Incoterms® and Commercial Contracts

Who is bound by the Incoterms® rules?

The Incoterms® rules govern certain responsibilities between the seller and the buyer under the contract of sale; they should not be confused with the allocation of responsibilities between the shipper, carrier and consignee under the contract of carriage

One of the most common misunderstandings related to the Incoterms® rules involves confusing the contract of sale with the contract of carriage.

Note carefully the distinction:

  • Contract of sale – The Incoterms® rules are embedded in this contract, an agreement between the seller and the buyer.
  • Contract of carriage – This contract is between the shipper and the carrier (or the carrier's agent). Depending on the contract of sale and the chosen Incoterms® rule, the shipper may be either the seller or the buyer. This means that the contract of carriage is necessarily linked to the contract of sale, because whoever is obligated under the contract of sale to take care of transport will then become the shipper, and will have to enter into a carriage contract with a carrier (a company offering transport services, like a marine shipping line, and airline, or a freight consolidator).

The key lesson to keep in mind to avoid misunderstandings is this: The Incoterms® rules are not part of the contract of carriage. There is indeed a relationship between the Incoterms® rules and carriage contracts, because the choice of a specific Incoterms® rule may oblige the shipper to obtain a certain type of contract of carriage (such as a clean 'on board' bill of lading) with particular conditions. One reason for confusion is that terms in the contract of carriage may resemble the Incoterms® rules (for example, in their usage of the word 'free') – but traders should remember that these are separate contracts with separate sets of responsibilities.

Many traders also appear to expect that the transport contract will automatically accord with the Incoterms® rule in the sales contract. It is indeed important that the transport responsibilities required by the Incoterms® rule in the contract of sale accord with the terms of the contract of carriage, but there is nothing automatic about it. It is up to the shipper to make the effort to give precise instructions to the carrier or freight forwarder so that the proper transport arrangements are made and so that the invoices for transport services are prepared accordingly. In some cases, inexperienced traders do not even inform the carrier as to the Incoterms® rule in the contract of sale, then profess surprise later when the billing for transport services does not accord with the Incoterms® rule.

Two Incoterms® rules, CIF and CIP, impose an obligation on the seller to pay for insurance coverage. They do not regulate the insurance contract itself, but merely the relations between the seller and buyer as regards insurance. The party responsible for the payment of the insurance coverage, i.e. the seller, will have to enter into a specific insurance contract. The mention of an Incoterms® rule in this latter contract does not allocate particular obligations to the parties to the insurance contract.