Incoterms_® and Commercial Contracts

Use of ® trademark symbol and letters of credit

Letters of credit citing Incoterms® 2010 with the circled R trademark indicator may cause unintended discrepancies for beneficiaries unable to do likewise in their documents (as with typewriters).

The absence of the ® trademark symbol in a citation to any version of the Incoterms rules, including Incoterms® 2010, should not render a document discrepant with a letter of credit that includes the ® trademark symbol in its citation to the Incoterms® rules.

‘Terminal handling charges’

Who pays for THC (terminal handling charges) under the new Incoterms® 2010 rules?

• Allocation of costs between the buyer and seller under the rules are set out in articles A6/B6, which in the new rules have been made clearer and in some cases clarify the relation between the contract of sale and the contract of carriage.
• ‘Terminal handling charges’ is a broad category and each charge being considered needs to be analyzed to see whether it occurred before or after delivery under article A4 of the relevant Incoterms® rule, and whether it relates to an obligation treated specifically in the rules, as, for example, an import or export clearance charge, obligations with respect to which are set out in articles A2/B2.

Costs of security charges

There are questions regarding who bears costs for ‘security charges’ (A2/B2 and A10/B10) under the Incoterms® 2010 rules. Since 1 January 2011, for example, all deliveries coming into the European Common Market are subject to an ENS-filing to be done 24 hours before loading the ship. We observe that carriers deal with this issue differently in terms of payment. Since there are a great number of legal reporting regulations (e.g. in the field of hazardous materials, veterinarian, port authorities), these costs are in some cases added to the usual sea freight and the fees are invoiced in accordance with sea freight (either prepaid or collect). Other carriers (mainly Asian) treat the ENS fees as purely prepaid costs to be covered by the shipper.

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Independent of this example, different points of view to this question are represented in practice, such as how to account the current security fees and whether or not they should be treated as import or export formalities.

While the Incoterms® rules are clauses to be used in sales contracts, within shipping company and freight contracts, they are treated as ‘francatur-clauses’ with the result that the carrier making reference to Incoterms clauses in contracts for carriage charges the costs either to the seller (shipper) or the buyer (consignee). Therefore, in our opinion, it is very important that clear statements should be made.

We think it necessary that a common practice should be determined and would be grateful if you could answer some of our questions:

• Who should according to the Incoterms® 2010 rules bear the costs for safety precautions for the transport of goods? Should this always be the buyer?
• Have you heard of similar issues within other economic sectors?

• At the time of preparing Incoterms® 2010 the drafting group reviewed the various cargo security arrangements around the world. It became evident that although cargo security is a much more important issue than it was in 2000, there was no consistent global practice. Given the lack of consistent global practice, the drafting group was reluctant to impose change. Therefore articles A2/B2 and A10/B10 were changed but only to a limited extent.
• The allocation of costs for security will vary between seller and buyer depending on the Incoterms rule chosen – for example DAT will be different to FCA.
• Note the Incoterms rules relate to the sale of goods contract between buyer and seller, and NOT to the relationship with the carrier.
• Under FCA then (assuming delivery point is not the seller’s premises):
• The seller is responsible for clearing export, but not import, formalities. Therefore, a seller in Japan is not responsible for an ENS filing such as is required for import.

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• However, under A10/B10 the seller must provide the buyer with documents or information required by the buyer to complete the ENS filing at the buyer’s risk and expense.
• Where safety precautions are required for transport after the delivery point, then they are the buyer’s responsibility UNLESS it is a mandatory requirement to allow the goods to be exported (but note that the seller must in any event appropriately package the goods under article A9). Under A10, the seller is responsible for providing information and data.

• For example, for DAP (buyer’s premises Paris), where the seller is based outside the European Community (EC) and the first point of import into the EC is in France:
• The ENS filing is an import requirement for the EC. Under DAP the seller is not responsible for clearing import requirements. Therefore, if the seller is based outside of the EC, the seller is not responsible for ensuring the ENS filing is completed.
• However, the ENS filing is completed by the ocean carrier. In this example the seller will have contracted with the ocean carrier, as the seller is responsible for transportation to the Paris destination. Therefore, the carriage contract will require that the seller provide the information needed for the ENS filing and the carrier may charge the seller for supplying it.
• The buyer is obliged to provide the information needed for the seller to provide to the ocean carrier for the ENS filing. This is because the buyer is obliged to clear import requirements under B2.
• As ENS filing is an import obligation, the buyer is obliged to reimburse the seller for the cost of ENS filing.

Export clearance ‘applicable’ in F-family of rules?

