Incoterms_® and Commercial Contracts

Customs not recognizing the Incoterms® rules

Why do certain customs bodies still not accept the Incoterms® rules?

This is purely a matter of lack of knowledge by customs bodies and officers. ICC has contacted the World Customs Organization as well as individual customs bodies, but parties having difficulty in a particular case may either formulate a FOB or CIF price to satisfy the authorities, or simply direct the authorities to the ICC to verify the authenticity of the Incoterms® rules.

Is it possible for customs to ‘reject’ certain Incoterms® rules?

It is common for customs authorities to require that the value of goods exported or imported be declared as having either an ‘FOB’ or ‘CIF’ value. The purpose of this is to standardize assessment of customs duties, which obviously must be assessed on some declared value or price. If customs authorities did not have a standard practice, this could leave open the question – should duty be assessed on the value of the goods including or excluding international transport?

However, the requirement by customs authorities that customs declarations be either in FOB or CIF does NOT mean that traders dealing with the country in question are obliged to enter only into contracts on these terms – rather, it means that customs authorities must be given an FOB or CIF value for the purposes of calculating duties and any other official purposes. Practically, this means that traders who have used in their contracts terms other than FOB or CIF will be forced to ‘translate’ their contract into the required FOB or CIF value. This should not be difficult.

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Should industry standard terms refer to the Incoterms® rules?

Is it correct to inform members of a trade association to reject the Incoterms® rules and reject their incorporation into standard contracts on the grounds that Incoterms could ‘conflict with the existing clauses of contracts and the applicable law under which these are governed’?

At a conference of the Timber Trade Federation, a suggestion was put forward by the Finnish delegation that the Federation’s standard contracts incorporate the Incoterms® rules. The Federation rejected the request on the grounds that such an incorporation would conflict with existing contracts and with applicable law. The Federation went on to state that ‘it is important that members reject these terms whenever there is an attempt to include them in contracts’.

The following questions are raised by the question from the ICC Finnish Delegation (the questions are followed by our brief answers):

1. Are the Incoterms® rules to be recommended by the ICC to the Timber Trade Federation?
   Answer: Yes
2. Is there any absolute legal impediment to the use of the Incoterms® rules in standard contracts of the Timber Trade Federation?
   Answer: No
3. Can the use of an Incoterms® rule alter the parties’ legal rights or responsibilities?
   Answer: Yes

1. Are the Incoterms® rules to be recommended to the Timber Trade Federation? Yes.

In order to answer this question, one has to understand the benefits of the use of the Incoterms® rules. The Incoterms® rules are standardized international trade terms, providing benefits of speed, clarity and predictability in international contracting. Incoterms 1990 are used throughout the world and have been endorsed by the United Nations Commission on International Trade Law (UNCITRAL). In the drafting of the 1980 Vienna Convention on the International Sale of
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Goods, UNCITRAL concluded that no attempt to provide a uniform legal interpretation of trade terms should be made, given the prevalence of trade custom as evidenced by the widespread international use of the Incoterms® rules.

The benefits of standards are not always easy to quantify, but the fact that the Incoterms® rules, which have been translated into more than 25 languages, are used by such a broad base of international traders is the perhaps the most concrete argument in their favour. The Incoterms® rules are the most widely-distributed of the International Chamber of Commerce (ICC) publications. Ultimately, the decision of a company or organization to deal on the basis of the Incoterms® rules is equivalent to a message to the international community in support of adherence to common, world-wide standards instead of insistence on national standards.

Weighing both the costs and potential benefits of adoption of the Incoterms® rules in their standard form contracts, the ICC can only encourage the Timber Trade Federation to give serious consideration to the important potential benefits offered by the Incoterms® rules.

2. Is there any absolute legal impediment to the use of the Incoterms® rules in standard contracts of the Timber Trade Federation? No.

