds of transport and those only suitable for ship transport.

3. Applicability of the Incoterms

The Incoterms do not have the character of national law, and do not apply automatically. Their authors did not and do not have the authority to enact binding law. Additionally, according to the prevailing view, the Incoterms as a whole do not constitute customary law which would apply as trade usage unless the parties agreed otherwise. A reason for this is the requirement for the parties to a sales contract to choose one specific Incoterm out of the 11 alternative terms. Without such a choice, none of the terms can apply automatically to the contract. Another indicator that the Incoterms cannot be regarded as customary law is the fact that they are regularly amended and thereby changed. Customary law requires longstanding, unchanged acceptance of a rule. However, once the parties have chosen an Incoterm, aspects of its defined rules that have consistently remained unaltered may be regarded as trade usages linked to the respective Incoterm.

The nature of the Incoterms as a choice of 11 different though equally functional alternatives has the necessary consequence that the uniform definition the ICC has given each single term only applies if the parties have validly incorporated a specific Incoterm into their contract. The Incoterms thus constitute internationally unified standard contract terms, which apply only if the parties have chosen a term. However, there is no obligation to choose an Incoterm. Only if the parties are convinced that a term suits their practical needs will (and should) they incorporate it into their contract.

The validity of the incorporation of an Incoterm into a contract is not governed by the Incoterms themselves. Instead, this problem has to be determined in accordance with the applicable law. This is primarily international uniform law, in particular the Vienna Sales Convention (CISG) (sale of goods, international (uniform law)). If the CISG is inapplicable, the rules of private international law (PIL) of the court seized will determine which domestic law applies to determine the validity of the incorporation. In principle, in order to validly incorporate the Incoterms the contract should specifically refer to them. If, for instance, parties agree only on ‘FOB Hamburg’, an unequivocal reference is lacking because it remains unclear and open to dispute whether that clause refers to the Incoterms 2010, to a prior version of the Incoterms or to the specific national understanding of that term in the country of the court seized. In many, though certainly not in all countries, courts interpret ‘FOB (named port of shipment)’ as a reference to the version of the Incoterms in force at the time of the conclusion of the contract. However, the ICC rightly stresses in its introductory remarks to the Incoterms that parties should use the formulation ‘FOB (named port of shipment) Incoterms 2010’—or a reference to the intended version—in order to avoid any dispute as to the meaning of the term.

The Incoterms give priority to contractual terms upon which the parties have specifically agreed, but also to commercial customs, for instance, local port usages. Only in cases where the contract or usages do not provide otherwise are the Incoterms applicable. Likewise, mandatory provisions of the applicable national law prevail over the Incoterms, which in turn rank over non-mandatory national law.

4. Scope of the Incoterms

The Incoterms are exclusively directed to parties to sales contracts, and deal with certain specific obligations concerning the contractual relationship. These obligations comprise the duty to provide for the transport and insurance of the goods, and thus also concern other contracts linked with the delivery of the goods. In practice, this is immensely important, as the Incoterms determine whether and to what extent a given party is obliged to conclude contracts for transport and insurance, and who has to bear the respective costs. Partly, the Incoterms provide the necessary content of the transport and insurance contract. The party responsible for concluding the transport and insurance contract is then under an obligation to see that this content is agreed upon with, and assured by, the carrier or insurer. However, the Incoterms regulate neither how the sales contract is concluded nor the remedies available in the event of the sales contract’s breach. Equally, they do not provide for the transfer of title to the goods. This question is to be determined according to the applicable national law (transfer of title (movable goods)).

Since the Incoterms regulate only a few—albeit very important—aspects of international sales transactions, a further legal system is needed that, in addition to the Incoterms, will provide solutions to any remaining problems in respect of the sales contract. Quite often the CISG will apply in this respect. Absent the applicability of the CISG, the national law designated by private international law will apply. The rules on private international law will generally allow the parties to choose the applicable law. However, the Incoterms will prevail over the CISG, or the (non-mandatory part of the) applicable law, only as far as their scope extends. The Incoterms and the CISG complement each other, and their content and terminology fit perfectly together. The Incoterms provide for modifications of the time and place of passage of risk generally foreseen by the CISG. Moreover, the Incoterms create additional obligations, which supplement those regulated by the CISG. However, the CISG’s general applicability as such remains unaffected. In no way can the incorporation of the Incoterms be regarded as an implicit exclusion of the CISG.

