Incoterms_® and Commercial Contracts

The word “Incoterms” is an abbreviation of International commercial terms, and the chosen Incoterms rule is a term of the contract of sale (N.B. not of the contract of carriage). Although the Incoterms rules are primarily intended for international sales they can be applied to domestic contracts by reference. Trade terms are, in fact, key elements of international contracts of sale, since they tell the parties what to do with respect to

• carriage of the goods from seller to buyer; and
• export, import and security-related clearance.

They also explain the division of costs and risks between the parties.

Merchants tend to use short abbreviations – such as FOB and CIF – to clarify the distribution of functions, costs and risks relating to the transfer of goods from seller to buyer. But misunderstandings frequently arise concerning the proper interpretation of these and similar expressions.

For this reason, it was considered important to develop rules for the interpretation of the trade terms that the parties to a contract of sale could agree to apply. The Incoterms rules, first published by the International Chamber of Commerce in 1936, constitute such rules of interpretation.

Although the Incoterms rules, in so far as they reflect generally recognized principles and practices, may become part of the contract of sale without express reference, the parties are strongly advised to

• include in their contract in conjunction with the trade term the words “the Incoterms® 2010 rules”; and
• check whether a standard contract used in their contract of sale contains such a reference, and, if not, superimpose the standardized reference “the Incoterms® 2010 rules” to avoid the application of any previous version of the Incoterms rules.

In recent years, the Incoterms rules have been revised at 10-year intervals ( Incoterms 1980, 1990, 2000 and 2010). These revisions are necessary to ensure that the Incoterms rules represent contemporary commercial practice. It is a mere coincidence that revisions have taken place at 10 year intervals and there is no reason to expect that this will be repeated in the future. Confusion may arise in the marketplace when merchants either fail to observe that there has been a change in the rules of interpretation or fail to clarify which version of the Incoterms rules should apply to their contract. In addition, fundamental changes to the rules, if not properly introduced, could endanger the status of the Incoterms rules as a generally recognized international custom of the trade. Indeed, the reason the 1980 UN

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Convention on Contracts for the International Sale of Goods (CISG) did not deal with interpretation of trade terms was a belief that this task could be more efficiently taken care of by the International Chamber of Commerce in cooperation with its national committees worldwide.

To avoid confusion and difficulties in applying the Incoterms rules, a reference to the current version should always be made in the contract of sale. When parties negotiate their contract individually, they should take care not only to refer to the Incoterms rules but also to add the year 2010. If they use a standard contract they should check whether it has been updated to include reference to “the Incoterms® 2010 rules”. If not, the previous year should be replaced by the year 2010.

The studies which were made before the revision was initiated clearly demonstrated that merchants had difficulties in choosing the correct term. The first efforts by ICC to assist merchants appear in the ICC Sale Form, where a distinction is made between "recommended terms" and "other terms". The recommended terms correpond to terms which now appear in the Incoterms® 2010 rules Group I for any mode or modes of transport, while the other terms correspond to the terms in Group II for sea and inland waterway transport.

The Incoterms rules do not deal with

• transfer of property rights in the goods;
• relief from obligations and exemptions from liability in case of unexpected or unforeseeable events; or
• consequences of various breaches of contract, except those relating to the passing of risks and costs when the buyer is in breach of his obligation to accept the goods or to nominate the carrier under an F-term.

Merchants often believe that the Incoterms rules can solve most of the problems which may arise in practice. Indeed, most of the questions put forward to the ICC Panel of Experts on the Incoterms rules concerned matters other than the interpretation of the Incoterms rules themselves. Frequently, the questions referred to contractual relations other than the contract of sale, such as the obligations of the parties under documentary credits, contracts of carriage and storage. Many questions concerned obligations of the parties other than those connected with the delivery of the goods. Therefore, it is necessary to emphasize that the Incoterms rules are only rules for the interpretation of terms of delivery and not of other terms of the contract of sale. This explains why – apart[Page18:] from the seller’s fundamental obligation to make the goods available for the buyer or to hand them over for carriage or deliver them at destination, and apart from the buyer’s obligation to take delivery – the Incoterms rules deal only with obligations in connection therewith, such as the obligations to give notice, provide documents, procure insurance, and pack the goods properly and clear them for export and import.

Transfer of property rights

In many jurisdictions, the transfer of property rights in the goods requires that the party take possession of the goods either directly or indirectly through the transfer of documents, such as the maritime bill of lading, controlling the disposition of the goods. However, in some jurisdictions, the transfer of property rights in the goods – the so-called transfer of title – may depend solely on the intention of the contracting parties.

Frequently, the contract of sale determines whether the buyer has become the owner of the goods. In some cases, the buyer may not become the owner when the seller, under a so-called retention of title clause, may have decided to retain title to them until he has been paid. The applicable law will decide the extent to which such clauses are effective in protecting the seller when he has surrendered possession of the goods to the buyer. The ICC Model International Sale Contract (hereinafter referred to as the ICC Sale Form; see ICC publication No. 556) underlines that retention of title clauses are not always effective and that the seller should carefully check the relevant law, normally the law of the country where the goods are situated, to determine if and to what extent he may rely on Article 7 of Part B of the Sale Form (see p. 9 of ICC publication No. 556).

Unforeseeable and unavoidable events

Even though, according to the Incoterms rules, the parties undertake obligations to perform various matters to the benefit of the other party – such as procuring carriage and clearing the goods for export and import – they may be relieved from such obligations, or from the consequences of non-performance, if they can benefit from exemptions under the applicable law or terms of their contract other than those concerning the Incoterms rules. Thus, according to the CISG, the parties may be relieved from their obligations if they are prevented from performing due to reasonably unforeseeable and unavoidable “impediments beyond control”. Standard contracts frequently contain explicit force majeure, relief or exemption clauses more or less corresponding to the main principle of CISG Article 79 and in the 2003 ICC Force Majeure and Hardship Clauses (ICC Publication No.650). Such a clause appears in the ICC Sale Form, Part B, Article 13.

Consequently, if a seller or a buyer is prevented from exporting or importing the goods due to an unforeseen export or import prohibition, his obligation under the contract of sale may be suspended, or, if the prohibition lasts for a long period of time, avoided altogether. In the aforementioned Article 13, a period of six months is required in these cases before a party is entitled to terminate the contract with notice. Although the Incoterms rules do not deal with the circumstances in which an obligation undertaken[Page19:]in connection with delivery of the goods may be avoided or modified, it is important to remember that any type of obligation – whether covered by the Incoterms rules or not – is subject to the applicable law or other terms of the contract.

Breaches of contract

The Incoterms rules – in the A5, B5 and A6, B6 clauses – deal with the transfer of risks and the division of costs. It follows from the A5 and B5 clauses that the risk may be transferred from the seller to the buyer before the goods have been delivered, if the buyer has failed to fulfil his obligation to take delivery as agreed or to give appropriate notice to the seller when the buyer is to nominate the carrier under the F-terms. In these cases, costs arising because of the buyer’s failure to fulfil his obligation would also fall upon him under the B6 clauses of the Incoterms rules.