The following points must be made here:

1. The Incoterms 1990 rules do not determine applicable law, nor do the Incoterms® rules have any impact on the parties’ choice of applicable law. The Incoterms® rules are neutral as to the law that applies to a contract.
2. Parties’ contractual provisions will always prevail over the Incoterms® rules in the event of a conflict. This reduces the significance of any possible conflict between the Incoterms® rules and the rest of the contract. Moreover, parties can contractually stipulate that in the event of a conflict between national law and the Incoterms® rules, the applicable national law will prevail.
3. The choice of the Incoterms® rules for standard contracts will not have a direct legal impact on those contracts already concluded.

3. Can the use of an Incoterms® rule alter the parties’ legal rights or responsibilities? Yes.

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Despite the analysis made above in 2., it is nonetheless true that choosing the Incoterms® rules can change things. Thus, for example, we may ask ourselves, what will happen if, having decided to incorporate one of the Incoterms 1990 rules into a contract, it then transpires that application of the substantive law will lead to a different result than that envisaged by the chosen Incoterms® rule? Generally, in cases of this type of conflict, the Incoterms® rule will prevail unless the particular national rule is judged mandatory. Thus, the choice of an Incoterms® rule can indeed alter the position of the parties. However, as stated above, it is clearly possible to stipulate that in the event of conflict between the Incoterms® rules and national law, that national law will prevail. Clearly, traders should be well-informed on any differences between their national law and the Incoterms® rules when considering adoption of the Incoterms® rules.

The Incoterms® rules – global standards for the common good?

The Incoterms® rules, like all other global standards, challenge individuals and firms to move beyond allegiance to national interests in the pursuit of a greater global good. Therefore, as a general principle, the ICC encourages sectoral, regional, national or proprietary groups to abandon their reliance on trade standards other than the Incoterms® rules.

This basic principle raises the question: is it not possible, since the Incoterms® rules are said by the ICC to represent a very general level of codification, that specific industries or particular transactions will call for more precise sets of definitions than those provided by the Incoterms® rules? What of the common practice, for example, of including in so-called ‘General Terms and Conditions’ or model forms a particular, industry-specific or company-specific definition of C.I.F.?

The ICC’s is that parties should be encouraged to abandon any particular interests which cause them to deviate from the Incoterms® rules. Although minor modifications or additions do not do injury to the basic harmonization value of the Incoterms® rules, their value is lost when parties depart entirely from the Incoterms® rules, such as by specifying a purely tailor-made definition of a particular term.

Several arguments can be put forth in favour of moving to a single, global standard:

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1. The Incoterms® rules carefully balance the interests of buyer and seller according to time-tested practice and logic; definitions which vary the basic structure of the Incoterms® rules may not incorporate the same emphasis on balance and neutrality;
2. Standardization in international trade generates savings related to:

1. reduced misunderstanding,
2. more efficient education,
3. more efficient communication,
4. more effective dispute-resolution.

(These savings are not available when particular sectors or companies seek to gain a contractual advantage by departing from the Incoterms® rules principles);

3. In those countries in which certain industry sectors depart from the Incoterms® rules, a risk of misunderstanding will arise with trading partners, because of the inconsistency between industry standard terms and the Incoterms® rules.

Eloquent support for the ICC position is provided in the following text from Ray Battersby, the UK SITPRO delegate to the Incoterms® Working Party (excerpted from his article on the Incoterms® rules and the Single Market in Incoterms in Practice, ICC Publication No. 505):

''The inclusion of Incoterms as part of the mandatory information that has to be supplied to national administrations through Intrastat Supplementary Declarations has had the positive effect of increasing EU traders’ general awareness of Incoterms’ existence. In the long term, this can only be of benefit to the role that Incoterms can play in providing a level playing field for international trade. The more widely Incoterms are used, the easier it becomes for sellers and buyers to treat their international and national sales on the same basis, thus achieving the ultimate goal of transparency of delivery. The continuing growth of international trade and its importance to the wealth of individual nations provides an ideal opportunity for Incoterms to be used as an effective tool for encouraging best business practice between sellers and users.''

The elaboration of an international standard has proven to be a fundamental issue in modern trade. The UNECE, in the preamble of the Recommendation No. 5 (reproduced hereafter) has officially recognized the use of the Incoterms® rules as the appropriate standard tool
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responding to the need for harmonization, regardless of the trade sector concerned.