Since the Incoterms have the characteristics of standard contract terms they are, in principle, subject to the applicable national law which would otherwise control the interpretation of such pre-formulated standard terms (the CISG does not regulate that control either). Because of the global acceptance, recognition and widespread use of the Incoterms, it is more than unlikely that a national law will invalidate single rules of the Incoterms, or even complete terms, as being unfair or against the national law on standard terms. Only where a party changes the contents of a term in a one-sided way would such a verdict be possible.

The Incoterms in themselves are neither binding nor mandatory. If the parties have agreed upon a certain term, they can modify it at any time. In particular, they can use a term designed for sea transport for other kinds of transport, or can modify a single rule of the Incoterm they have chosen. However, they should do so only if there is a clear need for such modification, and they should do it in clear and unequivocal words which do not give rise to doubt or dispute as to the meaning of the term.

The Incoterms are intended for the trade in goods: movable things, in the same sense as referred to in the CISG. In the introductory remarks to the Incoterms 2000, the ICC stressed that computer software is not a movable corporeal thing. The Incoterms would therefore not apply to computer software. With respect to standard software that is separately packed and sold by the thousands or millions, exclusion from the scope of the Incoterms is hardly convincing. In any event, the parties are free to contractually agree on an Incoterm for the sale of standard computer software.

As seen, originally Incoterms developed in overseas trade and were intended for the carriage of goods by sea. Today they have been expanded and can be used for any mode of transport of goods. However, it has to be taken into account that some of the Incoterms are still designed for sea and inland waterway transport and fit only these kinds of transportation (these are the terms FAS, FOB, CFR and CIF).

Not only are the Incoterms suited to international commerce and trade, but they can be equally used for any domestic trade where the contract involves the transport of the goods. In fact, they are often used in such instances. In principle, the Incoterms envisage trade between merchants. Yet, they do not require that merchants in a formal or technical sense are involved. Even private persons can agree on an Incoterm for their sales transaction.

5. Interpretation of the Incoterms

Although the Incoterms have the nature of standard contract terms, they are not to be construed in the way of ordinary contract terms, where the intention of the parties is a guiding principle. Instead, their interpretation resembles that of statutory provisions which are to be construed in an objective way. Moreover, any interpretation must take into account the purpose of striving for international uniformity in the understanding (interpretation of international uniform law). In addition the general introduction to the Incoterms and the Guiding Notes to the single terms provide explanations. In cases of doubt, the original English language version should always be used.

It must be noted that each Incoterm requires the specification of a place which should be as precise as possible. Only this specification shows where the goods are to be delivered or shipped or to where they have to be transported. Where the place is imprecise, some of the Incoterms contain interpretation rules to fill that gap (see for instance DDP under A.3a). However, where the necessary notice of the place is completely lacking and where the place cannot even be implicitly discerned from the contract or from usages between the parties or from trade usages, then the Incoterm has no effect.

6. Contents of the Incoterms

In essence, the Incoterms specify as precisely as possible, in 11 alternatives, the respective place of delivery and the passage of risk connected with a contract as well as the point at which other costs and burdens pass from seller to buyer. The overall cost borne by each party depends upon which term the parties agree to. They must take these costs into account in their calculation of the whole transaction. The choice of the appropriate Incoterm depends mainly on which party is in a better position to arrange for transport, insurance, etc, in a cheaper and more efficient way. The question of which Incoterm should be chosen is thus one of economic calculation.

All 11 Incoterms follow strictly the same structure. They distinguish between the obligations of the seller (regulated under A.1–A.10) and the corresponding obligations of the buyer (under B.1–B.10). For both the seller and buyer, the terms always regulate the same points in the same order (though with different contents). Each Incoterm is introduced by a Guiding Note explaining the substance of the term and, to a certain degree, some of its formulations. This assists the parties considerably in the choice of a specific Incoterm for their contract. Their choice then leads to a defined, term-specific schedule of risks and costs that each party has to take into account when calculating the overall costs of the transaction.