A seller under one of the Incoterms® 2010 rules in the F-family (FCA, FAS or FOB) delivers goods in seller’s own country, but the goods are destined post-delivery for another country. The buyer arranges and pays for carriage and risk for the goods has already passed to buyer at delivery in seller’s country.

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It is not clear from the language of the Incoterms® 2010 rules that in such a situation export clearance is ‘applicable’ for the seller under article A2. If it is ‘applicable’, why? If not, then isn’t the requirement on the seller even lower than under article A2 in EXW, where seller is required at least to provide assistance to the buyer for export of the goods?

If the goods are destined for another country, then export clearance is applicable and the seller needs to do it. The words ’where applicable‘ are used to denote that Incoterms® 2010 can be used in an entirely domestic setting as well. In EXW, the seller only needs to provide assistance for export clearance but is not responsible for it.

Non-freight costs during transit in C-family of rules

Under Incoterms® 2010 rules CPT, CIP, CFR and CIF, the seller must contract on usual terms at its own expense for the carriage of the goods to the named place or port of destination. After delivery at the place or port of departure, the buyer bears all risks for the goods (article B5) and must pay all costs and charges relating to the goods while in transit until their arrival at the place or port of destination, unless such costs and charges were for the seller’s account under the contract of carriage (article B6(b)).

What costs would realistically arise during transit not related to the freight being paid by seller? It seems these would arise only in extraordinary cases. Would the buyer have to pay for things like an increase in rates, charges connected with extra deviation, or a change of rotation?

• Under article A6(b) of the C-terms, seller must pay for freight and other costs relating to obtaining a contract of carriage. In any case, if the freightincluded pricing of the goods offered by the seller is accepted by the buyer and the sale contract is enacted between the parties on such terms, then the seller should bear any subsequent increases in the freight tariffs.
• In the sense of article B6 under C-terms, the transfer of risk also determines the division of costs. If something occurs as a result of contingencies after shipment, such as stranding, collision, strikes, governmental commands, or bad weather conditions, or any other unanticipated costs charged by the
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  carrier as a result of these contingencies, the unanticipated costs mentioned will be for the account of the buyer (unless specified as for the seller’s account in the contract of carriage).

Stowage of full container loads

Why are full-container-load sellers not responsible for container stowage as part of their obligation to load the collecting vehicle?

• When establishing the interpretation of the word ‘packaging’ as it is used in article A9 of each of the Incoterms® 2010 rules, the Drafting Group decided to limit its meaning to (i) the packaging of the goods to comply with any requirements under the contract of sale, and (ii) the packaging of the goods so that they are fit for transportation.
• The Incoterms® 2010 rules are silent on the stowage of containers including the performance of the actual task as well as the costs connected therewith. Under transport law, containers may be treated differently based on whose containers they are and whether full container loads (FCL) or less than full container loads (LCL) are concerned and this may be reflected in the transport conditions to which some Incoterms® 2010 rules yield themselves when it comes to the delivery under the contract of sale. Parties wishing to make the seller unequivocally responsible for the stowage of containers specify this in the contract of sale.
• The Incoterms® 2010 rules are intended for use with all types of goods and forms of transport. There is no consistent market practice on or allocation of responsibility for stowage across all types of goods, all forms of transport and in all parts of the world.

Incoterms® rules not designed to resolve accounting issues such as revenue recognition

We have a question on revenue recognition. For most sales of tangible goods, Generally Accepted Accounting Principles (GAAP) require at a minimum that ownership pass from the seller and that the seller’s risk for the condition of the goods end. This is a major concern for companies in the United States, particularly for publicly traded corporations under pressure to recognize revenue at the earliest moment. While presently primarily a US issue, GAAP-like rules are starting to appear internationally as International Financial
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Reporting Standards (IFRS), and users of the Incoterms® 2010 rules are also starting to raise questions on expense recognition. How are the Incoterms® 2010 rules related to revenue recognition?

• The Incoterms® rules are not designed to resolve accounting issues and do not speak to ownership transfer. Risk transfer occurs when goods are delivered, which is covered in article A4 of each of the Incoterms® 2010 rules. For contracts silent about when ownership transfer takes place, and covered by the law of a US common law state, UCC Part 2-401 makes delivery the default transfer mechanism. Other laws (e.g., the UN Convention on Contracts for the International Sale of Goods (CISG) or, under English law, the Sale of Goods Act 1979) may differ, as well as treatment of contracts that aren’t silent on transfer of ownership.
• It is essential in the contract to make it clear when ownership passes from the seller to the buyer.
• Note that assessing the accounting treatment of ownership of goods will be influenced by who is legally in control of the goods, who takes legal risk and who has legal ownership, but may take account of other factors.