However, apart from these specific cases involving the buyer’s breach, the Incoterms rules do not deal at all with consequences following from breaches of the obligations under the contract of sale. These consequences follow from the applicable law or other terms of the contract. To note a few examples: if the buyer does not pay for the goods in time, he has to pay so-called default interest (see the ICC Sale Form, Part B, Article 6). If the seller does not deliver the goods in time, he has to pay so-called liquidated damages to the buyer. These damages are calculated by charging certain percentages of the price of the goods for each period of delay (according to the ICC Sale Form, Part B, Article 10.1, this would amount to 0.5% of the price for each complete week of delay). When the maximum of liquidated damages has been reached (5% of the price of the delayed goods), the buyer may terminate the contract by notification to the seller after having given notice to the latter allowing him a further five days for the delivery.

If the goods do not conform with the requirements of the contract, the consequences are set forth in Article 11 of the ICC Sale Form. The Article says that the seller should either replace the goods with conforming goods, repair them or reimburse the price to the buyer. If the contract is terminated, the buyer may be entitled to damages not exceeding 10% of the price of the non-conforming goods. If the buyer retains the non-conforming goods, he may obtain a discount not exceeding 15% of the price.

Agreeing on modifications to the standard terms

In Part A of the ICC Sale Form, the parties are asked to consider whether the standardized terms in Part B are suitable, and, if not, to agree on modifications. In some cases, where time is of the essence, it may be appropriate to insert a fixed cancellation date, so that if goods are not delivered by that date the buyer could immediately cancel the contract by notification to the seller (Part A, clause 9 of the Sale Form). In addition, the percentages of the price payable in case of delay according to the standardized terms in Part B may be replaced by higher percentages or a fixed amount, depending on an agreement by the parties.

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Summary: limits of the Incoterms rules

In summary, as far as the seller’s obligation to deliver conforming goods is concerned, the Incoterms rules determine when the seller has fulfilled his obligation to deliver the goods on time but no more. The consequences following from the seller’s nonperformance must be found elsewhere. Ideally, the simultaneous use of the Incoterms rules and the ICC Sale Form should provide most of the answers required. (see introduction p.7)

The Incoterms rules standardize contract practice by enabling the parties to

• use generally recognized key words;
• agree on the most common understanding of such key words; and
• avoid misunderstandings in the use of them.

Problems remain because

• commercial practice is inconsistent;
• variations of the basic key word may be not appropriate or sufficiently clear;
• the Incoterms rule is not sufficiently precise; and/or
• the parties inadvertently choose the wrong term.

The need for interpretation of “key words”

Short abbreviations, such as FCA, FOB and CIF, can be regarded as “key words”, which, when used, unlock a number of rights and obligations. But these key words cannot be understood unless they are given a specific meaning through rules of interpretation. It is only through interpretation that the Incoterms rules are indispensable. In the absence of an authoritative interpretation, merchants may suffer from great confusion.

It can be debated whether the key words included in the Incoterms rules represent consistent commercial practice. Ever since the first version of the Incoterms rules in 1936, every effort has been made to ensure that this is the case. But a number of short expressions used by merchants do not correspond to the Incoterms rules. To note a few examples, the term CFR frequently appears in contracts of sale as C&F. In some cases, CFR appears as C+F. One can generally assume that the parties in these cases intended that the abbreviations mean the same as CFR, but it is far better, for the sake of clarity, to use the term as written in the official text.

In other cases, however, the parties may choose an expression which is not consistent with any of the terms represented by the Incoterms rules. One example is FOB+I. Here[Page21:] it is apparent that the parties intended to add an insurance obligation for the seller. But it is not clear whether it is of the same kind of obligation as one finds under CIF and CIP. Consequently, disputes can arise as to the extent of the seller’s insurance obligation when it appears in another term.

In the Guidance notes to the various Incoterms rules, strong warnings have been inserted to the effect that merchants should explain as precisely as possible what they mean when they use a variation or an addition to the Incoterms rule.

The most common practice

Unfortunately, commercial practice is not the same in all parts of the world. Therefore, the Incoterms rules can do no more than reflect the most common practice. In many cases, it is impossible to reflect in the Incoterms rules what actually happens in connection with the loading and unloading of the goods to and from the means of transport. Nonetheless, as noted, in the Incoterms® 2010 rules further efforts have been made to assist the users of the Incoterms rules in this regard. In particular, under the term FCA when the goods are picked up, it is clarified that the seller has to load the goods on to the buyer’s collecting vehicle, and the buyer has to unload the goods when they are delivered for on-carriage on the seller’s arriving vehicle.

However, it has not been possible to find such a consistent commercial practice with respect to the loading of ships under FOB and the unloading from ships under CFR and CIF. Here, the type of cargo and the loading and unloading facilities available in the seaports will determine the extent of the seller’s obligations under FOB and the type of contract he has to procure to the benefit of the buyer under CFR and CIF.

Before the contract of sale is concluded, therefore, the parties are advised to ascertain if there are any particular customs of the port where the goods are to be loaded under FOB, because these customs are quite different in different ports and may create surprises for the uninformed party. If, for example, the goods are to be loaded on board a ship in the seller’s home port, and under FOB the buyer has to nominate a ship, he should ascertain the extent to which costs will be included in the FOB freight and whether there will be some additionals debited to him in connection with the loading of the goods on board.

The FOB point

The traditional FOB point – meaning that risks shift from the seller to the buyer when the goods pass the ship’s rail at the named port of shipment – has been criticized for not reflecting what actually takes place in seaports. Nevertheless, ever since the 1700s many customs of the port and commercial practices have been developed around the notion of the ship’s rail. This has been changed in the Incoterms® 2010 rules in order to achieve better consistency between the division of risks and costs, with the expression "on board". As before, problems still remain with respect to the exact point for the division of the risk, which depends on the type of goods and the method used to bring the goods on board the ship.

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EXW and the seller’s assistance

Under the term EXW, it is a fairly consistent commercial practice that the seller assists the buyer in connection with the loading of the goods on to the buyer’s collecting vehicle, either by bringing the goods on to a ramp for loading or by loading the goods on to the vehicle. However, under EXW the seller has no obligation to assist; he only has to make the goods available for the buyer and no more. If the buyer wants to ensure that the seller’s obligation is extended, he has to agree with him at the time the contract is concluded. This is sometimes done by adding the word “loaded” after the term EXW ("EXW loaded"). However, such an addition does not clarify whether the seller’s risk of loss of or damage to the goods should be extended to include the loading operations. The parties should make clear whether the addition of the word “loaded” means “loaded at seller’s risk” or “loaded at buyer’s risk”.

If it is intended that the seller bear the risk during the loading operations, the parties could preferably contract using the trade term FCA, since in the Incoterms® 2010 rules it is clear that under FCA the seller has to load the goods on to the buyer’s collecting vehicle. The choice of FCA instead of adding “loaded” after EXW would bring the parties entirely within the authoritative interpretation of the trade term, whereas any self-made addition means that they contract at their own peril. However, using FCA instead of EXW also shifts the obligation to clear the goods for export from the buyer to the seller, which may or may not be what the parties intend.

Containerization

Trading patterns are usually difficult to change, even if the reasons for the choice of the trade term have changed and call for quite another choice. As an example, consider the changed routines for cargo handling. Since the late 1960s, particular difficulties have arisen in maritime trade where containerization (which occurs when the goods are prepared and stowed in containers before the arrival of the ship) has made the traditional FOB point wholly inappropriate. It bears repeating that FOB, CFR and CIF are appropriate only when there is delivery to the carrier by handing over the goods to the ship which simply does not take place when the goods are containerized.

