Incoterms

Incoterms are international rules recognized by governments, legal firms and merchants worldwide as the interpretation of the most commonly used terms in international trade. The scope of Incoterms extends to the rights and obligations of the parties to a contract of sale in relation to the delivery of goods. Each term is a three-letter abbreviation.

Purpose and scope of Incoterms

The purpose of Incoterms is to provide a set of international rules for the interpretation of the most widely used trade terms in foreign trade. In this way, the uncertainty of different interpretations of such terms in different countries can be avoided or at least significantly reduced.

Often the parties to a contract are not familiar with the different trading practices in the countries involved. This can lead to misunderstandings, disagreements and litigation with the resulting waste of time and money. To resolve all these problems, the International Chamber of Commerce first published in 1936 a set of international rules for the precise definition of trade terms. These rules are known as Incoterms 1936. Amendments and additions were later made in 1953, 1967, 1976, 1980, 1990 and currently in 2000 to bring these rules into line with modern international trade practices.

It should be emphasised that the scope of Incoterms is limited to matters relating to the rights and obligations of the parties to the contract of sale in relation to the delivery of the goods sold (the word goods here means "tangible goods" and excludes "intangible goods" such as computer software).

There are two most common misunderstandings of Incoterms in practice. The first is the misunderstanding of Incoterms as being more relevant to the contract of carriage than to the contract of sale. The second is the sometimes incorrect notion that they must cover all obligations that the parties would like to include in the contract.

As the International Chamber of Commerce has always emphasized, Incoterms deal only with the relationship between sellers and buyers in sales contracts, and, moreover, only in certain respects.

While it is important for exporters and importers to consider the actual relationships between the various contracts required to effect an international sales transaction – where not only the sales contract is required, but also contracts of carriage, insurance and financing – Incoterms apply to only one of these contracts, namely the sales contract.

However, the parties' agreement to use a particular term is valid for all other contracts as well. To give just a few examples: having agreed to CFR or CIF terms, the seller cannot perform the contract by any other mode of transport than sea, since under these terms he must provide the buyer with a bill of lading or other sea transport document, which is simply not possible with other modes of transport. Moreover, the document required under a documentary credit will necessarily depend on the means of transport to be used.

Secondly, Incoterms deal with certain specific obligations of the parties - such as the seller's obligation to place the goods at the disposal of the buyer or to hand them over for carriage or to deliver them at destination - and with the allocation of risk between the parties in these cases.

Furthermore, they relate to the obligations to clear the goods for export and import, the packaging of the goods, the buyer's obligation to accept delivery, and the obligation to provide evidence that the relevant obligations have been duly fulfilled. Although Incoterms are essential to the implementation of a contract of sale, a large number of issues that may arise in such a contract are not addressed at all, such as the transfer of ownership, other property rights, breaches of agreement and the consequences of such breaches, and exemption from liability in certain situations. It should be emphasized that Incoterms are not intended to replace the contractual terms necessary for a complete contract of sale, either through the inclusion of statutory terms or individually negotiated terms.

Incoterms do not deal at all with the consequences of breach of contract and release from liability due to various obstacles. These issues must be resolved by other terms of the contract of sale and the relevant laws.

Incoterms were always originally intended for use where goods were sold for delivery across national boundaries: they are thus international trade terms. However, Incoterms are often in practice incorporated into contracts for the sale of goods solely within domestic markets. Where Incoterms are used in this way, Articles A.2 and B.2 and any other provisions of other Articles relating to export and import are, of course, superfluous.

Why are Incoterms being revised?

The main reason for the successive revisions of Incoterms was the need to adapt them to modern commercial practice. Thus, the 1980 revision introduced the term Free Carrier (now FCA) to cover the frequent cases where the point of receipt of goods in maritime trade was no longer the traditional FOB point (passing the ship's rail),but a point on land before loading on board a ship, where the goods were stowed in a container for subsequent transport by sea or by a combination of different means of transport (so-called combined or multimodal transport).

Furthermore, when Incoterms were revised in 1990, the clauses dealing with the seller's obligation to provide proof of delivery allowed paper documentation to be replaced by EDI messages, provided that the parties had agreed in advance to communicate by electronic mail. Needless to say, efforts are continually being made to improve the drafting and presentation of Incoterms in order to facilitate their practical implementation.

Changes made in the 2000 edition

During the drafting process, which took some two years, the ICC sought to involve a wide range of world traders, represented by the various sectors on the national committees through which the ICC operates, in expressing their views and responding to the subsequent drafts. It was indeed gratifying to see that this drafting process generated far more feedback from users throughout the world than any previous version of Incoterms. The result of this dialogue was Incoterms 2000, which may appear to have made few changes compared with Incoterms 1990. It is clear, however, that Incoterms is now recognised worldwide and the ICC has therefore decided to reinforce this recognition and to avoid change for its own sake. On the other hand, considerable effort has been made to ensure that the wording used in Incoterms 2000 clearly and accurately reflects trade practice.

In addition, significant changes have been made in two areas:

• customs clearance and implementation of customs payments under FAS and DEQ terms;
• loading and unloading duties under the FCA term.