Buyer faced with multiple charges from carrier under C-family of rules

Two related questions:

1. Many buyers that import goods from Asian countries under Incoterms® 2010 rules CFR and CIF have discovered that as consignees they are frequently requested by the carriers to pay substantial additional charges (in some cases comparable to the total freight cost when buying under FCA). These numerous additional charges may include dues that some Asian ports levy on export shipments, but may also include more opaque charges such as ‘China additional’. The question arises as to which charges carriers are entitled to claim from the consignee under the contract of sale when freight is indicated to be prepaid in line with the practice under CFR and CIF, and what is the buyer’s position in relation to the carrier and the seller in situations where apparently superfluous charges are levied against the buyer by the carrier? The question does not concern Terminal Handling Charges (THC) at the port of destination.
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2. The C-family of rules allocates costs under article A6 as follows:

"The seller must pay […] b) the freight and all other costs resulting from A3 a), including the costs of loading the goods [on board] and any charges for unloading at the [place of destination] [agreed port of discharge] that were for the seller’s account under the contract of carriage; […]"

Demurrage, detention, congestion surcharges, peak season surcharge, winter surcharge, … are these ‘other costs’ invoiced by the carrier under the contract of carriage and thus due by the contracting party to the contract of carriage (the shipper = the seller). Are these costs under the contract of sale for the account of the C-seller or the C-buyer?

• The main rule under CFR and CIF as well as under CPT and CIP is that the seller must contract on ‘usual terms’ at its own expense for the carriage of the goods to the named port (CFR and CIF) or place (CPT and CIP) of destination.
• Except for the change to state that unloading costs that were for the seller’s account under the contract of carriage are for the seller, no other change has been made to the C-family in the Incoterms® 2010 rules on allocation of costs.
• What constitutes ‘usual terms’ will vary to reflect current market practice.
• However, it is currently well established under the C-family of rules that the buyer is expected to pay only costs that are unforeseen, such as those arising from stranding, collision, strikes, governmental commands, or bad weather conditions. Outside such clear cases, it is sometimes difficult to verify which costs are in accordance with usual transport terms. For instance, is the carrier entitled to charge the consignee for notification of arrival? When only unforeseen costs fall on the buyer, the question arises: By whom are such costs unforeseen, the seller or the carrier?

It can be generally stated that the freight prepaid by the seller should include all ordinary transport costs until the destination including the costs of handling, storage, and transhipment... The seller is obliged to contract for carriage by a usual route in a vessel of the type normally used for the type of goods sold. As much as it is evident
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that the vessel must be fit to carry the goods to the destination safely, the seller must contract with a carrier who is capable of anticipating ordinary cost items during the transportation and including them in the prepaid freight. Later currency adjustments in the freight are for the seller.

• Therefore, a buyer faced with port export levies and ‘China additional’ should consider challenging these costs.
• A buyer should also seek to specify in the contract of sale which specific costs will be borne by the seller and which costs by the buyer to avoid dispute.
• Buyers should be wary of using the C family of rules – they are complex and should be used only where the buyer has a full understanding of them.

Incoterms® 2010 rules do not address pipeline transactions

Do the Incoterms® 2010 rules cater for materials transported by pipeline, such as oil and gas?

While developing the Incoterms® 2010 rules, ICC considered addressing pipeline transactions but decided not to for several reasons.

1. Frequently, the product shipped is not the product actually received. Instead, a specified product is placed into the pipeline at the seller’s end, and a fungible product is withdrawn at the buyer’s end.
2. There are already numerous trade practices that address this situation.

Containers going by sea under C-family of rules

In containerized shipments going by sea, what is the difference between the maritime Incoterms® 2010 rules CFR/CIF and the corresponding multimodal rules CPT/ CIP with respect to the:

• Article A4 delivery obligation, and
• Article A8 documentary obligation?

