The Incoterms® 2010 rules were written to provide standard solutions for the division of costs, tasks and risks between the seller and the buyer in relation to any sale of goods where the contract presupposes that the goods are to be transported from the seller to the buyer.

Whenever the seller and buyer in a transaction are located apart from each other, the contract will also involve carriage of the goods. In practice, the goods are almost always carried by an independent carrier. As a consequence, the parties need to address the relationship between the contract of carriage and the Incoterms® 2010 rules whenever these rules have been incorporated into the contract of sale.

This guide is written to help to illustrate some of the issues that arise in the interface between the Incoterms® 2010 rules and the contract of carriage. In reading this guide, some basic reservations should be kept in mind. First, this guide is not an authoritative text in any respect with regard to the parties’ obligations under any contract of carriage or contract of sale. The guide’s purpose is only to introduce certain issues that must be considered when contracting for carriage in connection with a contract of sale. Secondly, it is very important to keep in mind at all times that the contract of sale and the contract of carriage are separate contracts involving different parties as well as entirely different sets of obligations. Thirdly, the guidance provided is based on the assumption that the chosen Incoterms® 2010 rule in the contract of sale is used as set out in the Incoterms® 2010 text, without any variants.

Moreover, regardless of whether it is the seller or the buyer that contracts for carriage, it is crucial to understand the full scope of the carrier’s obligations when entering into the contract. This guide is not a comprehensive guide to procuring transportation. The inexperienced transportation buyer should always seek professional advice before concluding any such contract.

One important difference between sale of goods law and transportation law relates to the rules themselves. In sale of goods, freedom of contract largely prevails. Only the application of competition laws, trade restrictions such as sanctions, currency controls or equivalent public measures restrict this freedom. The basic principle of freedom of contract is enshrined in the Vienna Convention on the Contracts for the International Sale of Goods (the CISG), which has been ratified by states representing a volume of at least 80 per cent of world trade. The CISG gives the parties the right to modify its provisions or exclude its application completely. One way this is often done by parties to a contract of sale is by choosing one of the Incoterms® 2010 rules, whereby the apportionment of the costs, tasks and risks relating to the delivery of the goods are divided in more specific ways than stipulated by the CISG.

The situation is different for the carriage of goods. There are a large number of international conventions that regulate carrier obligations in respect of the care of the goods during carriage as well as carrier liability in the event something should happen to the goods during transport. For many of these rules, freedom of contract has been set aside, restricting the parties’ liberty to agree terms. In particular, it is very common that the carrier’s liability for damage to or loss of goods is limited to an amount lower than the actual value of the goods carried. Because of this,
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anyone procuring transportation of goods should seriously consider obtaining its own separate insurance for the goods during transportation. The reader will find a separate note concerning insurance towards the end of this guide.

This is further emphasised by the complexities involved in the actual logistics chain. The contracting carrier is very often a freight forwarder, who also takes care of other tasks related to the transactions, most notably the customs clearance. The contract of carriage may then be performed by a number of subcarriers, often using different modes of transport. This is called ‘multimodal transport’.

The following guidance covers each of the various Incoterms® rules. Overall, these can be divided into two groups: sales where the buyer contracts for carriage and those where the seller does so.

There are three Incoterms® 2010 rules that presuppose the buyer taking care of contracting for carriage:

  • Free Carrier (FCA) (named place)
  • Free Alongside Ship (FAS) (named port of shipment) and
  • Free on Board (FOB) (named port of shipment)

We can illustrate the transaction and the two contracts as follows:

The FCA, FAS and FOB rules also allow for the possibility that the seller contracts for carriage at the risk and expense of the buyer. The ’risk’ in this context is commercial rather than physical (as compared to Articles A5/B5 of each Incoterms® rule). The buyer bears the risk of the availability of transport capacity or, most often, the freight rate charged by the carrier when contracted by the seller.

Under seven Incoterms® rules, it is an obligation of the seller to contract for carriage. These are

  • Carriage Paid to (CPT) (named place of destination)
  • Carriage and Insurance Paid to (CIP) (named place of destination)
  • Cost and Freight (CFR) (named port of destination)
  • Cost, Insurance and Freight (CIF) (named port of destination)
  • Delivered at Terminal (DAT) (named terminal at port or place of destination)
  • Delivered at Place (DAP) (named place of destination)
  • Delivered Duty Paid (DDP) (named place of destination)

Again, the relevant transactions can be illustrated as follows:

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Under the Incoterms® rule Ex Works (EXW), neither seller nor buyer has an obligation to arrange for carriage.

It is hoped that this guide will help clarify for the transport industry the interaction between the contracts of sale and transport and allow for greater alignment between the two contracts.