For each term, the Incoterms fix the duties of the parties, ordered separately for the seller and the buyer, beginning respectively with A1 and B1, under the following headings: (A1) Provision of goods in conformity with the contract; (B1) Payment of the price; (A2) and (B2) Licences, authorizations and formalities; (A3) and (B3) Contracts of carriage and insurance; (A4) Delivery; (B4) Taking delivery; (A5) and (B5) Transfer of risks; (A6) and (B6) Division of costs; (A7) Notice to buyer; (B7) Notice to seller; (A8) and (B8) Proof of delivery, transport document or equivalent electronic message; (A9) Checking—packaging—marking; (B9) Inspection of goods; (A10) and (B10) Other obligations.

In structure and contents, the Incoterms follow a continuum whereby the burdens linked to the sales transaction—import and export charges, transport and insurance costs, etc—slowly but steadily shift from the buyer’s to the seller’s shoulders. The 11 terms are for this reason subdivided into four groups (E-, F-, C- and D-terms). They range from EXW (ex works) under which the buyer must collect the goods at the seller’s place of business, to DDP (delivered duty paid) according to which the seller is obliged to place the goods free of charge directly at the buyer’s door. Between these extremes, the Incoterms provide for almost every possible combination of liability. For a better understanding which term fits for which kind of transportation the Incoterms 2010 are further divided into those for ship transport and those for all kinds of transport. Two F-terms (FAS, FOB) and two C-terms (CFR, CIF) are only suitable for ship transport whereas the other terms fit for ship transport as well as for any other kind of transport.

The E-group contains only one Incoterm: EXW = ex works (… named place). This term places all burdens of an international sale on the buyer. He must collect the goods at the agreed place where the seller has to place them (packaged if that is the usual practice) at the buyer’s disposal. All further necessary activity—loading on the transport vehicle, clearing for export and import, transport and insurance—is the buyer’s task, risk and cost burden. The risk of loss of or damage to the goods passes to the buyer with delivery (the placing of the goods at the buyer’s disposal) or, alternatively, with the expiry of the time for taking the goods.

Compared with the term EXW, the three F‑terms (FCA, FAS and FOB) shift the burdens of international sales to a considerable extent from the buyer onto the seller. Under the F-terms the seller must clear the goods for export and deliver them to the carrier at the agreed place. He has to bear the respective costs. On the other hand, it is the buyer’s burden to provide the means of transportation (and conclude the contract with the carrier), to clear the goods for import and to bear these costs. Neither party is obliged to insure the goods. Among the F-terms the term FCA = free carrier (… named place) fits for any kind of transport. Where delivery occurs at the seller’s own premises, under this term the seller must load the goods on the carrier’s means of transport; if delivery occurs elsewhere, he must place the goods at the carrier’s disposal (not unloaded from the seller’s means of transportation). With delivery to the carrier the risk passes to the buyer who has to arrange and pay for the carriage and any eventual insurance. The further F-terms, FAS and FOB, are only applicable to ship transport. FAS = free alongside ship (… named port of shipment) corresponds essentially to the FCA-term but it requires the seller to place the goods alongside the vessel at the agreed port of departure. From that moment the buyer has to bear the risk of loss or damage and all subsequently ensuing costs. The term FOB = free on board (… named port of shipment) shifts the risk and costs slightly further in the direction of the seller. Here, the seller must deliver the goods on board the ship at the agreed port of departure. Delivery is perfected as soon as the goods pass—for the first time—the ship’s rail. Also, the risk and cost burden passes at this moment.