When containerization takes place, the goods are either collected at the seller’s premises (a common practice when homogenous cargo is stowed by the seller in containers constituting a full load, i.e., so-called FCL-containers) or delivered to a cargo terminal where the goods are stowed in containers for later lifting on board the container vessel (the normal case when heterogeneous goods do not constitute a full load, i.e., so-called LCL-containers).

The parties may think the differences really do not matter and may believe that things will sort themselves out in any case. This is incorrect. The seller should take care not to remain at risk after the goods have been handed over to the carrier that the buyer nominates. This is particularly important when the seller has no possibility to give instructions with respect to the care and custody of the goods, which occurs, for example, when the carrier is obliged only to take instructions from his own contracting party, the buyer.

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Continued use of terms which do not appear in the Incoterms® 2010 rules

Although the traditional maritime terms DES and DEQ no longer appear in the Incoterms® 2010 rules, it is expected that they will continue to be used in commodity trading. If there is no reference to the Incoterms rules at all, some guidance for the interpretation of these trade terms may, as before, be found in the earlier versions of the Incoterms rules. Ideally, the parties should refer to DES and DEQ of the Incoterms 2000 rules. If by mistake they refer to these terms with the addition "the Incoterms® 2010 rules", it is reasonable to assume that they meant "the Incoterms® 2000 rules". In any event, no problem would seem to arise, as the substance of DAP and DAT corresponds to DES and DEQ respectively.

Checking how the goods are handed over for carriage

It also happens that the parties may choose a trade term intended for maritime carriage when they contemplate using other modes of transport. They believe, quite wrongly, that if a trade term has served well for maritime carriage it must also be appropriate for other modes of transport. As has been said, great efforts have been made in the Incoterms® 2010 rules to avoid an incorrect choice by presenting the terms in two groups, one for any or all or modes of transport (Group I) and one for transport by sea and inland waterways (Group II).

FCA, FOB, CPT, CFR, CIP and CIF compared

However, the parties are always strongly advised to check how the goods are, in fact, handed over for carriage, thereby avoiding the choice of a term which keeps the seller at risk after the goods have left his direct or indirect control. The choice of FOB should be restricted to cases in which the goods are actually intended to be (a) lifted across the ship’s rail, or (b) tendered to the ship in hoses for liquid cargo, or (c) filled from silos when the cargo is to be carried loose in bulk. In all other cases, FOB should not be used. Instead FCA, indicating the actual place where the goods are handed over for carriage, is the appropriate term.

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Under the C-terms, since the seller makes the contract of carriage, it may seem irrelevant whether the risk passes when the goods are placed on board or earlier when they are received by the carrier in his terminal. Nevertheless, if the seller wishes to avoid being at risk after handing over the goods for carriage until loading on board the ship, he should refrain from using CFR or CIF and instead use CPT or CIP, where the risk passes upon the handing over to the carrier. With regard to container traffic, such handing over will normally take place in the carrier’s terminal before the arrival of the ship. If loss of or damage to the goods occurs during the carrier’s period of responsibility, it may, in practice, become impossible to ascertain whether it has occurred before or after the delivery to the ship. This is another reason for choosing a trade term, such as FCA, CPT or CIP, where the risk of loss of damage to the goods passes from the seller to the buyer when the goods are handed over to the carrier.

The seller’s duty to provide substitute goods

It should also be noted that the seller’s possibility to recover from his insurer in case of loss of or damage to the goods does not relieve him from his duty to perform as he is still required to provide goods in substitution for the goods which might have been lost or damaged while he was still at risk, for example, during the period from handing over the goods for carriage until they were placed on board.

Cargo handling costs

Buyers are often concerned that their agreement to accept delivery at an inland point, rather than when the goods are placed on board, could result in an obligation for them to pay additional costs charged by cargo handling facilities, terminals or the carriers themselves (terminal handling charges, THC). However, this can easily be taken care of by an agreement between the parties either to split these costs or to place them entirely on the seller (for example, by inserting clauses to read “50% of THC to be paid by the seller” or “THC for seller’s account”).

Checking availability of documents required under the Incoterms rule

It happens that the parties fail to take into account that the maritime terms call for particular documents – namely a negotiable bill of lading or a so-called sea waybill – which are simply not available when other modes of transport are used. Negotiable bills of lading are not used for other modes of transport because sale of the goods in transit – which traditionally requires a bill of lading for title of the goods to be transferred to the next buyer – does not occur when the goods are carried by road, rail or air. This means that if a seller in London, for example, undertakes to sell goods CIF Yokohama when the goods are to be carried by air from London to Yokohama, he will find himself in the unfortunate position of not being able to fulfil his obligations under CIF to present an on board bill of lading to his buyer. Moreover, he would be the victim of his indifference or ignorance in that he has given the buyer the possibility of escaping a bad bargain by invoking the seller’s breach of contract in not presenting the correct document under CIF.

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The purpose of the Incoterms rules is to reflect contemporary commercial practice and to offer the parties the choice among

• the seller’s minimum obligation only to make the goods available for the buyer at the seller’s premises (EXW);

• the seller’s extended obligation to hand over the goods for carriage either to a carrier nominated by the buyer (FCA, FAS, FOB), or to a carrier chosen and paid for by the seller (CFR, CPT) together with insurance against risks in transit (CIF, CIP);

• the seller’s maximum obligation to deliver the goods at destination (DAT, DAP, DDP).

The Incoterms rules are sometimes criticized for offering an abundance of different terms. Would it not be possible to restrict the number of terms so that the parties would be invited either to choose delivery at the seller’s place or at the buyer’s place? The answer is that commercial practice involves different trading patterns for different types of cargo. With respect to commodities, such as oil, iron, ore and grain, the goods are frequently carried in chartered ships accepting the cargo as a full load. In this type of trade, the ultimate buyer may not be known, since the goods may be sold in transit. This, in turn, explains the need for a negotiable transport document, the bill of lading. Moreover, even if the ultimate buyer is known, he is usually not prepared to accept costs and risks which occur in the seller’s country. This explains the need for the maritime terms, which are still used for the largest volume of world trade.

With respect to manufactured cargo, however, maritime terms are inappropriate. Here, in most cases, the parties are well advised to use one of the Incoterms rules appropriate for delivery at the seller’s place (EXW or possibly FCA) or delivery at the buyer’s place, i.e., the destination terms, DAT, DAP and DDP. In many cases, carriage of manufactured goods is entrusted to logistics service providers, which should preferably be able to communicate continuously with their original contracting party. It is therefore impracticable to use terms such as CPT or CIP, where the seller makes the contract and leaves the rest to the buyer.

With respect to insurance, it is only when the goods are intended to be sold in transit that it is appropriate to let the seller undertake an insurance obligation to the buyer. In other cases, the buyer should preferably arrange his own insurance so that the insurance cover can be adapted to his particular needs. However, this is not possible when sale of goods in transit is contemplated, as the ultimate buyer is not yet known. This explains the frequent use of CIF in such cases.

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Commercial practice and the type of goods will dictate whether

• the seller should refrain from undertaking any additional obligation;
• the seller is prepared to do more than to make the goods available to the buyer at the seller’s premises;
• the buyer’s bargaining position allows him to require the seller to undertake extended obligations;
• the seller is able to undertake additional obligations and, in particular, to quote a more competitive price by extending his obligations;
• it is necessary to use the maritime terms FAS, FOB, CFR or CIF when the goods are intended to be resold by the buyer before they reach the destination.

