What are Incoterms and Common Definitions of Incoterms
At Flash Global, our number one goal is to mitigate risk for our global supply chain customers through our Trade Compliance program. Our Trade Compliance program, within our broader holistic service supply chain solutions, are in place so that our client's supply chains are continuously running without disruption in order to maintain specific KPIs set for in various service level agreements. With clients who have global operations, 24/7, it is vital that nothing such as incorrect trade compliance stops a part from being replaced. For many of our clients, a delay could very well cost thousands, hundreds of thousands, or even millions in lost revenue. Even more so, it could cost thousands in unnecessary fines due to incorrectly classifying product or using the wrong incoterms. This post begins a two part series on Incoterms. Today we will cover what are Incoterms and some common definitions. In the second part we will go a bit further and talk about why incoterms are important and who needs to be aware of Incoterms.
Fifty nine countries worldwide, including France, China and the United States, are signatories to the U.N. Convention on Contract for the International Sale of Goods (“CISG”). The purpose of the CISG is to bring uniformity to international business transactions principally with respect to commonly used trade terms. If you live and work in a member country then it is important to note that the CISG may control in matters of international trade, absent an express contractual opt-out clause. Unless a contracting party chooses by express provision to opt-out of the application of the CISG, then the CISG will likely govern. See CISG Article § 1(1)(a), reprinted in 15 U.S.C.A. The CISG had been held to incorporate implicitly common international business terms, such as the Incoterms.
What Are Incoterms?
Since 1939, Incoterms, developed by the International Chamber of Commerce (“ICC”), have been accepted by traders and governments worldwide to explain important terms such as insurance, carriage or risk of loss. The CISG has been interpreted to incorporate the International Chamber of Commerce’s Incoterms provisions. Hence, in a case in which an EU business sold to an American buyer medical equipment that became damaged during transport, an American Court found that the seller was responsible under the Incoterms for paying the cost of freight and insurance coverage necessary to bring the goods to the port designated. However, the court also found that the risk of loss (or damage) passed to the American buyer, even if the title to the equipment did not change until full payment by the buyer. Thus, the buyer was obligated to pay both the full agreed upon sale price and to pursue restitution from the buyer’s insurance company for the damaged equipment.\
Practice Tip: Specify who is responsible for 1) Transportation to the port; 2) Who has the risk of loss between the port and final destination; and 3) Indicate specifically who is responsible for clearing a medical device through customs, as the obligation under Incoterms is usually that the party domiciled in the country where such clearance is to take place has the responsibility.
Why Not Simply Specify By Clear Language Trade Terms And Not Use Incoterms?
The same “clear” contractual terms in different countries may mean different things. There may be “implied” contractual terms of which you are not aware. In the United States most of the fifty States and recognized Territories have adopted the Uniform Commercial Code (“UCC”) with respect to the sale of goods (which includes medical equipment). Under the UCC, implied warranties of merchantability and fitness of purpose are constructed with respect to every sale, absent clear and conspicuous language disclaiming the same. Implied covenants of good faith and fair dealing are likewise often incorporated into most every contract. In international transactions, the UCC may not apply. By the use of a set of international rules for the interpretation of the most commonly used terms, “The uncertainties of different interpretations of such terms, in different countries, can be avoided or at least reduced to a considerable degree.”
It is important to note that Incoterms pertain largely to the “delivery” terms of a contract and should not be presumed to cover all the terms of a contract for sale. By way of example, Incoterms will not apply to the terms of the insurance contract. They will not apply to the terms of financing or to the terms negotiated for carriage or transportation of the equipment. Incoterms are primarily used for equipment sold for delivery across international boundaries. They will not address the consequences of a breach of contract or exemptions of liability. Incoterms relate to the terms between the exporter and importer.
Key Concepts – Incoterms Terminology
When the parties intend to incorporate Incoterms into a contract for sale, it is important to make an express reference and, if possible, to the specific version of the Incoterms to be incorporated (i.e., Incoterms 2010).
Practice Tip: Until you become comfortable with the new version and its implications are digested, it may be best to reference Incoterms 2000.
The eleven Incoterms have been grouped in two categories for Incoterms 2010:
Rules For Any Mode Or Modes Of Transport
EXW EX WORKS
FCA FREE CARRIER
CPT CARRIAGE PAID TO
CIP CARRIAGE AND INSURANCE PAID TO
DAT DELIVERED AT TERMINAL
DAP DELIVERED AT PLACE
DDP DELIVERED DUTY PAID
Rules For Sea And Inland Waterway Transport
FAS FREE ALONGSIDE SHIP
FOB FREE ON BOARD
CFR COST AND FREIGHT
CIF COST INSURANCE AND FREIGHT
The terms which fall within the class entitled ‘rules for any mode or modes of transport’ may be used without regard to the mode of transportation. The second class has been updated to address the point of delivery and the place to which the equipment is carried are both ports. Under the last three terms of this class, the point equipment is being delivered when it is “on board” the vessel.
 Great Britain is not presently a signatory.
 The ICC has revised the Incoterms six times to reflect international commerce. The seventh revision was made effective on January 1, 2011.