Expanding your business beyond the borders and perceived safety of your own country may be a frightening prospect full of uncertainties, but in today’s global marketplace, it often is the only option available to stay competitive.
The nature of cross-border business is such that a lot can be lost in (miss)translation. Parties to international transactions will often speak different languages, employ different trade practices, rely on divergent business customs or any other of the plethora of cultural hodgepodges that one finds on the blue planet.
Consequently, uniformity in trade terminology can be hard to come by, leading to uncertainty in the operational language of a contract and a divergence in the expectations of parties to a transaction.
In 1980, the United Nations Convention on Contracts for the International Sale of Goods (“CISG”) promulgated a set of principles whose aim was to memorialize a unified substantive law governing international contracts for the sale of goods. In practice, the CISG serves as a legal framework on which parties to international contracts for the sale of goods can rely rather than their own local rules, avoiding conflicts of laws, and infusing the transaction with certainty and predictability. Any party based in a signatory country to the CISG purchasing or selling goods cross-border will see their contracts fall under the jurisdiction of the CISG and will consequently be subject to Incoterms, which have been incorporated implicitly into the CISG.
Incoterms are trade terms, commonly manifested by a three letter abbreviation, that reflect the mercantile scheme which the parties to an international contract for goods must adhere to. Incoterms will dictate the parties’ respective obligations vis-à-vis the delivery of goods and the transfer of risk.
Incoterms were first ideated by the International Chamber of Commerce in 1939 and have been updated with great frequency to parallel developments in international trade practices. The current iteration was released in 2010.
The eleven 2010 Incoterms, explained below, are separated into two categories: Rules for any mode or modes of transport, and Rules for sea and inland waterway transport.
Rules For Any Mode Or Modes Of Transport:
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“EXW (Ex Works): ‘Ex Works’ means that the seller delivers when it places the goods at the disposal of the buyer at the seller’s premises or at another named place (i.e., works, factory, warehouse, etc.). The seller does not need to load the goods on any collecting vehicle, nor does it need to clear the goods for export, where such clearance is applicable.
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FCA (Free Carrier): ‘Free Carrier’ means that the seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises or another named place. The parties are well advised to specify as clearly as possible the point within the named place of delivery, as the risk passes to the buyer at that point.
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CPT (Carriage Paid To): ‘Carriage Paid To’ means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.
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CIP (Carriage And Insurance Paid To): ‘Carriage and Insurance Paid to’ means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination. ‘The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIP the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.
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DAT (Delivered At Terminal): ‘Delivered at Terminal’ means that the seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named terminal at the named port or place of destination. “Terminal” includes a place, whether covered or not, such as a quay, warehouse, container yard or road, rail or air cargo terminal. The seller bears all risks involved in bringing the goods to and unloading them at the terminal at the named port or place of destination.
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DAP (Delivered At Place): ‘Delivered at Place’ means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. The seller bears all risks involved in bringing the goods to the named place.
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DDP (Delivered Duty Paid): ‘Delivered Duty Paid’ means that the seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport ready for unloading at the named place of destination. The seller bears all the costs and risks involved in bringing the goods to the place of destination and has an obligation to clear the goods not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities.”
Rules For Sea And Inland Waterway Transport:
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“FAS (Free Alongside Ship): ‘Free Alongside Ship’ means that the seller delivers when the goods are placed alongside the vessel (e.g., on a quay or a barge) nominated by the buyer at the named port of shipment. The risk of loss of or damage to the goods passes when the goods are alongside the ship, and the buyer bears all costs from that moment onwards.
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FOB (Free On Board): ‘Free On Board’ means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment onwards.
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CFR (Cost and Freight): ‘Cost and Freight’ means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.
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CIF Cost (Insurance and Freight): ‘Cost, Insurance and Freight’ means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination. ‘The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIF the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.”
With an understanding of Incoterms and their proper application in your contracts, you can reclaim some certainty in your international logistical processes. There are however some important tips to follow to ensure the effective use of Incoterms.
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Both sides of the transaction must come together and agree on the Incoterms to be applied to the transaction.
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You should incorporate the pertinent Incoterm into your contract ensuring there is no ambiguity with each party’s obligations.
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You should reference the specific Incoterm version you wish to use into your contract, with a preference towards the most recent. (ie. Incoterms 2010)
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You should take into consideration the type of good you are shipping and whatever constraints may be imposed on this good. For example, not all goods may be shipped by air which would invalidate the application of certain Incoterms.
With this framework of understanding, the risks associated with the logistics of international trade should be known, and the parties to an international contract for goods will regain some predictability in their transactions.
Ketan M. Ganase contributed to this article.
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