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Terms and business strategies

Sellers and buyers seldom reflect on the choice of an Incoterms rule for every transaction. Normally, the choice is determined by their business strategy. As noted, the choice of the maritime terms in most cases depends on the type of the cargo and the buyer’s intention to sell the goods in transit. Here, the choice between any of the F-terms rather than the C-terms depends on the ability of sellers and buyers to obtain the most favourable contract of carriage.

In countries where the seller has good possibilities of procuring maritime transport, or where he is induced to use a national shipping line, he may prefer to use CFR or CIF. Where the buyer for the same reasons has good possibilities to procure the transport, he is likely to insist on the choice of FAS or FOB. In the same manner, the choice between CFR and CIF depends on the seller’s and the buyer’s insurance arrangements and their possibilities to arrange insurance at the most competitive rate.

In principle, the same considerations apply with respect to the sale of manufactured goods. In this case, however, sellers, in order to remain competitive, frequently have to sell on extended terms using either DAT, DAP or DDP. But when a small exporter sells goods to a sizeable wholesaler or department store, these buyers may find it more advantageous to arrange for transport in order to ensure just-in-time deliveries at the most competitive price. In such cases, the buyer may prefer to use EXW or FCA.

CPT or CIP may be appropriate when the buyer prefers that the seller procure carriage (CPT), or carriage as well as insurance (CIP), but nevertheless agrees to bear the risk of loss of or damage to the goods when in transit. It should be added that the term CIP, if unamended is inappropriate with respect to manufactured goods, since the insurance cover is then far too restrictive and additional insurance is required. Normally, the most extended cover available (e.g., Clause A of the Institute Cargo Clauses LMA/IUA) is appropriate.

The relation between the Incoterms rules and the contract of carriage creates particular problems, because

• some of the Incoterms rules can be used only when the goods are intended to be carried by sea (FAS, FOB, CFR, CIF);
• the same terms are often used in both contracts of sale and contracts of carriage;
• commercial practice under contracts of carriage changes from time to time and varies in different places, ports and regions;
• the contract of sale is sometimes difficult to match with the contract of carriage;
• under contracts of sale and the applicable law, such as CISG, the seller has to tender goods or documents representing them and the buyer has to pay for them;

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• unless otherwise agreed, goods should be exchanged for money simultaneously; this principle also applies when a carrier is used by the parties and acts on behalf of the seller or the buyer, depending upon the chosen Incoterms rule;
• the parties may continue to use a traditional Incoterms rule when it has become inappropriate because of changed commercial practice (for example, they may continue to use FOB instead of FCA when there is delivery not to the ship, but to a carrier’s terminal in or outside the port area);
• the seller under the C-terms enters into the contract of carriage with the buyer as beneficiary; this makes it necessary to give the buyer the possibility of claiming the goods from the carrier, even though the buyer did not make the contract with him;
• the parties do not understand the exceptions from, and limitations of, the carrier’s liability (particularly with respect to carriage of goods by sea).

Charter parties

As noted, the maritime terms FAS, FOB, CFR and CIF can be used only when the goods are intended to be carried by sea, and a wrongful use of these terms may cause serious problems. Moreover, even a correct use of the maritime terms may cause problems in practice. As one example, the terms FAS and FOB are used as terms in charter parties as well, but as such they do not necessarily correspond to their use in the Incoterms rules. Instead, the exact terms of the charter party will decide what they mean. This is particularly important with respect to the time under the charter party that is offered the charterer for bringing the goods alongside the ship (FAS) or for loading them onboard (FOB). If that time is exceeded, the charterer will have to pay compensation to the shipowner (so-called demurrage). If the charterer uses less time, thereby saving time for the shipowner, he may be paid for this in the form of so-called dispatch money. The terms of the charter party will not concern the FAS or FOB seller, since he is not a party to the contract with the shipowner. It is therefore necessary to match the conditions of the charter party with the terms of the contract of sale so that the FAS or FOB buyer, in his capacity as charterer in the charter party, does not have to pay demurrage without recourse against the seller when the latter fails to bring the goods to the ship within the time needed for avoiding payment of demurrage to the shipowner.

Under CFR and CIF, the seller will charter the ship, and it will be in his self-interest to speed up the loading operations to avoid demurrage payments to the shipowner and possibly to earn some dispatch money. However, the problem now appears at destination. Under B4 of CFR and CIF, the buyer must not only accept delivery at the point where the goods according to A4 have been loaded on board the vessel at the port of shipment, but he must also “receive them from the carrier at the named port of destination”. Here again, the terms of the charter party might not match the terms of the contract of sale.

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Therefore, even if according to the charter party the shipowner has no obligation with respect to the discharging operations (as under the charter party term “free out”), this does not necessarily mean the seller has the right under CFR and CIF to procure a contract of carriage which does not include the discharge of the goods from the ship. In order to clarify that discharging costs are included, the parties sometimes add the words “liner terms” to CFR and CIF. Although this normally means that the discharging operations are included, there is no authoritative interpretation of “liner terms”. The parties are therefore advised to clarify in the contract of sale to what extent the cost of discharging operations is included.

When the discharging operations are for the buyer’s account under the contract of sale, it is necessary to specify how much time he is allowed before he has to pay demurrage for keeping the ship in port. The buyer must be prepared to discharge the ship as soon as so-called notice of readiness has been given. If time starts to run before he is ready to undertake the discharge, he assumes the risk. In addition, he will assume the risk for various hindrances preventing the discharging operations unless the hindrances are excepted under the terms of the contract of sale. Again, it is necessary to match the terms of the contract of sale with the terms of the charter party.

Normally, the buyer does not risk having to pay the seller demurrage when the goods are carried by liner shipping companies. In this case, the goods are normally discharged by these companies and stored in cargo terminals until they are received by the buyers. This is particularly true with respect to containerized cargo. But the problem of matching the terms of the charter party with those of the contract of sale is particularly important with respect to commodities carried in bulk. Because commercial practice differs in different ports and changes from time to time, a failure to match the terms of the contract of sale with the terms of the charter party may result in unpleasant and expensive surprises for the contracting parties.

Usual, normal and suitable carriage

Under the C-terms (A3(a)), it is for the seller to procure carriage “on usual terms”. Furthermore, the contract should provide for carriage by the usual route in a seagoing vessel (or inland waterway vessel) of the type normally used for the transport of goods of the type sold. The reference to what is “usual” and “normal” does not necessarily mean that the seagoing vessel is, in fact, “suitable” or that it minimizes the risk of loss of or damage to the goods. But if the seller knowingly selects a substandard vessel, which is therefore not “normal”, the buyer may hold him responsible if there is damage to or loss of the cargo.

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Risk distribution under CIF

The maritime carrier’s responsibility is traditionally limited to the exercise of due diligence in ensuring that the vessel is seaworthy when it leaves port. He is exempt from liability for fire or for loss of or damage to the cargo resulting from errors in the navigation and management of the vessel. This limited liability explains the need for sellers and buyers to take out marine insurance to protect themselves against risks they have to bear under the contract of carriage. If the goods are sold under any of the C-terms, the buyer can obtain protection, either by the obligation of the seller to take out insurance under CIF or through his own insurance arrangements. The traditional carrier defence of nautical fault has disappeared in the 1978 Hamburg Rules and the 2009 Rotterdam Rules. But the former has only been ratified by states representing a rather limited section of the international maritime trade and the future of the Rotterdam Rules is uncertain.