All changes, both substantive and formal, have been made on the basis of careful research among Incoterms users. Particular attention has been paid to the inquiries received since 1990 by the Incoterms Expert Group, organized as an additional service for Incoterms users.

Inclusion of Incoterms in the sales contract

Given the changes made to Incoterms from time to time, it is important to ensure that whenever the parties intend to incorporate Incoterms into their contract of sale, clear reference is always made to the version of Incoterms currently in force. This can easily be overlooked when, for example, reference is made to an earlier version in standard contract forms or order forms used by traders. Failure to make reference to the current version may then lead to disagreement as to whether the parties intended to incorporate that version or the earlier version as part of their contract. Traders who wish to use Incoterms 2000 should make it clear that they are using "Incoterms 2000" in their contract of sale.

Incoterms structure

In Incoterms 1990, for ease of understanding, the terms were grouped into four categories, which differ in essence: starting with the term according to which the seller only makes the goods available to the buyer at the seller’s own premises (the “E” term – EX WORKS); then there is a second group according to which the seller must deliver the goods to the carrier nominated by the buyer (the “F” terms – FCA, FAS and FOB); then the “C” terms according to which the seller must contract for carriage but does not assume the risk of loss of or damage to the goods or additional costs due to events occurring after shipment and dispatch (CFR, CIF, CPT and CIP); and finally the “D” terms under which the seller must bear all the costs and risks necessary to bring the goods to the country of destination (DAF, DES, DEQ, DDU and DDP). The following table is a classification of trade terms.

INCOTERMS 2000

Further, under all terms, as in Incoterms 1990, the respective obligations of the parties are grouped under articles, where each article on the seller's side reflects the position of the buyer with respect to the given issue.

Terminology

In drafting Incoterms 2000, considerable effort was made to achieve as much consistency as possible and desirable among the various expressions used in the thirteen terms. In this way, it was possible to avoid using different formulations to express the same meaning. In addition, wherever possible, expressions from the United Nations Convention on Contracts for the International Sale of Goods were used.

"shipper"

In some cases it was necessary to use the same term to convey two different meanings simply because there was no suitable alternative. Traders are familiar with this difficulty in both contracts of sale and contracts of carriage. Thus, for example, the term "shipper" means both the person who hands over the goods for carriage and the person who contracts with the carrier: however, the two "shippers" may be different people, for example under a FOB contract where the seller hands over the goods for carriage and the buyer contracts with the carrier.

"delivery"

It is particularly important to note that the term "delivery" is used in two different senses in Incoterms. Firstly, it is used to determine the moment when the seller has fulfilled his obligations to deliver as defined in the A.4. clauses of Incoterms. Secondly, the term "delivery" is also used in connection with the seller's obligation to take or accept delivery of the goods, an obligation which appears in the B.4. clauses of Incoterms. When used in this second sense, the word "delivery" signifies, firstly, that the buyer "accepts" the very nature of the "C"-terms, namely, that the seller has fulfilled his obligation to ship the goods, and, secondly, that the buyer is obliged to take delivery of the goods. This latter obligation is important in order to avoid unnecessary charges for storing the goods until the buyer has collected them. Thus, under CFR and CIF, the buyer is obliged to take delivery of the goods and to accept them from the carrier. If the buyer fails to comply with this obligation, he may be liable to pay damages to the seller who has made the contract of carriage with the carrier, or the buyer may be forced to pay demurrage charges in order for the carrier to release the goods to him. When it is said here that the buyer is bound to "take delivery", this does not mean that the buyer has accepted the goods as satisfying the contract of sale, but only that the seller has fulfilled his obligation to hand over the goods for carriage in accordance with the contract of carriage which he is required to make under the terms of A.3 (a) of the "C"-terms. Thus, if after taking over the goods at destination the buyer discovers that the goods do not satisfy the contract of sale, he will be able to use any remedies available to him under the contract of sale and the applicable law against the seller. As already pointed out, these matters are entirely outside the scope of Incoterms. Where required, Incoterms 2000 uses the expression "to place the goods at the disposal of the buyer" at a specified place. This expression has the same meaning as the expression "deliver the goods" used in the United Nations Convention on Contracts for the International Sale of Goods.

"usual"

The word 'usual' appears in several terms, for example in the EXW term in relation to the time of delivery (A.4) and in the 'C' terms in relation to the documents which the seller must provide and the contract of carriage which the seller must procure (A.8, A.3). It may, of course, be difficult to say exactly what 'usual' means, but in many cases it may be possible to determine precisely what traders usually do, and this practice may then provide guidance. In this sense 'usual' is more useful than 'reasonable', which requires an assessment not in terms of international practice but with reference to the more difficult principle of good faith and fair dealing. In some circumstances it may well be necessary to decide what 'reasonable' means. However, for the reasons given, 'usual' is in most cases to be preferred to 'reasonable' in Incoterms.