• While delivery under CFR and CIF must be made on board the vessel at the port of shipment, under CPT and CIP the goods must be handed over to the carrier. Therefore, the delivery obligation is no longer related to the vessel, but to the carrier. When parties
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  intend to use several carriers and do not agree on a specific point of delivery in their sales contract, under CPT and CIP the seller fulfils its delivery obligation when the goods have been delivered to the first carrier. Under CIF and CFR, the delivery is not completed until the goods have been placed on board a vessel at the port of shipment. Therefore, the principle of delivery to the first carrier cannot be applied under CFR and CIF, unless the carriage to the port of shipment is also performed by sea or inland waterway transport. The important difference occurs between CPT/CIP and CFR/CIF in this respect.
• In general, ‘usual transport document’ in article A8 would refer to the receipt of the carrier to whom the goods are handed. In maritime carriage, negotiable bills of lading are traditionally used. However, other documents such as liner waybills and cargo quay receipts are also used. Parties seeking to avoid the legal uncertainty of maritime transport documents will not find not many uniform rules on this matter. They may refer to the Uniform Rules for Sea Waybills adopted by Comité Maritime International (CMI) in June 1990.

Goods damaged prior to arrival at departure terminal under C-family of rules

A C-seller has used an independent carrier (‘first carrier’) to bring the goods to the terminal from which the ship/ plane will leave to the agreed place of destination (CMR seller’s premises ➞ departure terminal). The goods are damaged prior to arrival at the departure terminal. There will be no shipment from the terminal to the agreed place of destination (no bill of lading or air waybill to the agreed place of departure). Is the C-seller in breach?

• For non-delivery (Article A4)? or
• For not providing a delivery document (Article A8)?

• If the CPT or CIP Incoterms® 2010 rule were chosen, then the delivery obligation would not be breached, since the delivery would be fulfilled by handing over the goods to the first carrier. However, if CFR or CIF were chosen, then the seller would breach its delivery obligation by not delivering the goods to the port of shipment and not placing the goods on board the vessel.
• In the first case (CPT/CIP), the receipt document obtained from the first carrier, to whom the goods
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  are handed over, serves as the usual transport document under article A8. Therefore, the required delivery document would have been provided and there would be no breach in this respect. In the latter case (CFR/CIF), the seller would be in breach since it would not be in a position to provide the sufficient maritime delivery document.

Global insurance policy

When a seller has concluded a global transport insurance policy (police d’abonnement), is it selling under CIF/CIP or DAP/DDP?

CIF and CIP require the seller to obtain at its own expense cargo insurance complying at least with the minimum cover as provided by Clauses (C) of the Institute Cargo Clauses (LMA/IUA), contracted with underwriters or an insurance company of good repute. The insurance should entitle the buyer, or any other person having an insurable interest in the goods, to claim directly from the insurer. Moreover, the insurance shall cover, at a minimum, the price provided in the contract plus ten per cent (110%). Any other insurance concluded by the seller, which does not have these minimum qualifications, shall not fulfill the seller’s insurance obligation under CIP/CIF article A3(b).

Therefore, if the seller concludes a global transport insurance policy, such policy would not fulfil the requirements of the CIF/CIP rules since it does not normally automatically allow the buyer to claim directly from the insurer – the seller would normally have to enter into special arrangements with the insurer. Otherwise, it would be preferential for the buyer to choose the DAP or DDP rules, since the seller must bear all risks of loss or damage to the goods until they are delivered at the place of destination.

Mandatory local law overriding Incoterms® 2010 rules

In the Introduction of the Incoterms® 2010 book, it is provided that, ‘…parties should be aware that mandatory local law may override any aspect of the sale contract, including the chosen Incoterms rule.’ We understand that local law may override terms of the sale contract that are not covered by the Incoterms® 2010 rules (such as remedies for breach, payment terms, marking requirements, etc.), but how does local law override the agreed Incoterms® rule?

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• Incorporating an Incoterms® rule into a contract is tantamount to drafting the relevant clauses of the chosen Incoterms® rule in that contract – the language of the chosen Incoterms® rule becomes part of the contract. So mandatory local law may override (theoretically) any provisions of a contract, including any that happen to have been incorporated from the book, Incoterms® 2010, or other, earlier version of the rules.
• An example would be the way the United States addresses export clearance. Article A2 of each Incoterms® rule except EXW tasks this to the seller. United States Foreign Trade Regulations state that exports must be reported by the freight forwarder whenever it is appointed by the buyer, as is usual with F-group Incoterms® rules. (As an exception, the buyer may appoint another party to report, but again this would be done on behalf of the buyer.)

‘Transport documents’ in the Incoterms® 2010 rules:

What exactly do the words ‘transport document[s]’ refer to in the Incoterms® 2010 rules? Some sources on the subject of freight and forwarding define these words to mean all documents used in transport activity, but the meaning of ‘transport document’ in the Incoterms® rules seems to be somewhat more limited, perhaps related to the legal function or validity of certain types of documents.