The Incoterms® rules as ‘Payment terms’ – COD/CAD

Do the Incoterms® rules also include definitions of payment terms, such as COD (cash on delivery), CAD (cash against documents), etc.?

It is incorrect to call the Incoterms® rules payment terms, and the Incoterms® rules do not define COD or CAD terms. The Incoterms® rules only specify under section B1 that the buyer must pay the price as provided in the contract of sale.

The Incoterms® rules and payment – what connection?

Although a terse export offer might specify a given monetary amount in association with an Incoterms® rule (e.g., ‘$100/ton FOB Liverpool Incoterms 1990’), this should not mislead traders into thinking that the Incoterms® rules are ‘payment terms’.

There is an obvious and clear link between the contract price and the chosen Incoterms® rule. For example, an FOB price, which does not include the cost of international freight, will always be cheaper than the CIF price, simply because the FOB price does not include ocean freight. But when traders refer to ‘payment terms’ or ‘payment conditions’, they are generally referring to the various options or modes for performance of the buyer’s payment obligation, i.e., payment by cheque, bank draft, electronic transfer or documentary credit, etc.

The Incoterms® rules deal principally with the costs and risks of transporting the goods from seller to buyer; how the price is paid is a distinct issue. It would nonetheless be an oversimplification to call the Incoterms® rules ‘transport terms’ or ‘delivery terms’, because they deal with more than just transport and delivery – they also deal with the allocation of risk, customs responsibilities, and insurance. Despite this, Incoterms are commonly referred to as ‘delivery terms’, ‘consignment terms’, or ‘sales terms’, which is regrettable because they focus exclusively on transport or pricing responsibilities.

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The ICC prefers to call the Incoterms® rules ‘trade terms’, because they govern an essential bundle of rights and obligations that are at the heart of the export trade transaction.

Since the Incoterms® rules are all represented by threeletter codes, many inexperienced traders leap to the assumption that any three-letter code used in international trade must be an Incoterms® rule. There are hundreds of abbreviations that could be confused with the Incoterms® rules in this fashion. Fortunately, there are only 13 currently valid Incoterms® rules, and for complete clarity it is preferable that the three-letter Incoterms® rule abbreviation be combined with a reference to Incoterms 1990 (or date of current version).

The Incoterms® rules and the European Single Market

What changes in the Incoterms® rules use may be occasioned by the arrival of the European Single Market on 1 January 1993?

There does not yet appear to be a need for specific Incoterms® rules adapted for the Single Market. Incoterms 1990 remain applicable. However, certain of the sections in the Incoterms® rules, notably those dealing with customs clearance, have become less useful or inapplicable within the European Single Market. In particular, the term DDU will no longer be of particular utility after 1997 because of the move to an origin-based VAT instead of the currently destination-based system. Then, the term DDP would have to be preferred. The word ‘Duty’ in DDU and DDP should be interpreted as including not only duties but also taxes, official charges and customs clearance, and in any event the term ‘duty’ here only applies if in fact there are any duties.

The Incoterms® rules deal with several other important issues aside from customs obligations, such as transfer of risk and allocation of costs, and therefore should remain useful even within customs-free trade areas such as the European Single Market.

The question is an important one, not only because Europe is one of the world’s leading trading centers, but also because the European drive to customs-free union has been echoed in a similar trend in other parts of the
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world, notably Mercosur (bringing together Brazil, Uruguay and Argentina).

The response of the Panel of Incoterms® Experts should be understood in the context of its timing: the answer was given before the extension of the delay for establishing an origin-based VAT system. Although the dates of the European transition period are no longer of interest, the principles stated in the response of the Panel remain correct and of particular interest.

Essentially, the Incoterms® rules are useful whenever one can ascribe an ‘international’ aspect to a particular transaction, and even in purely domestic cases, regardless of the abolition of customs-unions. The Incoterms® rules deal with the crucial issues of transfer of risk and division of transport costs between seller and buyer. These issues are standardized in international practice by the Incoterms® rules. Even if two countries were to completely fuse their legal systems, the Incoterms® rules might well remain useful as a standard so as not to put domestic traders at a disadvantage vis-à-vis foreign exporters adhering to the Incoterms® rules’ global standard.