'charges'

In relation to the obligation to clear the goods for import it is necessary to determine what is meant by 'charges' which must be paid on import of the goods. Under the DDP term in A.6. Incoterms 1990 used the expression "official charges payable on export and import of the goods". Under the DDP term, in article A.6. of Incoterms 2000, the word "official" was omitted because this word created uncertainty as to whether the charges were "official" or not. No material change in meaning was intended by deleting the word. The "charges" to be paid relate only to those charges which are a necessary consequence of the import as such and which must therefore be paid in accordance with the relevant import regulations. Any additional charges levied by private parties in connection with the import, such as storage charges unrelated to the duty to clear the goods, are not included in these charges. However, the performance of this obligation may well result in some costs to customs brokers or freight forwarders if the party bearing the obligation does not perform this work himself.

"ports" , "places" , "points" and "premises"

Incoterms use various expressions to indicate the place at which the goods are to be delivered. In terms intended to be used exclusively for the carriage of goods by sea, such as FAS, FOB, CFR, CIF, DES and DEQ, the expressions "port of shipment" and "port of destination" have been used. In all other cases, the word "place" has been used. In some cases, it has been found necessary to also indicate a "point" within a port or place, since the seller may want to know not only that the goods are to be delivered to a particular area, such as a town, but also where within that town the goods are to be placed at the disposal of the buyer. In contracts of sale such information is often lacking, and so Incoterms provide that, where no specific point within the agreed place has been agreed and there are several such points, the seller may select the point that suits him best (see, for example, FCA A.4). Where the delivery point is the seller's "place", the expression "the seller's premises" has been used (FCA A.4).

"ship" and "vessel"

In terms intended for use in the carriage of goods by sea, the expressions "vessel" and "ship" are used synonymously. Needless to say, the term "vessel" must be used when it forms part of the trade term itself, such as "free alongside ship" (FAS) and "delivered ex ship" (DES). Also, in view of the traditional use of the expression "passing the ship's rail" in the FOB term, the word "vessel" must be used in this connection.

"checking" and "examination"

In A.9 and B.9 of Incoterms, the headings "checking - packing and marking" and "examination of the goods" have been used respectively. Although the words "checking" and "examination" are almost synonymous, it has been found appropriate to use the former in relation to the seller's obligation to deliver in accordance with A.4. and leave the second word for the specific case where "pre-shipment inspection" is performed, since such inspection is usually only necessary when the buyer or the authorities of the country of export or import want to ensure that the goods comply with the terms of the contract or official conditions before the goods are shipped.

Seller's obligations to deliver

Incoterms focus on the seller's obligation to deliver. The precise allocation of functions and costs in connection with the seller's delivery of the goods is usually not a problem where the parties have a long-standing trading relationship. In doing so, they establish a practice (a "course of dealing") between themselves which they follow in subsequent transactions as before. However, when a new commercial relationship is established or a contract is concluded through brokers - which is quite common in the sale of goods - the terms of the contract of sale should be followed and, where Incoterms 2000 are incorporated into that contract, the allocation of functions, costs and risks resulting therefrom should be used.

It would of course be desirable if Incoterms could specify in as much detail as possible the obligations of the parties in connection with the delivery of the goods. Compared with Incoterms 1990, further efforts have been made in this respect in some specific situations (see, for example, the FCA term, Article A.4.). But it was not possible to avoid references to the usages of the trade in the Articles A.4. of the FAS and FOB terms ("according to the usages of the port"). The reason for this is that, particularly in the piece goods trade, the exact method of delivery of the goods for carriage in contracts under the FAS or FOB terms varies from seaport to seaport.

Transfer of risks and costs associated with the goods

The risk of loss of or damage to the goods, as well as the obligation to bear the costs relating to the goods, passes from the seller to the buyer when the seller has fulfilled its obligations to deliver the goods. Since the buyer is not entitled to postpone the passing of risk and costs, all the terms provide that the passing of risk and costs may take place even before delivery if the buyer fails to accept delivery as agreed or fails to give such instructions (as to time of shipment and/or place of delivery) as the seller may require to fulfil its obligations to deliver the goods. A prerequisite for the early passing of risk and costs is that the goods are identified to the buyer or, as provided in the terms, are specifically separable for him (conformity with the contract).

This requirement is particularly important under the EXW term, since in all other circumstances the goods are normally known to be identified for the buyer when arrangements have been made for the shipment or dispatch of the goods (the "F" and "C" terms) or for the delivery of the goods at their destination (the "D" terms). However, in exceptional cases the goods may be sent from the seller unpacked without the exact quantity being specified for each buyer. In such a case the transfer of risk and costs will not take place until the goods have been previously identified in the manner specified (cf. also Article 69.3 of the 1980 UN Convention on Contracts for the International Sale of Goods).

Terms

9.1 The E -term imposes a minimum obligation on the seller: the seller has only to place the goods at the disposal of the buyer at the agreed place - usually the seller's own premises. On the other hand, as is often the case in practice, the seller will often assist the buyer in loading the goods on to a vehicle provided by the buyer. Although the EXW term would better reflect this if the seller's obligations were extended to include loading, it has been decided to retain the traditional principle of a minimum obligation on the part of the seller under the EXW term so that it can be used for cases where the seller does not wish to undertake any obligation to load the goods. If the buyer wishes the seller to do more, this should be agreed in the contract of sale.