The bill of lading

The fact that under the C-terms the seller procures the contract of carriage for the benefit of the buyer puts the buyer in a position where he has to exercise rights against someone with whom he has not made the contract. This, indeed, explains the development of the bill of lading used for maritime carriage. Possession of the bill of lading controls the right to claim delivery of the goods from the carrier at destination. It is a fundamental obligation of the seller under CFR and CIF A8 to provide the buyer with such a document, which enables him to claim the goods from the carrier at the port of destination and, unless otherwise agreed, to sell the goods in transit by the transfer of the document to a subsequent buyer.

Traditionally, only the negotiable bill of lading could fulfil both of these functions. But in recent years other maritime documents have also been used. Now, even without a bill of lading, the buyer is entitled to claim the goods from the carrier at destination. So-called sea waybills (liner waybills, cargo quay receipts) contain instructions from the shipper to the carrier to deliver the goods to a named person at destination. These instructions[Page31:]can also be made irrevocable, with the result that the shipper is prevented from giving further instructions to the carrier. The instructions can also be given by an electronic data interchange message, as discussed in later sections.

Sale of goods in transit

The Incoterms rules do not contain a term for sale of goods in transit. In practice, CFR or CIF are frequently used. When the seller has concluded a contract of carriage with the carrier, he will obtain a bill of lading which may be used for the first contract of sale, as foreseen in article A8 of the Incoterms rules. But the buyer may then, in a second contract, appear as seller and hand over the same bill of lading to the second buyer. Subsequent sales may be implemented to transfer the risk from the seller to the buyer at the time the contract is concluded, when the goods may be in mid-ocean and nothing can be ascertained regarding their condition. CISG, in Article 68, therefore provides that it may follow from the transport document that the parties have intended the risk to pass at the time the goods were handed over to the carrier. If so, the buyer is protected by his right of action against the issuer of the transport document. In this manner, CFR and CIF are also appropriate to use for the sale of goods in transit. The wording of CFR and CIF A3 (a) has been changed in order to clarify what happens when multiple sales down a chain ("string sales") are intended. The seller then undertakes to "procure" goods delivered for the destination agreed in the contract of sale.

In practice, the seller generally loads the goods whenever the buyer sends a vehicle to collect them, while the buyer unloads the goods from a vehicle sent by the seller to deliver the goods at a place named by the buyer. This is frequently what occurs also under the D-terms: the seller loads the goods on a collecting vehicle sent by the buyer to pick up the goods, while the buyer generally unloads the goods from the seller’s arriving vehicle. This is now explicitly stated in DAP A4 ("... placing them at the disposal of the [Page32:] buyer on the arriving means of transport ready for unloading at the agreed point"). If the parties agree that the seller should unload the goods from the arriving means of transport, DAT should be chosen. Here it is stated in A4 that the "seller must unload the goods from the arriving means of transport and must then deliver them by placing them at the disposal of the buyer at the named terminal".

The Incoterms rules are based on the main principle that the party best positioned to undertake the function to clear the goods and to pay duties and other costs in connection with export and import should do so. Thus,

• under all F-terms the seller should do what is necessary to clear the goods for export;
• under all C-terms the seller assumes the obligation with respect to export, and the buyer assumes the obligations with respect to import;
• under all D-terms, except DDP, the buyer should do what is necessary to clear the goods for import;
• under EXW the buyer has to assume the obligations with respect to export as well as import (this is an exception to the main principle that the exporter clears the goods for export, and follows from the nature of EXW to express the seller’s minimum obligation); and
• when there are no customs requirements, all of the Incoterms rules can be used without variations, since the obligations relating to export and import clearance are relevant only “where applicable”.

The obligation to clear the goods for export and import respectively is not only a matter of functions and costs. It is also essential to know whether the seller or the buyer will be at risk when difficulties arise. Normally, difficulties result in delays only as a consequence of inadequate or incorrect information provided to the customs authorities or because of inappropriate customs procedures. But in some cases, wrong information may result in customs fines, or an unforeseen export or import prohibition may prevent the goods from leaving or entering the country and thus prevent the performance of the contract of sale.

The Incoterms rules do not resolve the question whether the party obliged to perform the export or import clearance obligation is liable to the other party for breach of contract, or whether such breach would be excused at law or under the terms of the contract of sale (see Article 79 of the CISG).

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Normally, it is appropriate that the party domiciled in the country of export or import undertake to clear the goods for export or import, as the case may be. First, it is easier for him to determine any costs, difficulties or risks connected with the clearance of the goods. Second, customs and tax regulations in a country may have been made on the assumption that the exporter and the importer respectively would assume costs in connection with the clearance; this would permit a tax deduction by a party domiciled in the country without according the same benefits to foreigners. The parties are reminded in the Guidance note to DDP that it may be appropriate to exclude from the seller’s obligations some of the costs, such as VAT, payable upon import of the goods.

EXW and export formalities

Whenever the term EXW is used for an intended export sale, in order to be consistent with the policy chosen for the F-terms it might seem appropriate to place the clearance for export obligation on the seller. However, this would have meant a departure from the main principle that the term EXW should represent the seller’s minimum obligation only to make the goods available for the buyer at the seller’s premises. In cases where no immediate export is intended by the buyer, or perhaps no export at all but a resale to another party in the country is intended, a change of EXW with respect to the clearance obligation would have left the parties without the possibility of choosing an appropriate Incoterms rule. Therefore, it was decided to leave EXW unamended in this respect, but with a warning in the preamble that the buyer should ensure that he can carry out the export formalities directly or indirectly. If he cannot, he should abstain from using the term EXW unamended.

Since all C-terms, like the F-terms, represent shipment contracts, it follows that the seller must clear the goods for export while the buyer must clear them for import.

Customs-free regions

There has been some confusion with respect to the use of the Incoterms rules in intra- European Union trade. The parties often looked for an Incoterms rule which did not deal with customs clearance at all, since it was no longer required, at least not in the traditional sense. This problem arises, of course, not only in intra-European Union trade, but also in other regions where customs procedures are not required. Although it goes without saying that an Incoterms rule may be used even if some of the obligations falling upon the seller or buyer have become redundant, it is now made clear that stipulations with respect to clearing of the goods for export or import only take effect “where applicable”. Even in customs-free regions, specific requirements may well be stipulated for a certain type of goods, for example, for alcohol and tobacco (so-called bonded cargo).

Responsibility for charges

In practice, charges of different kinds may be levied in connection with the discharge of the goods. To avoid placing the liability on the seller to pay for all these charges, the word “official” was used in some places in the Incoterms 1990 rules. This word does not appear in the Incoterms® 2010 rules, but it should be observed that under clause A2 the [Page34:]seller is obliged only to “carry out all customs formalities” and that under clause A6 he is relieved from paying additional costs after he has fulfilled his delivery obligation under clause A4. Consequently, such additional costs unrelated to “customs formalities” shall not be for his account.

Security-related clearance

As a result of the terrorist attacks on 11 September 2001 in the United States (the so-called "9/11 attacks") security measures have intensified. In order to comply with such measures, exporters and importers have to give information about the goods in advance and, in some cases, accept scanning and inspection of the goods. Mutual assistance of sellers and buyers is required and this is now explicitly stated in the A10/B10 clauses of the Incoterms rules (see further on this p.68 ).

The Incoterms rules deal only with the seller’s obligation to take out insurance to the benefit of the buyer under CIF and CIP. Under all other terms, it is for the parties themselves to arrange insurance as they see fit.

