Incoterms and its Application in Contract

Introduction                                                          Shuvan Raj Acharya[1]     

International Commercial Terms (Incoterms) provides a set of rules for the interpretation of the most commonly used trade terms in international business transaction.  It is also the subject of international business law. Incoterms defines the responsibilities of both the seller and buyer in regards to the international trading. Incoterms are so widely used trade usages or international custom that applicable in case of contract of sale of goods. The international business community developed and recognized the various commercial terms to make business environment easier. The main aim of the Incoterms is to minimize the risks, i.e. delivery risk and payment risk in international commercial transaction.

Therefore, the importance of incoterms is increasing day by day international commercial transaction. It’s very important that helps not only traders but lawyers, transporters and insurer. It helps to the contracting parties to resolve their disagreement in good faith and amicable consultation with each other. Specially, Incoterms specifies the important obligations of both the seller and buyer relating to the delivery of goods or products from one place to another place.

In this relation, International chamber of Commerce (ICC) published Incoterms, 2010 and which enforced from January 1st 2011. Historically, it is important to mention here about the development of Incoterms. Firstly, it was published in 1936 and revised in 2000 defining the 13 terms. After that the incoterms, 2010 replaced the 4 terms from incoterms, 2000 and introduced the Incoterms, 2010 with 11 important terms. The terms are as follows:

  • EXW – Ex Works (named place of delivery)
  • FCA – Free Carrier (named place of delivery)
  • CPT –  Carriage paid To (named place of destination)
  • CIP –  carriage and Insurance paid To (named place of destination)
  • DAT – Delivered at Terminal (named terminal at port or place of destination)
  • DAP – Delivered at place (named place of destination)
  • DDP – Delivered Duty Paid (named place of destination)
  • FAS – Free Alongside Ship (named port of shipment)
  • FOB – Free on Board (named port of shipment)
  • CFR – Cost and Freight (named port of destination)
  • CIF – Cost, Insurance & Freight (named port of destination)

Incoterms are arranged in order ranking the responsibility of both the seller and the buyer. The E term EXW, or Ex Works, defines the more responsibilities of the buyer and less responsibilities of the seller. The D term DDP- Delivery Duty paid, defines the more responsibilities of the seller and less responsibilities of the buyer. The C terms are shipment contracts. The D terms are destination contracts. The main objective of stating the trade term in contract is to minimize the risk relating to business transaction. Two of the most obvious forms of transaction risk are delivery risk and payment risk. Delivery risk is the risk to the buyer that the seller will fail to ship the goods as called for in the contract. Similarly, payment risk is the risk to the seller that the buyer will fail to pay as promised.  The most commonly used definitions for trade terms are Incoterms as above mentioned, published by ICC, a private forum. If used in a contract, they will be recognized and enforced by courts.

 The main Features of Incoterms, 2010

  1. Classification of Incoterms on the basis of modes of transportation

Incoterms, 2010 are classified into two groups based on the modes of delivery of the goods. The rules EXW, FCA, CPT, CIP, DAT, DAP and DDP are falls under any modes of transportation but FAS, FOB, CFR and CIF are falls under transportation of goods only by waterway.

  • Revision in terms

The newest revision was released in 2010. The new terms DAT and DAP replaced the terms DAF – Delivered at Frontier, DES – delivered Ex Ship, DEQ – Delivered Ex Quay and DDU – Delivered Duty Unpaid from Incoterms, 2000.

  • Applies  in case of contract of sale of goods

Incoterms, 2010 are applies in case of making the contract of sale of goods because it provides the important obligations of contracting parties both the seller and buyer by using the shorthand methods, i.e., CIF.

  • Allocating the risks

As according to the Incoterms, 2010, the parties are responsible for bearing the risks. The seller is responsible if the damage or loss before deliver the goods and the buyer are responsible if the goods are destroyed after the goods moved into the buyer’s warehouse.

  • Used in domestic as well as in international business

Incoterms are widely used in both domestic and international commercial transactions. The subtitle of the Incoterms, 2010 rules formally recognizes that they are available for application to both international and domestic sale contracts.

  • Maintain uniformity in international transaction

ICC provides internationally accepted terms regarding the responsibilities of both the buyer and seller. Incoterms clearly defines the delivery risks and credit risks. The terms are periodically revised and updated in line with trade practices and translated into different languages. The terms are cited and used by courts and legal scholars in many countries as having the effect of customary law.

  •  Electronic data interchange (EDI)

Traditionally, the buyer has had to present an original signed bill of lading to receive the goods. The written signature requirement is replaced by a digital signature and EDI messages. Incoterms, 2010 recognizes the electronic means of communication. EDI eliminates the need to prepare multiple copies of documents manually, which reduces redundant paperwork and improves efficiency and accuracy in business transaction.