• Incoterms® 2010 does not contain a general definition of a transport document. The term ‘transport document’ is generally used in Articles A8 and B8 of the C-terms, which require the seller to provide the buyer with the usual transport document(s) for the transport that the seller has contracted. The obligations as to whether the seller has to provide a negotiable or non-negotiable transport document, or any transport document, depend on the Incoterms® rules used, on the practice in the trade and on the parties’ agreement. Moreover, under the F-family of rules, the seller must assist the buyer in obtaining a transport document. Should the seller exceptionally contract for carriage on usual terms at the buyer’s risk and expense, it is incumbent upon the seller to provide a transport document under equivalent principles, as in the C-family of rules. In all other situations, the more generic term ‘delivery document’
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  is used in Article A8. A ´delivery document´ must be a transport document under the C rules and, in other Incoterms® rules, it can be a transport document or other document such as a receipt, depending on the circumstances.
• A usual transport document follows usually from the relevant transport legislation and from the practice of the trade. Thus, bills of lading are used in maritime transport when goods are sold in transit. The characteristics of the bill of lading are defined by both legislation and practice. Similarly, for land, rail and air transport, both legislation and practice define what usual transport documents are in each case. Generally speaking, transport documents represent receipts and proof that the goods are taken in the charge of the carrier and they evidence the contract of carriage by containing or referring to the transport conditions. Moreover, negotiable transport documents (bills of lading) allow the goods to be sold in transit by the delivery and endorsement of the bill. For road, rail and air transport, usual transport documents have functions in respect of right of control. Documents other than those with the above functions may also be used in the context of carriage of goods, such as mate’s receipts, but these are not the transport documents envisaged in the Incoterms® 2010 rules.

‘Usual proof of delivery’ v. ‘usual transport document’ in FCA, FAS and FOB

In article A8 of the Incoterms® 2010 F category of rules (FCA, FAS and FOB), the seller must provide the buyer with ‘usual proof that the goods have been delivered’, but in the C rules they may have to provide the buyer with the ‘usual transport document[s]’. Why is the ‘usual proof that the goods have been delivered’ not considered to be the same as the ‘usual transport document[s]’? Why use different formulations?

• The reason for different formulations is that the seller and the buyer have different tasks under FCA, FAS and FOB as opposed to CPT, CIP, CFR and CIF when it comes to making contracts of carriage.
• Under FCA, FAS and FOB, the normal situation is that the buyer contracts for carriage, and the transport document is issued to the buyer. The seller has to render assistance for the buyer in obtaining a transport document, but the seller needs to prove
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  only that goods are delivered to the carrier or (in FCA) to a person named by the buyer.
• When it comes to the C-family of rules, the seller must contract for transport and provide the buyer with (a) usual transport document(s) because the seller must, in addition to providing proof that the goods are delivered to the carrier, give the buyer the possibility to exercise rights on the basis of the contract of carriage against the carrier as evidenced by the transport document. In case of negotiable transport documents, the seller also transfers the indirect possession of the goods by the transfer of the bill of lading.

Obligation v. custom for transport documents in C-family of rules

Why in article A8 of the Incoterms® 2010 rules CIP and CPT does the seller have to provide transport documents only if it is customary or if the buyer so requests, while in CFR and CIF the seller must in every case provide the buyer with transport documents? The functions of all the C-rules seem to be generally the same regardless of which means of transport are used, so why is this provision different for the rules used for any mode or modes of transport (CPT, CIP) and those used only for sea and inland waterway transport (CFR, CIF)?

• The difference between CPT and CIP on the one hand and CFR and CIF on the other lies in the nature of the transport documents used in traditional maritime transport, where CFR and CIF are used, and those in the other modes of transport including multimodal transport.
• Under CFR and CIF, the seller must deliver the goods on board a vessel, and the only document that traditionally evidences this is an on board bill of lading. Moreover, the document must enable the buyer to sell the goods in transit. Since selling goods in transit is possible only by either using a bill of lading or by notification to the carrier (this refers to electronic platforms replicating the use of bills of lading) one cannot normally dispense with a transport document. Therefore, both tradition and the required functions of a transport document require that the seller provide the buyer with one.
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• However, when it comes to CPT and CIP, the presumption is a non-negotiable transport document. In some practices, transport documents are as a rule not issued at all. Transport laws require carriers to issue transport documents on request, and should the buyer be in need of a transport document, the buyer may ask the seller to provide one, and the seller may the convey the request to the carrier.
• The difference between the two approaches described above is largely semantic, since if the practice is not to issue transport documents, then there is no usual transport document either.

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