The seller’s insurance obligation to the benefit of the buyer

• stems from the nature of the C-term, which requires the seller to contract for carriage – without assuming the risk of loss of or damage to the goods in transit;
• requires the seller only to take out insurance on minimum terms (the C clause of the Institute Cargo Clauses (LMA/IUA) or any similar set of clauses); and
• invites the buyer to agree with the seller to arrange additional insurance or to arrange it himself.

Whenever the goods are not intended to be sold in transit, it is natural for the contracting parties to arrange their own insurance in order that the seller can protect himself against risks of loss of or damage to the goods up to the point he is at risk. For the seller, this will require transport insurance up to the point of delivery according to the F-, C- and D terms, and, conversely, there is no need for him to procure transport insurance when the goods are sold EXW.

Insurance when the parties use FOB instead of FCA

Problems arise when the transportation risk is split between the seller and the buyer at some intermediate point. In this case, the seller has no insurable interest after he has reached the point noted in the A4 clauses of the Incoterms rules, while the buyer has no insurable interest before that point. This means that an FOB-buyer has no insurable interest before the goods have been placed on board and that, accordingly, the FOB seller remains at risk until that point has been reached.

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If the parties use FOB when FCA should have been used instead, the seller remains at risk even after the goods have been handed over to the carrier nominated by the buyer at the carrier’s terminal or at a place other than the ship itself. Normally, sellers have general insurance arrangements (so-called open cover) which protect them in such cases. However, a seller who fails to cover himself adequately in these situations will not normally benefit from the buyer’s insurance, even if that insurance contains a so-called transit clause to the effect that the insurance protection lasts from warehouse to warehouse, thereby covering the period before loading the goods on board. There are two reasons for this: first, the FOB-seller is not a contracting party to the FOB-buyer’s insurance contract; and second, the FOB-buyer has no insurable interest before the goods have been placed on board.

Insurance under CIF and CIP

CIF and CIP are the only two Incoterms rules dealing with insurance. The former is an addition to the maritime term CFR and the latter to CPT, which relates to all modes of transport. Since goods are normally not resold in transit except when they are carried by sea, CIF is the most common Incoterms rule containing an insurance obligation for the seller to the benefit of the buyer. This explains why the seller’s obligation is limited to take out only minimum insurance, because if the goods are intended to be resold in transit, one does not know beforehand the insurance arrangements of the subsequent buyers.

Nevertheless, minimum cover is often inappropriate even with respect to goods intended for sale in transit. The goods may become damaged because of contamination, breakage or penetration of seawater into the vessel. Such risks are not included in the minimum cover under clauses C of the Cargo Clauses (LMA/IUA).

When insurance is excluded

Note, however, that there is no insurance protection under any customary insurance clauses for loss, damage or expense caused by the nature of the goods, inadequate packing of the goods or such loss or damage or expense which is proximately caused by delay. There is also a general exclusion of coverage for loss, damage or expense arising from insolvency or financial default of the owners, managers, charterers or operators of the vessel. This may expose the buyer to uninsured risks, since the seller under CFR and CIF may escape liability, provided he can prove he has fulfilled his obligation under A3(a) to “contract ...on usual terms … for carriage by the usual route in a seagoing vessel … of the type normally used …”. If loss or damage occurs because of inadequate packing, the seller may be liable under the A9 clauses of the Incoterms rules, but neither of the parties can obtain protection from insurers.

Risks of war and labour disturbances

The standard insurance cover excludes war risks as well as loss, damage or expense caused by strikes, other labour disturbances, riots and other civil commotion. If insurance against such risks is requested, the A3(b) clauses of CIF and CIP require the seller to arrange coverage against them, but only if the coverage is procurable.

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The relationship between the Incoterms rules and documentary credits concerns the seller’s obligation to deliver documents to the buyer in order to prove that the seller has fulfilled his obligations under the Incoterms rule and the contract of sale and that, consequently, the buyer is obliged to pay him. In this context the parties should ensure that

• the instructions given by the buyer to the bank undertaking the documentary credit (the issuing or opening bank) are fully compatible with the requirements under the contract of sale;
• the seller is offered the opportunity in advance, and well before the handing over of the goods for carriage, to check the terms of the documentary credit;
• inconsistency between the requirements under the documentary credit and the requirements under the contract of sale is avoided, since the buyer may be in breach of his payment obligation if the seller cannot get paid under the documentary credit when his documents conform with the contract of sale; and
• the buyer does not instruct the bank to pay against a transport document which does not control the disposition of the goods and which would therefore not prevent the seller from sending the goods to someone else after he has been paid.

In practice, problems frequently arise because sellers and buyers fail to ensure that the instructions given to the issuing or opening bank conform with the terms of the contract of sale. To assist sellers and buyers in understanding the documents required in different situations under the contract of sale – and to enable the seller to check that the docu ments required under the contract conform to the documents he has to present under the documentary credit – the ICC Model Contract in the Introduction, Article 8, lists the most common documents as follows:

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In Article 7 of Section A: Specific Conditions of the ICC Model Contract, the parties are invited to insert a date on which the documentary credit must be notified to the seller a certain number of days before the date of delivery. The parties should ensure that the time period is sufficient for the seller to check that the documents mentioned in the instructions to the bank conform with the documents required under the contract of sale.

Note that only the bill of lading is a transferable document of title that can be used when the buyer intends to sell or pledge the goods while they are in transit. This sale or pledge is completed by the transfer of the paper document or its electronic equivalent. Note further that the “sea waybill” is not transferable and that the seller can alter the delivery directions unless the document contains a clause preventing this (irrevocable instructions to the carrier to deliver the goods to a named person, or a so-called NO DISP-clause).

In the Incoterms® 2010 rules, the replacement of paper communication by EDI applies generally and not only to transport documents. Furthermore, an express agreement to accept EDI is no longer necessary if it is customary to use it. If so, an agreement between the parties is implied. As a consequence, the text referring to EDI in Incoterms 2000 rules clauses A8 has now been moved to clause A1/B1.

• The buyer may still insist on paper documentation unless there is an express or implied agreement to communicate electronically (an EDI agreement);
• any EDI system replacing paper documentation should provide for electronic equivalents to paper documents and must for such purpose be sufficiently secure and well developed.

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Early attempts to take account of electronic commerce

In the late 1980s, it was already anticipated that electronic commerce would grow to such an extent that traditional requirements with respect to paper documentation under the Incoterms rules would have to be supplemented with options for the parties to provide electronic equivalents to paper documents. Thus, at the end of every A8 clause (except in EXW, where there are no documentary requirements), both the Incoterms 1990 rules and the Incoterms 2000 rules referred to situations where seller and buyer had agreed to communicate electronically.

At the same time that the Incoterms 1990 rules were developed, the Comité Maritime International (CMI) presented its Rules for Electronic Bills of Lading. Under these Rules, the right to control the goods and to transfer that right to someone else required possession of a “Private Key”, which was to be made available to the shipper by the carrier upon his receipt of the goods. The Private Key could be construed in any technically appropriate form the parties could agree upon for securing the authenticity and integrity of an electronic transmission. The transfer of the Private Key to a subsequent party was to be effected by a notification to the carrier that the current Holder intended to transfer its right of control and transfer to a proposed new Holder. If the latter accepted to become a new Holder, the carrier was to cancel the current Private Key and issue a new one to him.