This is the view expressed by one of the Incoterms® Panel Experts, Ray Battersby of SITPRO, in his article, ‘Incoterms and the Single Market’, printed in the ICC’s Incoterms in Practice (ICC Publication No. 505):

''T]he abolition of customs formalities at internal frontiers does not exempt sellers and buyers from licensing or official authorization requirements for strategic goods (which still need to be accompanied by official documentation) or other official authorization requirements for strategic goods (which still need to be accompanied by official documentation) and other goods which are purchased from non-EU member states... [EU] sellers and buyers should thus be aware that there are a number of areas in which Single Market transactions should not be treated on entirely the same basis as domestic sales. Goods subject to excise controls also fall within the category of goods not in free circulation.''

This still leaves the following potentially awkward questions: in customs-free zones, which Incoterms® rule is preferable, DDU or DDP? And why do these terms retain the word ‘duty’, even for use in contexts where no duty could be assessed?

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Bonded goods and bail cover costs

Does the arrival of the European Single Market have any impact on the allocation of bail cover costs for goods subject to excise tax?

This in not precisely an Incoterms® rule question, but rather a tax question.

Bail cover has previously been included in the cost of the T2 transport document. After 1 January 1993, the carriage of goods subject to excise tax is ruled by EEC decision 92/12 which states that these goods can be stored and sent only by an authorized bonder or licensed operator who must be guaranteed by a bail cover. Application of the new regime will vary depending on national fiscal rules. Fiscal and taxation rules are not covered by Incoterms. However, in the case where a fiscal matter is connected with a document, Incoterms will determine who is responsible for and in charge of the said document according to sections A2 and B2 or A10 and B10. Consequently, when the bond is linked with a document, the payment for the cost of the bond will be dealt with by A2 and B2.

What is bail cover? What is a ‘T2’? ‘SAD’? Bonded warehouse?

The above Panel Answer may require some explanation for readers from outside the European Union, or who are otherwise unfamiliar with the practice of bonded warehouses.

First, as regards European Union transport procedures, the abolition of the Single Administrative Document (SAD) in intra-EU transactions has theoretically liberated European exporters and importers from the obligation of completing customs declarations at any intra-EU borders. Nonetheless, the SAD system is being replaced by a system which specifies that certain minimum fiscal and statistical information is required by national EUmember state administrations. The necessary statistical information for intra-EU trade will be provided in supplementary statistical forms called INTRASTAT forms.

There are other official forms which are of particular interest as regards transit of goods in or through European Union countries, in particular the ‘T2’ form, used whenever goods from one EU country and
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destined for another EU country have to transit through a third, non-EU country.

The objective of harmonized European transit forms is to prevent goods being delayed at frontiers, and to ensure duty free admission in member states (via form T2) or to indicate that goods are subject to duty (via form TI).

EXW and FAS are the only Incoterms® rules that do not place any responsibility on the seller for export customs clearance, and therefore it may be argued that these are the only terms that would not put a requirement on the seller to provide even the minimum statistical forms. In practice, it is likely that even EXW and FAS sellers in the EU would perform the minimum duty of providing statistical information to the authorities, but this service would be performed at the cost and risk of the buyer.

Certain goods, such as tobacco and alcohol, are subject to highly-specific tax/fiscal regimes, and in particular to excise taxes. The transit of such goods through some countries must be guaranteed by a bond (‘bail cover’) which assures customs authorities that the required duties will be paid on the goods. Bart Van de Veire explains the impact of the bonding obligation on the Incoterms® rules as follows (Incoterms in Practice (ICC Publication No. 505), chapter 2):

''[T]he cost of the bond will be borne by the so-called ‘principal’ on the document. The principal will invoice the one who gave him the order to issue the transit form, i.e., the seller or the buyer according to the chosen Incoterm; the invoice will cover both his own operations for issuance of the document as well as the price of the bond. In ‘F’ or ‘C’ – terms, the charge for the transit is to the buyer’s account. In fact, for practical reasons, it will be often taken care of by the seller who is in the country of departure, but again, the seller will have given the buyer assistance in obtaining a necessary document, the cost for which will fall on the buyer according to article A10 of Incoterms.''

