Incoterms_® and Commercial Contracts

The basic nature of the Incoterms® ¹ rules – are they purely contractual terms, standard trade usages and customs, and/or the ‘international law of merchants’ (lex mercatoria)?

The International Chamber of Commerce (ICC)’s Incoterms® rules are probably the world’s best-known import/export tool. They are a common, basic element in every import or export contract for goods. That means that the Incoterms® rules are used in countless commercial transactions every day, in every country. But what exactly are these indispensable tools called the ‘Incoterms® rules’?

First, we must understand that the set of rules today known as the ‘Incoterms® rules’ has a long history. The Incoterms® rules are in fact based on venerable precedents in international trade customs, as evidenced by an 1812 British court decision involving FOB.

In the 19th century, as international trade expanded rapidly, usage of terms such as FOB and CIF became a common international trade practice that arose from the need to clearly specify, in international transactions, the respective risks and responsibilities of seller-exporter and buyer-importer. International traders in those early times were not compelled by any laws to use terms such as FOB or CIF – rather, these terms were voluntarily adopted as a convenient shortcut for negotiating international contracts. Thus, custom of usage of international trade terms (of which the Incoterms® rules are today the world’s leading example) arose because they filled a practical business need.

The courts and legal systems of the world, in turn, eventually ratified and supported these long-standing practices of international merchants. In countless court decisions it was
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gradually established that these long-standing practices of international merchants were susceptible to a more or less uniform interpretation. Thus, ever since the first publication of the Incoterms® rules in 1936, the courts have virtually always enforced the Incoterms® rules whenever they are applicable to a particular contractual dispute.

In the early part of the twentieth century, prior even to the founding of ICC in 1919, it had become clear to exporters that trade ‘customs’ could be subject to widely varying interpretations in different national courts. One could distinguish a ‘German CIF’ from an English one, or an ‘American FOB’ from a French one. These differences were inevitably the source of misunderstandings, which led to unnecessary costs and uncertainties. Thus, the Incoterms® rules were created in 1936 to harmonize and standardize the meanings of trade terms at an international level. Trade terms were already widely accepted before ‘Incoterms 1936’, but their meaning had never been so fully and completely standardized.

The purpose of the Incoterms® rules was to create a global standard rule of interpretation, which pre-supposed that national courts around the world would enforce the provisions of the Incoterms® rules, even if these were at variance with national jurisprudence. In fact, the courts and legislatures of the world have generally deferred to the Incoterms® rules as a definitive statement of international trade customs. The United Nations Commission on International Trade Law (UNCITRAL) and the Working Party on Facilitation of International Trade Procedures of the Economic Commission for Europe of the United Nations (UNECE) have formally endorsed the Incoterms® rules, citing their usefulness to international trade.

However, ICC recognized that the practice of international trade is not static, but rather evolves with developments in technology and other global changes. So, for example, when in the 1960s and 1970s the rapid expansion of containerized and multimodal transport substantially changed the conduct of international trade, ICC updated the Incoterms® rules to meet these new transport practices. In particular, the older rules that had grown out of traditional maritime practice – FOB, CFR and CIF – generated new Incoterms® rule counterparts with a view to accommodating multimodal and containerized traffic: FCA, CPT, CIP and, in the current version of the rules – Incoterms® 2010 – DAT (Delivered at Terminal) and DAP (Delivered at Place).

These ‘newer’ Incoterms® rules, borne from the need to keep pace with developments in containerization and multimodality, must derive their authority from principles other than trade customs and long-standing usage. Thus, for example, the express contractual incorporation of the newer terms, which is strongly recommended by ICC, can virtually ensure that the newer terms
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will survive any legal challenge. In this light, it is also important to emphasize that the Incoterms® rules are a product of a world business organization, a neutral body set up solely to further the interests of international trade. If a party hesitates to incorporate the Incoterms® rules in a particular contract, the counterparty can reassure them that Incoterms are a reliable, neutral, and universally accepted standard.

Over the seven-and-a-half decades that the Incoterms® rules have existed, ICC has periodically sought to improve them wherever possible. Certain questions sent to ICC by export trade professionals over the decades have revealed areas of unnecessary ambiguity. These questions have proved extremely useful in helping ICC’s drafting experts update the Incoterms® rules so as to produce more effective versions that reflect evolving trade conditions.

The questions explored in the second part of this book represent the effort of top ICC Incoterms® rules experts to grapple with challenging questions of how to interpret the Incoterms® rules. The reader should always keep in mind that in order to be widely applicable and easily understood, the Incoterms® rules need to rely on general expressions and clear wording. This is the only way to develop a standard that can be used by every different kind of company in every country in the world.

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