The system was based on the principle that the Private Key was at all times unique to the Holder and could not be transferred to a new Holder. The Private Key was separate and distinct from any means used to identify the contract of carriage and from any security password or identification used to access the computer network. If a proposed new Holder did not wish to participate in the electronic system, the rules gave the current Holder the option to demand a paper bill of lading from the carrier, which could then be transferred to the new Holder. Such a paper bill of lading would then have to contain a statement to the effect that the paper bill of lading was issued upon the termination of the EDI procedures. Upon issuance of the paper bill of lading, the Private Key would be cancelled and the EDI procedures terminated.

Under the CMI Rules, there were, in effect, three players – the carrier, the shipper (acting as the first Holder) and the consignee (acting as the second or subsequent Holder). Provided they all wanted to participate in the EDI procedures according to the Rules, no major problems were expected. However, the market was not prepared to accept the system. Instead, the CMI Rules inspired further moves by international bodies. UNCITRAL developed the 1996 Model Law for Electronic Commerce, containing two important Articles on transport documents (Articles 16-17). The Model Law was based mainly on the system under the CMI Rules for Electronic Bills of Lading. Generally, the Model Law recognizes that a paper document is no more than a medium representing certain functions, the first to evidence an agreement, and the second to give a party the legal right to claim the goods from the carrier at destination and to transfer rights to the goods [Page40:] in transit. If these functions of a paper document can be obtained by another medium, such as the electronic exchange of messages, this should, according to the Model Law, be recognized worldwide. Electronic communication is further enhanced by the 2007 UN Convention on the use of electronic communication in international contracts, as well as by the provisions on the electronic record of the Rotterdam Rules (see http://www.uncitral.org).

Reliability of electronic v. paper systems: BOLERO and others

Rightly or wrongly, the market considers that a paper document still represents the most reliable method of providing evidence and securing the authenticity of the document’s contents. To be generally accepted, an electronic system must be equally reliable as paper documentation. Presumably, the slow development of electronic systems for transport results from the erroneous assumption that they are not sufficiently reliable.

A system called BOLERO, sponsored by the Society for Worldwide Interbank Financial Telecommunication (SWIFT) and the Through Transport Club (TTC), has been developed. BOLERO differs from the system under the CMI Rules in that the electronic messages are received and sent through a Trusted Third Party (TTP). The authenticity and integrity of the electronic message is secured by digital signatures which identify the senders and receivers and exclude the possibility that the parties will change the contents of the message once it has been sent. Consequently, the party managing the system can, as BOLERO does, guarantee the correct delivery of the EDI message.

The BOLERO system offers an added value to all those participating by requiring them to subscribe to a Rule Book that provides an “electronic agreement”. The system is not limited to participation by carriers, shippers and consignees, but is also open to other parties, such as freight forwarders, insurers, customs authorities, banks and governmental bodies issuing licenses or certificates of origin.

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Since the Incoterms rules reflect only the commercial practice most commonly used, the parties may wish to either depart from the Incoterms rules or add provisions in order to obtain further precision. It must then be observed that

• the parties operate outside the scope of the Incoterms rules and contract at their own peril;
• they should therefore carefully consider whether a departure from the Incoterms rules is appropriate;
• an amended or added term should be carefully worded to avoid unintended con - sequences; and
• an added obligation does not necessarily change the risk distribution under the Incoterms rules; risks do not necessarily follow from functions and costs, as evidenced by the C-terms under which the seller has to pay for the freight up to the indicated destination but does not have to assume the risks of loss of or damage to the goods after dispatch from the country of export.

In the Guidance note to several terms, the need to adapt an Incoterms rule has been recognized. In some cases, such as under EXW, commercial practice frequently differs from the rules of interpretation under the rules. As noted, EXW has nevertheless been retained in its traditional wording because of the need to include a term available to the parties when they do not wish to place any obligation on the seller in addition to his simply placing the goods at the buyer’s disposal at his premises.

Normally, it is not necessary to transform what the seller does into a legal obligation. Consequently, when an EXW-seller, for example, assists the buyer in moving the goods on to a ramp for subsequent loading on the buyer’s collecting vehicle – or even assists the buyer in loading the goods on to that vehicle – it is rare that the parties see a need to use a contract term to ensure that the seller, if he does not assist the buyer, is held liable for non-performance.

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Additions to EXW

If the parties wish to put additional obligations on the seller, they should make clear exactly what these imply. If, for instance, the parties merely add the word “loaded” after EXW, it is reasonable to assume that the seller is obliged to load the goods on the buyer’s collecting vehicle. But it is not clear whether they also wish the seller to be at risk until the goods have been so loaded. It is also unclear what would happen to the risk of loss of or damage to the goods if the buyer’s collecting vehicle did not arrive in time. Should the seller nevertheless remain at risk?

If the parties do not want any change in the risk allocation under EXW, but only want to add an obligation for the seller to load the goods on the buyer’s collecting vehicle, they may add after the word “loaded” the words “at buyer’s risk”, or, even more precisely, “at buyer’s risk subsequent to the seller’s notice that the goods have been placed at the disposal of the buyer”.

Additions to FOB

In some cases, the trade term will not assist the parties in determining exactly how the costs of loading or discharge should be distributed between them. This is the case with the maritime terms FOB, CFR and CIF. Therefore, the parties frequently seek further precision by adding after FOB words such as “stowed” or “stowed and trimmed”. Here again, it is not clear whether they refer not only to functions and costs, but also to risks, and intend that the latter go along with the former. Clarifications similar to those suggested for EXW would then be appropriate: for example, “stowed and trimmed but at buyer’s risk after the goods have been placed on board”.

The danger of unspecified variants of the Incoterms rules

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Additions to FCA

When the parties use FCA instead of FOB, the point of delivery is shifted from the ship to an inland point in or outside the port area in the country of shipment. Consequently, a number of costs may arise from the FCA point until the goods have been placed on board the ship. In particular, difficulties arise with respect to various costs debited in connection with the handling and storage of the goods in cargo terminals, so-called Terminal Handling Charges (THC). The buyers’ reluctance to accept payment of THC may explain why the parties continue to use FOB, even though FOB reflects an incorrect reception point. However, if the parties wish the seller to pay the THC, it would be better to say this explicitly: “FCA Bremen Incoterms® 2010, THC for seller’s account”. Alternatively, the parties can divide the THC into percentages: “50% of THC for seller’s account”.

Additions to the C-terms

Additions to the C-terms are particularly cumbersome, since these terms represent so-called shipment contracts, under which the seller fulfils his obligations by procuring a contract of carriage and handing over the goods to the carrier. If obligations referring to the destination are added, this may be interpreted to change the basic nature of the term – from a shipment term to an arrival term – with the result that the seller would be at risk until the goods have actually arrived at the destination.

However, when expressions such as “CIF landed” or “CIF outturn weights” are used, these are normally not intended to change the basic nature of the term. The word “landed” is usually understood as referring only to the costs of discharge, and the term “outturn weights” merely signifies that the buyer should pay according to the weight ascertained after discharge, so that, for instance, condensation of the goods during the transport should be disregarded when fixing the price. However, this does not mean that the seller would bear the risk of fortuitous loss of or damage to the goods during the carriage. Nevertheless, if the parties merely intend to clarify the extent to which the seller should pay for the discharge of the goods at the port of destination, it would be preferable to say this explicitly (for example: “discharging costs until placing the goods on the quay for seller’s account”).