9.2 The F -terms require the seller to deliver the goods for carriage in accordance with the buyer's instructions. The point at which the parties contemplate delivery under the FCA term has been difficult because of the wide variety of circumstances that may occur in contracts under that term. Thus, the goods may be loaded on a vehicle sent by the buyer to collect them from the seller's premises; alternatively, the goods may need to be unloaded from a vehicle sent by the seller to deliver the goods to a terminal named by the buyer. Incoterms 2000 takes these variations into account by providing that, where the place named in the contract as the place of delivery is the seller's premises, delivery is complete when the goods are loaded on the buyer's vehicle, and that, in other cases, delivery is complete when the goods are placed at the disposal of the buyer without unloading from the seller's vehicle. The variations mentioned for the different modes of transport in FCA A.4. of Incoterms 1990 are not repeated in Incoterms 2000.

The delivery point under FOB, which is the same as the delivery point under CFR and CIF, has remained unchanged in Incoterms 2000, despite considerable controversy. Although the FOB term "deliver the goods beyond the ship's rail" may now seem inappropriate in many cases, it is nevertheless understood by merchants and applied in the light of the goods and the loading facilities available. It was felt that changing the delivery point under FOB would create unnecessary confusion, particularly in relation to the sale of goods carried by sea, usually under charter parties.

Unfortunately, the word FOB is used by some merchants simply to indicate any delivery point, such as "FOB Factory", "FOB Works", "FOB Seller's Works" or other inland points. The meaning of the abbreviation Free On Board is ignored. It remains the case that such use of "FOB" tends to create confusion and should be avoided.

An important change has taken place in the FAS term with regard to the obligation to clear the goods for export, since it is more common practice to impose this obligation on the seller rather than the buyer. To ensure that this change is given due attention, it has been highlighted in capital letters in the preface to the FAS term.

9.3 The "C" -terms impose on the seller the obligation to contract for carriage on usual terms at his own expense. Therefore, the point to which he must pay the transport costs must necessarily be stated after the relevant "C"-term. Under the CIF and CIP-terms, the seller must insure the goods and bear the cost of the insurance. Since the division of costs point is fixed in the country of destination, the "C"-terms are often mistakenly considered to be arrival contracts, whereby the seller bears all risks and costs until the goods have actually arrived at the agreed place. It should be emphasized, however, that the "C"-terms are of the same nature as the "F"-terms in that the seller performs the contract in the country of shipment or dispatch. Thus, contracts of sale under the "C"-terms, like contracts under the "F"-terms, fall into the category of shipment contracts.

It is in the nature of shipment contracts that, while the normal transport costs for carrying the goods by a usual route and in a usual manner to the named place are to be paid by the seller, the buyer bears the risks of loss of or damage to the goods, as well as additional costs arising from events occurring after the goods have been duly delivered for carriage. The "C"-terms are thus distinguished from all other terms in that they contain two "breaking" points. One indicates the point up to which the seller must arrange for transport and bear the costs under the contract of carriage, and the other serves to transfer risk. For this reason, the utmost care must be taken when adding obligations to the seller that become his after the risk has passed beyond the above-mentioned "critical" point. The essence of the "C"-terms is to relieve the seller from any further risks and costs after he has duly performed the contract of sale by concluding a contract of carriage, handing over the goods to the carrier and arranging for insurance under the CIF and CIP terms.

The nature of the "C"-terms as shipping contracts may also be illustrated by the common use of documentary credits as the preferred method of payment employed in such terms. Where the parties to a contract of sale have agreed that the seller will receive payment on presentation to the bank of the agreed shipping documents under a documentary credit, it would be entirely contrary to the main purpose of the documentary credit for the seller to bear further risks and expenses after the time of receipt of payment under the documentary credit or after the shipment and dispatch of the goods. Of course, the seller will have to bear all the costs of the contract of carriage, whether the cargo is prepaid, paid for upon shipment, or payable at destination (freight is payable by the consignee at the port of destination); however, additional costs that may arise as a result of events occurring after shipment and dispatch are necessarily for the account of the buyer.

If the seller has to procure a contract of carriage which includes the payment of duties, taxes and other charges, such costs are of course for the seller to the extent that they are attributable to him under the contract. This is now made clear in Article A.6 of all the C-terms.

If it is usual to make several contracts of carriage involving the transhipment of the goods at intermediate points to reach the agreed destination, the seller must pay all these costs, including any costs incurred in transhipment from one means of transport to another. However, if the carrier has exercised his rights under the contract of carriage to avoid unforeseen obstacles (such as ice, strikes, labour disturbances, governmental regulations, war or hostilities),then any additional costs resulting therefrom will be for the buyer, since the seller's obligation is limited to procuring the usual contract of carriage.

It often happens that the parties to a contract of sale wish to specify clearly to what extent the seller is to procure a contract of carriage, including the costs of unloading. Since such costs are usually covered by freight when the goods are carried on ordinary shipping lines, the contract of sale often provides that the goods shall be carried in this manner or at least in accordance with the "shipping conditions of the regular vessels". In other cases the words "including unloading" are added after the CFR and CIF terms. However, it is not advisable to add an abbreviation after the "C"-terms unless in the relevant trade the meaning of the abbreviation is clearly understood and accepted by the contracting parties or under the relevant law or usage of the trade.