The four C-terms bring a further shift in favour of the buyer. On the one hand, the C-terms regulate delivery in the same way as the F-terms with the risk also passing from seller to buyer with delivery at the place of departure. On the other hand, in contrast to the F-terms, the seller now has to arrange for the transport to the place of destination and bear the transport costs, certain further defined costs and—under CIF and CIP—insurance. In contrast to the other Incoterms, under the C-terms the risk and the cost burden pass at different points, the risk at the beginning of the carriage, the cost burden at its end. Among the C-terms, CFR and CIF are designed for shipping while CPT and CIP can be used for all kinds of transportation. CFR = cost and freight (… named port of destination) means that the seller must provide the transport and bear all transport costs to bring the goods to the port of destination. The risk passes to the buyer, however, when the goods pass the ship’s rail in the port of departure. Neither party is obliged to insure the goods. In contrast to CFR, the often used CIF = cost, insurance and freight (… named port of destination) burdens the seller not only with responsibility for transport but also with the duty to procure insurance for the goods until they arrive at their destination, and to also bear these costs. CIF and FOB are the most common Incoterms. CPT = carriage paid to (… named place of destination) corresponds to CFR but applies to all kinds of transportation. The seller bears the costs for the transport to the destination; the risk passes to the buyer when the goods have been delivered to the first independent carrier. The Incoterm CIP = carriage and insurance paid to (… named place of destination) extends the CIF-term to all kinds of transport. The costs of transport and insurance are borne by the seller.

Most generous for the buyer are the Incoterms of the D-group. Inversely, they are most burdensome for the seller. They constitute arrival contracts, according to which the place of delivery is generally in the country of the buyer. The seller is obliged to bring the goods to that place and bear all costs of transport and all other costs that may become due until delivery, for instance costs of transit through other countries. The risk passes only when the goods are delivered at the agreed place of arrival. The Incoterms 2010 have reduced the former five D-terms to three. The former terms DES and DEQ which were designed for ship transport have been deleted; the former terms DAF and DDU have been transformed into, and replaced by, DAP and DAT. They and DDP which survived can be used for all kinds of transport. DAF = Delivered at frontier (… named place) obliges the seller to place the goods at the buyer’s disposal at the agreed point at the frontier. The seller must clear the goods for export but not for import into the adjoining country. Unloading from the seller’s means of transport, import clearance and further transport are the buyer’s responsibility and cost burden. The same solution is provided by the Incoterm DES = delivered ex ship (… named port of destination) for goods forwarded by ship. The buyer must unload the goods from the ship and clear them for import. Under the term DEQ = Delivered ex quay (… named port of destination) it is the further duty of the seller to unload the goods and place them on the quay or wharf at the buyer’s disposal. Import clearance remains, however, the buyer’s task. The Incoterm DDU = Delivered duty unpaid (… named place of destination) means that the seller delivers the goods at the agreed place and bears the cost of transport. The buyer remains responsible for unloading the goods and clearance for import. However, even import clearance is shifted onto the seller under the Incoterm DDP = delivered duty paid (… named place of destination). Here, the seller has to place the goods at the buyer’s disposal at the agreed destination, generally in the buyer’s country, without any export or import charges for the buyer who has only to unload the goods. While EXW is the least burdensome Incoterm for the seller and the most burdensome for the buyer, exactly the contrary is true for DDP. DDP is most effortless for the buyer and most burdensome for the seller.

7. The future of the Incoterms

The Incoterms considerably facilitate international trade. In a way which particularly fits the interests of parties to international sales contracts, the Incoterms supplement and support efforts toward the unification of international trade law thus far undertaken by nations and international organizations. The prompt adaptation of the Incoterms to evolving trade practice, for instance to container transport and the use of electronic communication, has allowed the Incoterms to retain their practical usefulness. The fact that they are sponsored by the ICC guarantees that they will also be adapted to changing practices in a prompt and flexible manner in the future.

Literature

Frédéric Eisemann and Werner Melis, Incoterms 1980 (1982); Jan Ramberg, ICC Guide to Incoterms 2000—Understanding and Practical Use, ICC Publication no 620 (1999); Jens Bredow and Bodo Seiffert, Incoterms 2000 (2000); Roy Goode, Herbert Kronke, Ewan McKendrick and Jeffrey Wool, Transnational Commercial Law. International Instruments and Commentary (2004); Christoph Graf von Bernstorff, Die INCOTERMS 2010 der Internationalen Handelskammer (ICC) (2011); Catherine J Peterson, Incoterms 2000 and Incoterms 2010: A Practical Review (2011); Jan Ramberg, ICC Guide to Incoterms 2010—Understanding and Practical Use. ICC Publication No 720E (2011); Burghard Piltz, ‘Incoterms 2010’ Internationales Handelsrecht 2011, 1.

Retrieved from Incoterms – Max-EuP 2012 on 02 October 2022.

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