Since it is obviously related to the price, the reference to the Incoterms rules is usually made in the seller’s offer: the more obligations for the seller, the more expensive his offer becomes. If there is a contract in writing, or a standard contract such as the ICC Sale Form, the reference to the chosen the Incoterms rule is in the part of the contract dealing with delivery. It should be noted, in particular, that

• even in the absence of specific relief clauses, exemptions at law are available to the benefit of both parties (for example under the CISG Article 79);
• the Incoterms rules do not deal with property rights in the goods; and
• the Incoterms rules require the seller to deliver goods conforming with the contract of sale but do not deal with the consequences if they are non-conforming.

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A quick glance at the ICC Sale Form, Part B General Conditions shows the relative importance of an Incoterms rule compared with other terms of the contract. Reference is made to EXW in Article 7, but there is a reminder that another term might also be appropriate, signalled by the introductory words “Unless otherwise agreed”. No reference is made to the Incoterms rules version current at the time when the ICC Sale Form was published (1998), since it was already known at that time that a new version, the Incoterms 2000 rules, was forthcoming. Instead, Article 1.4 states that any reference made to a publication of the ICC is deemed to be made to the version current at the date the contract is concluded.

Delivery terms are indispensable for the implementation of the contract of sale. In the absence of a delivery term, the parties would simply not know what to do. Most of the other terms concern problems arising when the contract is not performed as contemplated (various breaches of contract, such as delayed or non-conforming good. In other words: the Incoterms rules tell you what to do and other contract terms, as supplied by the applicable law, tell you what happens if you do not do it.

Increase of costs after the contract is concluded

As noted, the Incoterms rules contain specific provisions for the transfer of costs and risks from seller to buyer, but the risks referred to are limited to the risk of loss of or damage to the goods. Thus, the Incoterms rules do not deal with the problems caused by an increase of costs between the time of the conclusion of the contract and the performance. For example, consider the case in which a seller in Sudan quoted a CIF price for delivery of the goods in Hamburg, but because of the war between Egypt and Israel, the Suez Canal was closed. The seller, at the time, had not yet arranged contracts of carriage and insurance. He had to make a contract for the carriage of the goods around the Cape of Good Hope, and, apart from the cost increase resulting from the considerably longer distance, the freight rates rose sharply as a result of the war. The seller sought unsuccessfully to avoid the contract because of the considerable cost increase, but the UK House of Lords, in an oft-quoted decision, ruled against him. If the seller had quoted an FOB price, the risk of the cost increase would have been borne by the buyer instead.

Risk of performance if goods are lost or damaged

Another important question concerns the risk of performance in case the goods become lost or damaged. The Incoterms rules can resolve who has to bear the risk of the loss of or damage to the goods, but they do not determine whether the affected party is relieved from his obligation to perform. Consequently, if the seller has undertaken to deliver the goods under any of the D-terms and the goods are lost in transit, he is still obliged to perform by finding substitute goods as quickly as possible. If unforeseen and fortuitous events have caused the loss or damage, he may avoid having to pay damages caused to his buyer by the delay. But he cannot avoid the duty to perform the contract, unless he can be relieved under a term of the contract or, exceptionally, under the applicable law.

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Non-conforming goods

When non-conforming goods are delivered to the buyer, the non-conformity may or may not be cured by the seller. If the seller fails to cure the non-conformity or to provide substitute goods in time, the buyer may be entitled to avoid the contract. Here again, the conclusions which may be drawn from the Incoterms rules are limited to the question of whether or not the goods have been delivered and whether any non-conformity has resulted after the time the risk of loss of or damage to the goods has been transferred from the seller to the buyer.

Transfer of risk v. transfer of property rights

In practice, merchants often confuse the transfer of the risk with the transfer of property rights in the goods. This is understandable, since a change of possession of the goods often also implies a change of ownership. However, a transfer of the risk may well occur before the change of possession or ownership – namely, if the buyer fails to take delivery as agreed or if the seller has agreed with the buyer that the former will remain the owner until he has been paid (“retention of title”).

Unfortunately, the method of determining whether title to the goods has passed differs among jurisdictions, and the matter is outside the scope of the CISG. Whether some international unification of the law will be reached in the future remains to be seen. In the meantime, the parties are advised to take appropriate measures to protect themselves whenever there is a risk the other party may become insolvent or incapable of fulfilling his obligations. The ICC publication Transfer of Ownership in International Trade (N°546) is indispensable in providing first-hand information. In practice, parties often protect themselves by contractual guarantees, for example, in the form of demand guarantees, or by documentary credits, whereby the seller may be paid in connection with the shipment of the goods provided he is able to present the proper documents to the bank.

International contracts of sale usually contain terms dealing with resolution of disputes which determine

• where disputes, in the absence of amicable settlement, should be litigated;
• how disputes should be resolved (by courts of law or by arbitration); and
• which law or rules of law should be applied.

The choice of arbitration

Contracting parties seldom reckon with the risk that conflicts between them will arise and that they will fail to settle their differences amicably in case something unexpected occurs. However, when they contract by incorporating standardized terms, these terms frequently contain clauses dealing with the resolution of disputes. In some cases, the clauses stipulate that the parties should first try to settle their disputes amicably. This, of course, goes [Page46:]without saying. Fortunately, the parties can usually settle either between themselves or with the assistance of lawyers. But there may be situations where, for one reason or another, they will require the assistance of a neutral, third person in their settlement negotiations (so-called conciliation). If this does not result in a settlement, the parties may have no other alternative than to have their dispute resolved by arbitration or by litigation before courts of law. The 1998 ICC Rules of Arbitration offer well-designed rules, and, in case of arbitration, the procedure is supervised by the ICC International Court of Arbitration, ensuring equality and fairness and resulting in an enforceable arbitration award (see ICC publication N° 581).

Jurisdiction of the arbitral tribunal

When negotiating a contract, parties with equal bargaining positions normally prefer not to give the other party any advantage by agreeing to a dispute resolution in the latter’s country, or to the choice of the law of that country. When the parties choose arbitration they can avoid such choices simply by allowing disputes to be resolved under rules of various arbitration institutions, such as the ICC Court of Arbitration. If the parties have not stipulated the place of arbitration, it will be fixed by the ICC Court (Article 14 of the ICC Rules), and if the parties have not chosen the applicable law, the arbitral tribunal will apply the rules of law which it determines to be appropriate (Article 17.1). Although Part B Article 14 of the General Conditions in the ICC Sale Form refers to ICC Arbitration, Part A of the Specific Conditions Article 15 also offers the parties the opportunity to specify another kind of arbitration, or, alternatively, litigation before a named court of law.

Alternatives to arbitration and litigation

Arbitration and litigation before courts of law should be regarded as methods to resolve disputes when all other efforts have failed. Even though arbitration provides a smoother system by offering secrecy during the proceedings and a quicker, and sometimes more reliable, way to obtain an award than litigation – where a decision by a lower court may be appealed to higher courts – arbitration can be a costly and cumbersome exercise. In recent years, alternative methods for dispute resolution have expanded (so-called ADR procedures), enabling the parties to obtain an award in a simpler way at a reduced cost.

It is true that any simplification of the dispute resolution process which limits a party’s opportunity to present his case in full, using all appropriate evidence, may create uncertainty regarding the correctness of the award. But in practice a losing party seldom understands why he lost in any event, so the choice between maximum certainty and optimal simplification frequently results in opting for the latter.

Need for specificity in referencing arbitration

An arbitration agreement should be in writing and a reference to arbitration rules must be clear and specific. The following arbitration clause is recommended by ICC: “All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.”

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