In particular, the seller should not, and could not, without changing the very nature of the C-terms, undertake any obligation as to the arrival of the goods at destination, since the risk of delay during the carriage is borne by the buyer. Any obligation as to time must therefore necessarily relate to the place of shipment or dispatch, e.g. "shipment (dispatch) not later than ...". A contract, for example, "CFR Hamburg not later than ..." is in fact incorrect and is therefore open to all sorts of interpretations. It may be assumed that the parties intended either that the goods should arrive in Hamburg on a certain date, in which case the contract is not a contract of shipment but a contract of arrival, or, alternatively, that the seller should dispatch the goods at such a time that they will arrive in Hamburg before a certain date, unless the carriage is delayed by unforeseen events. In the trade of goods it happens that the goods are purchased when they are at sea, and in such cases the word "afloat" is added after the trade term. Since in these cases the risk of loss of or damage to the goods has already passed from the seller to the buyer under the CFR and CIF terms, difficulties of interpretation may arise. One possibility is to retain the normal meaning of the CFR and CIF terms regarding the allocation of risk between seller and buyer, namely that the risk passes upon shipment: this would mean that the buyer may be forced to bear the consequences of events that have already occurred at the time the contract of sale comes into force. Another possibility of specifying the moment of passing of risk is the time of conclusion of a new contract of sale. The first possibility is more realistic, since it is usually impossible to ascertain the condition of the goods during the carriage. For this reason, Article 68 of the 1980 United Nations Convention on Contracts for the International Sale of Goods (CISG) provides that "if the circumstances so indicate, the risk is assumed by the buyer when the goods are handed over to the carrier who issued the documents included in the contract of carriage". However, this rule has an exception when "the seller knew or ought to have known that the goods had been lost or damaged and did not disclose this to the buyer". Therefore, the interpretation of the terms CFR and CIF with the addition of the word "afloat" will depend on the law applicable to the contract of sale. The parties are advised to ascertain the applicable law and any decision that may then follow. If in doubt, the parties are advised to clarify the matter clearly in their contract.

In practice, the parties often continue to use the traditional expression C&F (or C and F, C+F). However, in most cases it appears that they regard these expressions as equivalent to CFR. To avoid difficulties of interpretation, the parties should use the correct term, namely CFR, which is the only standard abbreviation accepted worldwide for "Cost and Freight (... named port of destination)".

The CFR and CIF terms in the A.8. articles of Incoterms 1990 obliged the seller to provide a copy of the charterparty whenever his transport document (usually the bill of lading) contained a reference to the charterparty, for example by the express indication "all other terms as for the charterparty". Although, of course, a contracting party should always be able to ascertain precisely all the terms of his contract - preferably at the time of conclusion of the contract of sale - it appears that the practice of providing a charterparty as indicated above creates problems in connection with documentary credit transactions. The seller's obligation under CFR and CIF to provide a copy of the charter party together with other transport documents was omitted in Incoterms 2000.

Although the Incoterms A.8 articles tend to ensure that the seller provides the buyer with "proof of delivery", it should be emphasized that the seller satisfies this requirement by providing the "usual" evidence. Under CPT and CIP this would be the "usual transport document" and under CFR and CIF it would be the bill of lading or sea waybill. Transport documents must be "clean", which means that they must not contain any clause or statement stating the poor condition of the goods or packaging. If such clauses or statements appear in the document, it is considered "unclean" and will not be accepted by banks in documentary credit transactions. However, it should be noted that a transport document, even one free of such clauses or statements, does not normally provide the buyer with conclusive evidence against the carrier that the goods have been shipped in accordance with the terms of the contract of sale. Typically, the carrier will, in standard language on the front page of the transport document, disclaim liability for the information regarding the goods, stating that the details included in the transport document are merely representations by the shipper. Under most applicable laws and principles, the carrier must at least use reasonable means of verifying the accuracy of the information, and his failure to do so may make him liable to the consignee. However, in the container trade, the carrier has no means of verifying the contents of the container unless he himself was responsible for loading the container. There are only two terms relating to insurance, namely CIF and CIP. Under these terms, the seller is obliged to procure insurance for the benefit of the buyer. In some cases, it is up to the parties to decide whether and to what extent they wish to insure themselves. Since the seller arranges insurance for the benefit of the buyer, he does not know the exact requirements of the buyer. Under the London Underwriters' Cargo Insurance Terms, insurance is provided on "minimum cover" under Condition "C", on "medium cover" under Condition "B" and on "widest cover" under Condition "A". Since in a sale of goods under the CIF term the buyer may wish to sell the goods in transit to a subsequent buyer who may in turn wish to resell the goods again, it is impossible to know the amount of insurance appropriate for such subsequent buyers, and thus the minimum insurance under CIF is traditionally chosen, which allows the buyer to require additional insurance from the seller if necessary. Minimum insurance, however, is not appropriate for the sale of manufactured goods where the risk of theft, pilferage or improper handling or storage of the goods requires more than the insurance under Term "C". Since the CIP term, unlike the CIF term, is normally used for the sale of manufactured goods,It would be more appropriate to stipulate the most extensive insurance coverage under CIP than the minimum insurance under CIF. But to vary the seller's obligation to insure under CIF and CIP would be confusing, and so both terms limit the seller's obligation to insure to the minimum insurance. It is particularly important for the buyer under CIP to know that if he requires additional insurance, he must agree with the seller that the latter will provide the additional insurance or undertake the extended insurance himself. There are also certain cases in which the buyer may wish to obtain more protection than is provided under Condition "A" of the above-mentioned Association, such as insurance against war, riots, civil commotion, strikes or other disturbances of labour. If he wishes the seller to procure such insurance, he must give him instructions to that effect, in which case the seller must, if possible, procure such insurance.