Bonded warehouses are used to store and/or inspect dutiable goods prior to payment of the import duty (or in the alternative, prior to re-export to another country). Generally, the proprietor of the warehouse must provide a bond to the customs authorities in order to cover any potential liability for duties. The utility of these warehouses is that the importer can inspect the goods, or have her customers inspect them, before paying the duty. Moreover, in the case of goods assessed a high
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duty (such as tobacco or alcohol), payment of the duty can be delayed by storage in a bonded warehouse, which may enable the importer to utilize capital more efficiently.

Letters of credit and the Incoterms® rules

Under a contract concluded on FOB terms, is a seller bound to accept a letter of credit opened by the buyer which specifies that the trade term is the FCA Incoterms® rule?

A French company concluded a contract on FOB terms for goods to be delivered to an Algerian buyer; 80% of the goods were to be shipped by sea on conventional pallets, and payment was to be by letter of credit. The Algerian bank opened a credit under FCA terms specifying to seller that according to the mode of shipment this was the correct term, given that the goods in question were not intended to be loaded over the ship’s rail. Was seller bound to accept this credit?

1. The Incoterms® rules do not seek to regulate the mechanism agreed by the parties for the payment of the price; they simply impose on the buyer the duty to pay it: (FOB B1).
2. The mechanism for the payment of the price is a matter for the contract of sale to spell out, and the interpretation and effect of such contractual clauses will depend on the law governing the contract of sale. It would therefore be inappropriate for the Panel to give specific advice to the seller in this case as to this rights and remedies under the contract of sale.
3. However, given that both the Incoterms® rules and the UCP 500 originate with the ICC, this question does raise a number of practical points which are worth making in a general way:

1. When choosing an Incoterms® rule for incorporation into the contract of sale, it is essential to have proper regard to the method of transport to be used.
2. When applying for the opening of a letter of credit, it is important for the buyer to give the bank clear documentary instructions, avoiding instructions which are not documentary. Thus, for example, an instruction that the commercial invoice must mention FCA Incoterms 1990 is a documentary instruction, whereas a general instruction that the documentary credit should be issued ‘under FCA terms’ is not.
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3. From the issuing bank’s point of view: when requested to open a letter of credit which contains a documentary requirement related to the chosen Incoterms® rule, the issuing bank should refrain from proposing any unilateral modification of this documentary requirement. The bank should understand that legal consequences may follow from issuance of a letter of credit specifying an Incoterms® rule different from the Incoterms® rule specified in the contract of sale. Thus, as a general rule a bank should avoid issuance of a credit which may be at variance with the requirements of the contract of sale. If the issuing bank believes that the Incoterms® rule chosen in the contract of sale is inappropriate, it may merely wish to draw the attention of the applicant to this fact, and suggest that the applicant contact the beneficiary to propose an appropriate revision of the contract of sale. Both issuing bank and applicant should be wary of taking any steps which may constitute an attempted unilateral modification of the contract of sale.
4. When receiving a letter of credit, a seller should take care to read its terms and to ensure that it imposes on him the same documentary duties as are imposed upon him by the contract of sale and by the same Incoterms® rule incorporated into his contract of sale.

This cases raises a variety of interesting questions concerning the inter-relationship of two important sets of ICC uniform rules, the Incoterms® rules and the ICC’s rules for letters of credit (documentary credits).

In practice, the use of documentary credits is most frequently associated with the classic maritime terms, CFR (also known as C&F) and CIF, and to a lesser extent, FOB. Historically, these were the first trade terms, and the international commercial practice of payment by letter of credit grew in parallel with the evolution of a common international understanding of FOB and CIF. For some traders and bankers, it has been difficult to adjust to the use of new transport modes and documentation, and to the newer Incoterms® rules (FCA/CPT/CIP) associated with them.

