What are Incoterms and why are they relevant in relation to international contracts?
Incoterms are international commercial clauses published by the International Chamber of Commerce (ICC) and are referred to in international contracts for the sale of goods. They provide specific rules in relation to the buyer and seller’s responsibilities when dealing with loss, damages and the costs of transport. In fact, they are only commercial in nature, and are used widely during international commercial transactions, so they do not constitute any form of legislation. Incoterms have been reviewed and edited in 2010 and were previously reviewed in 2000 and 2009.
ICC has codified these terms and published them, in order to establish uniform procedures relating to the subdivision of the responsibilities of parties in international transports. In mere terms, Incoterms are binding only if expressly stipulated by parties in their contracts.
It is evident that parties can choose reviewed Incoterms of 2010 or older ones, if preferred. There are two major classifications: one refers to four letters, such as group E, group F, group D and group C and the other refer to the contractual nature, such as generic transport or maritime and inland waterway transport.
Each term establishes different rules regarding the subdivision of responsibilities between buyer and seller, as explained below.
Little prospect of major clauses
These classifications answer several questions: when there is a transfer of risk, which one will pay transport and custom fees and taxes, which one will set up the invoice, which one will organize transport and package goods sold, who will fulfil necessary formalities and arrange relative documents, such as waybill.
For ICC resources regarding the following specific terms, please click here.
Group E: in this group, the terms provided are favourable to the seller and transfer risks and costs to the buyer.
- EXW – Ex works : this means the place of manufacturing, which provides the majority of responsibility for the buyer; in particular, he has to load and collect the cargo from the point of unloading to the delivery point. The seller is favoured here, because he has only to provide goods on his premises.
Group D: in these terms, the seller supports all costs for transport, custom fees and he has the responsibility for loss or damage; for this reason, parties will rarely choose this clause, considering also that the seller will ask the buyer for a higher price when he will negotiate with him:
- DDP – Delivery Duty Paid: it is the most disadvantageous clause for the seller, because he has to deliver the goods to the final destination at the disposal of the seller, organise transport and accounting for all costs, including custom ones or taxes for import/export;
- DAP – Delivery At Place: the seller has to deliver the goods to the final destination, selected by the buyer and at his disposal, organising the transport to the selected place and supporting the risks for transport;
- DAT – Delivery At Terminal: the seller delivers the goods to the Terminal, that is the place chosen by the buyer for his disposal, such as quay, warehouse, container yard or road, rail or air cargo terminal, the seller bears all risks until this moment;
Group F: in this case, the seller has to provide goods to the carrier indicated by the buyer. This means that the buyer will pay transport fees; the transfer of risk to the buyer begins when the seller provides goods to the carrier. Parties very often use this clause.
- FOB – Free on Board: the seller has delivered the goods when he has provided all goods to the carrier (as the goods are on board); it is used for maritime and inland water transport;
- FCA – Free Carrier: the same as FOB for all other transports;
- FAS – Free alongside Ship: The seller has delivered when he has placed the goods alongside the vessel and by this moment passes the transfer of risk for loss or damage;
Group C: those clauses are the most fair considering the transfer of risks and payment of fees.
- CFR – Cost and Freight: the seller has to provide the goods to the carrier and he has to the pay the relative costs, but he does not have the responsibility for loss or damage when the goods are on board;
- CIF – Cost Insurance and Freight: the same as CFR, plus a contractual clause for insurance against loss or damage, which is intended as a minimal cover: if the buyer needs more protection, he has to request for it expressly;
- CPT – Carriage Paid To: the seller has to provide goods to the carrier or other persons nominated by the buyer and he has to contract for transport to the final destination, paying relative costs;
- CIP – Carriage and Insurance Paid to: the same as CPT, but here the seller has also to negotiate insurance, covering risks for loss or damage (a minimum cover, or plus if requested expressly by the buyer).
EU caselaw and Article 5(1)(b) of Council Regulation (EC) No 44/2001 Article 7(1,a,b) of Regulation (EU) No 1215/2012
The EU Court of Justice has recently decided to use Incoterms in order to identify the place of delivery, in light of recent caselaw dated 9th June 2011, Electrosteel Europe SA v Edil Centro SpA.
In particular, the term EXW was used and accepted as a contractual clause capable of identifying the place for delivering under article 5(1) of Reg. 44/2001, which determines, between other parameters identifying special jurisdiction, the place where the goods were or should have been delivered pursuant to the contract.
The Court expressly explains that “In order to verify whether the place of delivery is determined ‘under the contract’, the national court must take account of all the relevant terms and clauses of that contract which are capable of clearly identifying that place, including terms and clauses which are generally recognised and applied through the usages of international trade or commerce, such as the Incoterms drawn up by the International Chamber of Commerce in the version published in 2000.”
The EU legislation has approved this interpretation and set it up in article 7(1,b) EU Regulation 1215/2015, which provides that :
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(Links to EU Regulations and sentence of ECJ:
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A62010CJ0087
https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32001R0044:en:HTML
https://eur-lex.europa.eu/legal-content/en/ALL/?uri=CELEX%3A32012R1215)
It is evident that parties of an international sale of goods can evaluate this legislation as a way to determine themselves, through an express stipulation of a specific Incoterms clause, the place of delivery, which means consequently they can identify the place where a proceeding will occur under article 7 of EU Regulation 1215/2012 regarding special jurisdiction.
Parties have to also observe some other practical prescriptions, as follows.
Conclusion: necessity of an explicit clause
In order to validate and apply an Incoterms clause, it is necessary to respect the recommendations suggested by ICC. For example, it will be necessary to stipulate in writing the clause and to assure that parties have precisely stated and accepted that specific clause.
The interpretation of clauses can depend by the intention of the parties (or purpose) and not under national law. Using an Incoterm clause do not imply arbitration under ICC but ICC recommends inserting a clause providing application of Rules of Arbitration by ICC to settle any a controversy or dispute.
It will be appropriate to consider all these details, as indicated above, when entering into an international sale of goods contract; if necessary it would be favourable to ask for a legal advice, so to be assured of the meaning of terms stipulated.
As indicated above, an Incoterms clause can become relevant when dealing with rules of special jurisdiction, a very important aspect to comprehend from the beginning of an international sale of goods contract.