9.4 The D -terms are different in nature from the C-terms because under the D-terms the seller is responsible for the arrival of the goods at the agreed place or destination at the frontier or in the country of import. The seller must bear all risks and costs involved in bringing the goods to that place. Thus the D-terms are arrival contracts whereas the C-terms are shipment contracts. Under the D-terms, except for DDP, the seller is not required to deliver the goods cleared for import in the country of destination.

Traditionally, under the DEQ term the seller was required to clear the goods because the goods had to be unloaded on the quay and thus brought into the country of import. But due to changes in customs clearance procedures in most countries, it is now more appropriate for the party domiciled in the country concerned to carry out the clearance and pay the duties and other charges. Thus, the change in DEQ was made for the same reason as the change in FAS mentioned earlier. Like FAS, the change in DEQ is also highlighted in capital letters in the introduction. It appears that in many countries trade terms not included in Incoterms are used primarily for rail transport (free frontier). However, under such terms it is not generally understood that the seller assumes the risk of loss of or damage to the goods during the carriage up to the frontier. In these circumstances, it would be preferable to use CPT indicating the frontier. On the other hand, if the parties intend for the seller to bear the risk during the carriage, DAF indicating the frontier should be used.

DDU was added in the 1990 version of Incoterms. The term serves an important function in cases where the seller is prepared to deliver the goods to the country of destination without clearing them for import and paying duty. In countries where customs clearance may be difficult and time-consuming, it may be risky for the seller to undertake to deliver the goods beyond the customs clearance point. Although under B.5 and B.6 of the DDU term the buyer must bear the additional risks and costs that may result from his failure to fulfil his obligations to clear the goods for import, the seller is advised not to use the DDU term in countries where difficulties in clearing the goods for import may be expected.

The expression "no obligation"

As can be seen from the expressions "the seller is obliged" and "the buyer is obliged", the Incoterms terms deal only with the obligations that the parties have towards each other. The words "no obligation" have therefore been inserted in all cases where one party has no obligation towards the other. Thus, if, for example, in accordance with Article A.3. of the relevant term the seller is obliged to provide and pay for the contract of carriage, we find the words "no obligation" under the heading "contract of carriage" in Article B.3.a),which formulates the buyer's position. When, however, neither party has an obligation towards the other, the words "no obligation" will appear with respect to both parties, for example with respect to insurance.

In both cases it is important to stress that even though one party may be under "no obligation" to the other party to perform a particular task, this does not mean that it is not in his interest to perform that task. Thus, for example, just because a buyer under the CFR term has no obligation to his seller to make a contract of insurance under B.4., it is clearly in his interest to make such a contract, since under A.4. the seller has no such obligation to procure insurance.

Incoterms options

In practice, it often happens that the parties themselves want to achieve greater precision by adding words to the Incoterms. It should be emphasized that Incoterms do not provide any guidance for such additions. Thus, if the parties cannot rely on established trade custom to interpret such additions, they may encounter serious problems when it is impossible to ensure a consistent understanding of such additions.

For example, when using the general expressions "Free on Board Stuffed" or "Free Works Including Stuffing", it is not possible to achieve a uniform understanding throughout the world that the seller's obligations are extended beyond the cost of actually loading the goods onto the vessel or vehicle, respectively, to include the risk of accidental loss of or damage to the goods during the loading process. For these reasons, the parties are well advised to make it clear whether they mean only that the seller is to bear the burden or cost of the loading operations or whether he is also to bear the risks until loading is actually completed. This is a question to which Incoterms do not provide an answer: consequently, unless the contract also clearly states the intentions of the parties, the parties may encounter unnecessary difficulties and expense. Although Incoterms 2000 does not provide for many of the commonly used variations, the prefaces to some trade terms do alert the parties to the need for special contractual provisions if the parties wish to go beyond the Incoterms.

EXW - Adds seller's obligation to load goods onto buyer's vehicle
CIF/CIP - Buyer requires additional insurance
DEQ - Adds seller's obligation to pay costs after unloading

In some cases, sellers and buyers rely on the commercial practice of container and charter party trade. In these circumstances, it is necessary to clearly distinguish between the parties' obligations under the contract of carriage and their obligations to each other under the contract of sale. Unfortunately, there are no authoritative definitions of such expressions as "container terms" and "terminal handling charges" (THCs). The allocation of costs under these terms may vary from place to place and may change from time to time. The parties are advised to clarify in the contract of sale how these costs are to be allocated between them.