  •  Insurance coverage

Under the CIF term the seller must procure and forward to the buyer a policy of marine insurance to cover the risk of loss once it passes to the buyer. The buyer may request additional insurance be purchased for its own protection. By providing both carriage and insurance coverage, the seller is able to earn additional profit yet retain its rights in the goods until payment is made against documents.

  • Security related clearance

The Incoterms, 2010 specifies the responsibilities to both the buyer and seller to receive or provide support in obtaining security related clearances, such as fittings and other chain-of-custody information.

  1. Terminal handling charge

Under the revised incoterms, 2010, seller and buyer are being urged to contract precisely where delivery is made and what charges are covered. This should avoid double-billing of terminal charges at the port of discharge. The seller must responsible for the carriage of goods to destination and bears cost, risk and responsibility until goods are delivered at named terminal.

Conclusion

Actually, choosing a term for the purpose of incorporation in a contract of sale of goods is a difficult task. The parties of contract are more than just bargaining over who will pay freight cost or bear the risk of loss. Certain terms may fit better with the needs of the parties. Recently, one of the manufacturing company, registered in South Africa willing to supply Wind turbine in Nepal. After that, the company has sent the draft of an Agreement to the company registered in Nepal for the purpose of distributing the products of that manufacturing company. The company has mentioned the various terms relating to responsibilities of both seller and buyer in sending draft Agreement including the Incoterms, 2000. But, The Legal Advisor of Nepalese party has changed the many clauses including the Incoterms, 2010. Because of, there was an only one reason to protect the Nepalese party in case of violation of laws and Agreement in future one hand. Other hand, it was necessary to incorporate the strong terms and conditions in that draft Agreement as sent by foreign company.

Always, we have been facing the problem of contract interpretation due to the differences or distances involved in international transactions. The negotiations may be influenced by language barriers and cultural differences.  Nepal, being  a developing country day by day facing these kind of problems in case of making or enter in to a contract in the field international business. Specially, both the buyer and seller conducted negotiations through series of conversations, meetings, communications by mail, telephone, fax, e-mail etc. Trade terms are usually expressed in the form of abbreviated symbols, i.e. CIP, DAT, FAS, CFR and CIF etc. They are a shorthand method that permits the parties to express their contractual term quickly, with little confusion, and with few language problems. If the parties use a trade terms in their contract, they must define it. If it is not defined in the contract, a court would have to look to the applicable law for its interpretation.

There is also a problem to select the applicable laws in case of drafting the contract relating to international trade. Lawyer that their clients advise   a choice of laws calling for disputes to be decided according to their own national laws. Assume that a dispute arises over a contract between a buyer whose business is located in Nepal and seller whose business is located in South Africa. Regardless of who initiates the lawsuits or whether it is brought in Nepal or South Africa, if no choice of law provision states, otherwise their rights will be determined by international standard. Likewise, there is another problem which faces the parties at the time of making a contract in case of specify the Arbitration clause or Dispute Settlement clause.    

In an international contract for the sale of goods, the terms of sale are as essential to the contract as the quality of the goods themselves. Moving goods around the world is expensive and risky. If a contract does not specify the terms of sale and who bears the risk of loss, the parties may be in for a tremendous surprise. Moreover, because of the risks of non-payment and non-delivery, the parties may not wish to do business on cash or open account terms until a business relationship is established.

Settling disputes between parties can be much more difficult in international business than in domestic business. Litigation of a case in a court in a foreign country is both costly and time consuming. In addition, the laws of a foreign country can differ greatly from those laws one is accustomed to at home. There can be differences in the law of different countries. Language and logistical issues can be problems as well. A firm may representation by attorneys in their own country and in the country of litigation. Frequent court appearances could require great travel expenses. International cases also involve complex procedural problems. The advice of lawyer at this stage in business transaction is extremely important.

End Notes:

Bhandari, Dilli Raj , (2016 AD.) Business Law, Kathmandu, ABC Books publishers and Distributer House Pvt.Ltd.

karki S.B. etal., (2072 BS),   Business Law, Kathmandu,  6th Revised edition, Platinum publication Pvt. Ltd.

Schaffer Richard etal., (2009 AD) International Business Law and its Environment, 7th Edition,  USA South-Western Cengage learning. Upreti, Shreeprakash Upreti, Business Law, Samjhana Publication Pvt. Ltd., Kathmandu, 2015 AD.

www.incotermsexplained.com, Visited on June 1st, 2017.

Google.com.np/search, Visited on June 1st, 2017.


[1] Member, Supreme Court Bar Association.