The role of the ocean bill of lading is crucial to understanding this issue, particularly as regards the perceived security value which it offers banks issuing documentary credits. With a traditional maritime term such as CIF, the seller delivers goods on board a vessel at a port of departure, and obtains from the carrier an
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ocean bill of lading. Possession of an ocean bill of lading is regarded by national laws and international customs of trade as representing control of delivery over the goods. Therefore, a credit which calls for provision of an ocean bill of lading appears to provide the issuing bank with additional security in the event the applicant should become insolvent. In such a case, the bank could theoretically obtain delivery of the goods, arrange for their re-sale, and use the proceeds to mitigate its exposure to credits issued on behalf of the insolvent applicant.

This explanation explains to some extent why some bankers have been cautious in accepting the ‘new’ Incoterms® rules which call for the use of transport documents other than the traditional bill of lading (e.g., FCA, CPT, CIP). In fact, these more modern transport documents, such as the sea waybill, multimodal transport document, air waybill (AWB), or FIATA bill of lading may provide banks with similar levels of security to that offered by the ocean bill of lading, or at least with an acceptable level of security. Nonetheless, in some countries, banks and their customers have clung to old practices based on FOB/CFR/CIF, and the use of ocean bills of lading, when it would appear that the multimodal or containerization aspects of particular transactions call instead for the Incoterms® rules, such as FCA/CPT/CIP and multimodal transport documents.

Should international trade bankers know about the Incoterms® rules and apply this knowledge in the opening or checking of documentary credits?

Strictly speaking, the Incoterms® rules do not play any mandatory role in the documentary credit process under the ICC standard rules which govern documentary credits (Uniform Customs and Practice for Documentary Credits – commonly referred to as the ‘UCP 500’ or simply ‘UCP’).

The UCP does not require trade bankers to apply a professional understanding of the Incoterms® rules, either in the issuance of the credit or in the verification of documents submitted under the credit. However, from a wider perspective, it is important that the bank understand the Incoterms® rules, because the bank’s rights and obligations under a transport document, (e.g., in the event of the insolvency of the applicant), may be affected by the choice of Incoterms® rule in the contract of sale, and the protection or liability that this Incoterms® rule will in turn impose on the applicant. Bankers should also have some knowledge of the insurance requirements under the Incoterms® rule, because the insurance
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document is an extremely common and important component of the documentary credit process.

Can all 13 Incoterms® rules be used in transactions based on documentary credit payments? In practice, documentary credits have been most commonly issued in conjunction with sale contracts on FOB, CFR or CIF Incoterms® rules, which characterize the classic export ‘shipment’ contracts (referred to as such because the seller fulfils delivery obligations when the goods are shipped on board a vessel in the port of departure). Today, however, documentary credits are increasingly used in conjunction with sale contracts governed by a more modern set of Incoterms® rules specifically designed for multimodal or containerized shipments: FCA, CPT and CIP.

Traders should also be aware of the growth in usage of the so called ‘D’ Incoterms® rules: DAF, DES, DEQ, DDU and DDP, which are ‘arrival’ terms (the seller’s obligations are completed upon the goods arrival in the buyer’s country).

What should a banker do when asked to issue a credit on the basis of an inappropriate Incoterms® rule? For example: the banker may be requested by the applicant to issue a documentary credit based on an FOB contract, but the banker knows that transport will be by air, and that consequently the FCA Incoterms® rule is normally indicated.

First, it is highly inadvisable, although it appears to have happened on rare occasions, for the banker simply to suggest that the credit be issued on the basis of the FCA Incoterms® rule. Such an action could even force the applicant unwittingly into a breach of the contract of sale – documentary credits often originate in explicit provisions of the sale contract, and in such cases, under some systems of law the buyer is strictly required to have the credit issued precisely according to the terms of the sale contract.

In these jurisdictions, if the credit advised to the beneficiary differs materially from the terms negotiated in the contract of sale, the beneficiary may be able to use this mistake as a pretext for terminating the contract (e.g., in a rising market). Similarly, the FOB seller who receives a credit issued under the FCA rule may be able
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to claim that the non-conforming credit constitutes a breach of contract.