Expressions frequently used in charterparties such as "FOB stowed", "FOB stowed and ready for delivery" are sometimes used in contracts of sale to clarify the extent to which the seller under the FOB term is required to stow and make ready the goods on board the vessel. Where these words are added, it should be made clear in the contract of sale whether the added obligations relate only to costs or to costs and risks as well.

As already stated, every effort has been made to ensure that the Incoterms reflect the most common commercial practice. However, in some cases – particularly where Incoterms 2000 differ from Incoterms 1990 – the parties may wish the trade terms to operate differently. They are reminded of such variations in the introduction to the terms by the word “However”.

Customs of a port or a particular trade

Since Incoterms offer a set of terms for use in different trades and regions, it is not always possible to formulate the obligations of the parties precisely. To some extent, therefore, it is necessary to refer to the usage of the port or of the particular trade or to practices which the parties themselves may have established in previous transactions (cf. Article 9 of the 1990 UN Convention on Contracts for the International Sale of Goods). It is, of course, desirable that sellers and buyers should always keep each other duly informed of such usages when negotiating their contracts and, if ambiguities arise, clarify their legal position by appropriate clauses in their contracts of sale. Such special terms of a particular contract will supersede or modify anything that has been formulated as a rule of interpretation for the various Incoterms terms.

Buyer's options regarding the place of shipment

In some situations it may not be possible at the time of the conclusion of the contract of sale to decide precisely on the exact point or even the place to which the seller is to deliver the goods for carriage. For example, at that time a territory or a fairly large place, such as a seaport, may have been simply specified. It is then usually agreed that the buyer has the right or obligation to name a more specific point within that territory or place at a later date. If the buyer is obliged to name a specific point in accordance with the above, the result of his failure to do so may be liability for risks and additional costs (Articles B.5 and B.7 of all terms). In addition, the buyer's waiver of the right to name a specific point may entitle the seller to choose the point that suits him best (FCA Article A.4).

Customs clearance

The term "customs clearance" has given rise to confusion. Thus, whenever reference is made to the obligation of the seller or the buyer to undertake to clear the goods through the customs office of the country of export or import, it is now explained that this obligation includes not only the payment of duty and all other charges but also the performance and payment of all administrative acts connected with the passage of the goods through customs and the information of the authorities in this connection. Furthermore, in some areas it has been considered, although quite wrongly, unnecessary to use terms dealing with the obligation to clear the goods through customs where, as in the case of the countries of the European Trade Union or other free trade areas, there is no obligation to pay customs duty and no restrictions on import or export. To clarify these situations, the words "if required" have been added to Articles A.2 and B.2, A.6 and B.6 of the relevant Incoterms rules so that the terms can be used without any ambiguity in cases where customs procedures are not required.

It is usually desirable that customs clearance should be arranged by a party domiciled in the country in which the clearance is to take place, or at least by someone acting on that party's behalf. Thus, the exporter usually clears the goods for export, while the importer must clear the goods for import.
Incoterms 1990 departed from this principle in the trade terms EXW and FAS (buyer clears the goods) and DEQ (seller clears the goods),but in Incoterms 2000 the FAS and DEQ terms place the responsibility for clearing the goods for export on the seller and for import on the buyer respectively, while EXW, which represents the seller's minimum obligation, was left unchanged (buyer clears the goods for export). Under the DDP term, the seller specifically agrees to do what the term itself implies - Delivered, Duty Paid - namely to clear the goods for import and pay any resulting duties.

Package

In most cases the parties know in advance what packaging is necessary for the safe carriage of the goods to their destination. However, since the seller's obligation to package the goods may vary considerably depending on the mode and duration of the envisaged transport, it has been considered necessary to provide for the seller's obligation to package the goods appropriately for the transport, but only to the extent that the circumstances relating to the transport are known to him before the conclusion of the contract of sale (cf. Articles 35.1 and 35.2 6 of the 1980 United Nations Convention on Contracts for the International Sale of Goods, which requires that the goods, including packaging, must be "fit for any particular purpose expressly or impliedly known to the seller at the time of the conclusion of the contract, except where the circumstances show that the buyer did not rely, or that it was unreasonable for him to rely, on the seller's knowledge and judgment").

Inspection of goods

In many cases the buyer may be advised to arrange for inspection of the goods before or at the time of handing over by the seller for carriage (the so-called pre-shipment inspection or PSI). Unless the contract provides otherwise, the buyer himself pays the cost of such inspection, which is carried out in his own interests. However, if the inspection is carried out to enable the seller to comply with any mandatory regulations applicable to the export of the goods in his own country, he must pay for such inspection himself, unless the EXW term is used, since under this term the costs of the inspection are borne by the buyer.

Types of transportation

Recommendations for use

In some cases the introduction recommends the use or non-use of a particular term. This is particularly important with regard to the choice between FCA and FOB. Unfortunately, traders continue to use the FOB term where it is completely inappropriate, thereby forcing the seller to bear the risks of handing over the goods to the carrier named by the buyer. FOB may only be used where the goods are intended for delivery "across the ship's rail" or, at most, on the ship, and not where the goods are handed over to the carrier for subsequent loading on the ship, for example, loaded into containers or loaded onto trucks or wagons in so-called "ro-ro" transport. Thus, the introduction to the FOB term strongly cautioned that the term should not be used where the parties do not intend to deliver the goods across the ship's rail. It happens that parties mistakenly use terms also intended for the carriage of goods by sea when another mode of transport is intended. This may put the seller in a position where he cannot fulfil his obligation to provide the buyer with an appropriate document (e.g. a bill of lading, sea waybill or electronic equivalent). The table above in paragraph 17 shows which term should be used for each mode of transport. In addition, the introduction to each term indicates whether it can be used for all modes of transport or only for carriage by sea.

Bill of Lading and Electronic Commerce

Traditionally, the on-board bill of lading is the only acceptable document that the seller can present under the CFR and CIF terms. The bill of lading serves three important functions, namely:
 

• Proof of delivery of goods on board the vessel;
• Certificate of contract of carriage;
• A means of transferring rights to goods in transit to another party by delivering a document to that party.

Transport documents other than the bill of lading will fulfil the first two functions mentioned, but will not control the delivery of the goods in transit to destination or enable the buyer to sell the goods in transit by handing over the documents to their buyer. Instead, the other transport documents will name the party entitled to receive the goods at destination. The fact that possession of the bill of lading is necessary to receive the goods from the carrier at destination makes its replacement by an electronic document particularly difficult.

Furthermore, several original bills of lading are usually issued, but it is of course essential that the buyer, or the bank acting on his instructions in paying the seller, ensure that the seller hands over all the originals (the so-called "full set"). This is also a requirement of the ICC Rules for Documentary Credits (the so-called ICC Uniform Customs and Practice ("UCP"). The current version is issued on the day of publication of Incoterms 2000; ICC publication number 500).

Transport documents must not only show that the goods have been delivered to the carrier but also that the goods have been received, so far as the carrier can prove, in good order and condition. Any entry in the transport documents which would indicate that the goods have not been received in such condition would render the document "unclean" and thus unacceptable under the UCP.

Despite the special legal nature of the bill of lading, it is expected that it will be replaced by an electronic document in the near future. The 1990 version of Incoterms has already taken due account of this expected development. According to the A.8. clauses of the terms, paper documents may be replaced by electronic information, provided that the parties have agreed to communicate electronically. Such information may be transmitted directly to the party concerned or through a third party providing additional services. One such service which may usefully be provided by a third party is a register of successive holders of a bill of lading. Systems providing such services, such as the so-called BOLERO service, may require further support from appropriate legal rules and principles, as evidenced by the CMI 1990 Rules for Electronic Bills of Lading and Articles 16 to 17 of the UNCITRAL Model Law on Electronic Commerce.

Non-transferable documents instead of bills of lading

In recent years documentary practice has been considerably simplified. Bills of lading are often replaced by non-negotiable documents similar to those used for transport other than sea. These documents are called "sea waybills", "container waybills", "cargo receipts" or variations of such expressions. Non-negotiable documents may be used quite satisfactorily except where the buyer wishes to sell the goods in transit by transferring a paper document to a new buyer. To make this possible, the seller's obligation to provide a bill of lading under CFR and CIF must necessarily be retained. However, if the contracting parties know that the buyer does not intend to sell the goods in transit, they may expressly agree to relieve the seller of the obligation to provide a bill of lading, or, alternatively, they may use the CPT and CIP terms where there is no requirement to provide a bill of lading.

The right to give instructions to the carrier

A buyer paying for goods under a "C"-term must ensure that upon receipt of payment the seller does not dispose of the goods by giving new instructions to the carrier. Some transport documents used for certain modes of transport (air, road or rail) give the contracting parties the possibility of preventing the seller from giving new instructions to the carrier by providing the buyer with a specified original or duplicate of the waybill. However, documents used instead of bills of lading in sea transport do not usually contain such an "obstructing" function. The International Maritime Committee corrected this deficiency in the above-mentioned documents by introducing the Uniform Rules for Sea Waybills in 1990, which allow the parties to insert a "no disposition" clause under which the seller conveys to the carrier, by instructions, the right to dispose of the goods in respect of delivery to some other person or place than that named in the waybill.

International Chamber of Commerce Arbitration

Contracting parties wishing to have recourse to ICC Arbitration in the event of a dispute with their counterparty to a contract of sale must expressly and specifically agree to ICC Arbitration in their contract of sale or, in the absence of a single contractual document, in the exchange of correspondence that constitutes the contract between them. The mere inclusion of one or more Incoterms in a contract or related correspondence does NOT constitute an agreement to have recourse to Arbitration.

The International Chamber of Commerce recommends the following standard arbitration clause: All disputes arising out of or in connection with this contract shall be finally settled in accordance with the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.