Note that the UCP does not strictly require a banker faced with a credit application containing an inappropriate or questionable Incoterm to act at all. However, if the banker does decide to offer advice, he may wish simply to alert the applicant to the inappropriate use of the Incoterms® rule. Neither the applicant nor the banker should ever act unilaterally (that is, without consulting the seller-beneficiary) to ‘improve’ the contract of sale as regards the choice of Incoterms® rule.

Example: the L/C advice features the words ‘FOB Incoterms 1990’, but the commercial invoice ultimately presented under the credit by the beneficiary refers only to ‘FOB’. Could the issuing or confirming bank consider this a discrepancy when checking the documents? Most probably, yes, although there is no case law on the matter. Actually, there can be very much difference between a simple reference to ‘FOB’ (which may imply that interpretation of FOB will be that of the applicable national law) and the full and complete reference to ‘FOB Incoterms 1990’, which ensures that interpretation will be according to the standard definitions of the Incoterms® rules.

Since national law definitions of trade terms can differ markedly from the Incoterms® rules, such a discrepancy might be significant. For example, under US law, FOB has been accorded six separate possible interpretations, only one of which corresponds to the ICC definition. The ICC has suggested that the best way to avoid this problem is to either avoid mentioning the Incoterms® rules in the credit or to only refer to the Incoterms® rules in connection with a specified, particular document, such as the commercial invoice.

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‘C + I’ – Interpretation

Why is there no reference in the Incoterms® rules to the term ‘C+i (destination)’?

Although this term is used in practice, it is outside the Incoterms® rules and always has been. The reference to ‘C’ may be most unfortunate if the intention is that the buyer should pay for the main carriage. This term can be interpreted as ‘Cost and Insurance’ or even ‘Carriage and Insurance’. More details are needed on this question about what is involved in their use of ‘C+1 destination’. If, as the question letter suggests, this term is ‘effectively FCA plus transit insurance to the port of destination’, then the following Incoterm alternative may be suitable: use FCA and add ‘+ insurance’ (but specify quantity and kind of insurance coverage, i.e., Institute Cargo Clause A, SRCC, transit, etc.).

Why are some trade terms not Incoterms® rules?

This question points to the usage in practice of a wide range of variants of trade terms. The ICC position has been that many of these terms are ambiguous or are not used in standard ways worldwide, so that it is not possible to include them in a compendium of standard terms like the Incoterms® rules. However, in certain regions and in certain sectors it is not at all uncommon to find the frequent use of certain variants.

The question has been debated within the ICC for many years, and doubtless will be again during the Incoterms 2000 revision: should the ICC begin to include default definitions for some of the more common variants (e.g., Ex Works loaded, FOB stowed, etc.).

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‘C’ – family of Incoterms® rules v. ‘D’-family of Incoterms® rules

Is the CIF Incoterms® rule, included in an international contract of sale, compatible with the seller’s request to sign a disclaimer that releases him from liability as soon as the goods have been handed over to the freight forwarder at the port of departure? If this is the case, what Incoterms® rule should be used in order to render the seller liable until delivery of the goods in the country of destination?

The seller should have used the CIP Incoterms® rule. If the buyer does not want to bear the risks of transport, he should use a ‘D’ rule and, more precisely, DDU as he will pick up the delivery from the seller’s works, in the buyer’s country.

As the goods must be handed over to a freight forwarder, the contract of sale should have made reference to the CIP Incoterms® rule instead of CIF. Anyway, in both cases the seller must carry out, at his own expenses, the contract of carriage and must pay for the insurance of the goods. Under CIF, the transfer of risks takes place when the goods pass the ship’s rail and thereafter, the buyer bears the risks of the sea carriage.

The above answer by the Incoterms® Panel emphasizes that CIF should be used exclusively in a maritime context. The statement in the question to the effect that goods would be delivered to a freight forwarder indicated to the Panel that transport would be multimodal, and therefore that CIP would be the most appropriate term. Usage of CIF places a documentary obligation upon the seller to provide an ocean bill of lading to the buyer, and this obligation may be difficult or awkward to fulfil when delivery is to an inland freight forwarder.

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