Name: Mark Zeller
Position: Customs Consultant
Employer: Self employed
Location: Durban, South Africa
Specialisation: African Customs Regulations
With the revision process now underway for the next edition of Incoterms, Mark Zeller in South Africa reviews some of the pitfalls of underestimating the importance of the current set of International Commercial Terms, more commonly known as INCOTERMS 2000.
Most readers who are involved in international sales will have been asked for a pro forma invoice at one stage or another quoting EXWorks, FOB, CIF or DDP prices; to name but a few. But what are these mysterious codes for, and what are the real implications of their use in international sales contracts?
First of all, lets get our definitions correct. The word ‘INCOTERM’ is an abbreviation of ‘International Commercial Term’ and the chosen INCOTERM is a term of the contract of sale. The International Chamber of Commerce (ICC) created INCOTERMS in 1936. Since then, this set of international commercial terms has undergone revisions in 1953, 1967, 1976, 1980, 1990 and the latest revision was brought out in 2000. The ICC has now set to work, through the establishment of the ICC Taskforce on Incoterms, Chaired by Charles Debattista (Professor of Commercial Law, University of Southampton) on bringing these essential trade terms up to date within the context of our changed trading environment.
Incoterms enable the contracting parties to set out clearly and concisely the extent of their respective obligations, and above all, the moment when costs and risks are transferred from the exporter to the importer.
In Incoterms 2000, the parties define the point to which the exporter is responsible for the goods and what are the expenses relating to his obligations which will therefore have to be included in the price offered by the exporter.
Identification of these responsibilities and costs is made clear when the point of handover of risks – always a physical location – is effectively decided upon by the buyer and seller. As a general rule (there are exceptions as we will see later) all risks and responsibilities that the cargo might be subject to prior to the cargo’s arrival at the agreed and named place are the concern of the seller. All risks and responsibilities that the cargo might be subject to after the cargo’s arrival at the agreed and named place are the concern of the buyer.
INCOTERMS 2000 are like shorthand – a series of expressions that buyers and sellers will communicate in and understand regardless of their home language. The system of expressing Commercial Terms as a universally understandable set of codes allows buyers and sellers, who may not share the same language, to establish their individual responsibilities to the other party clearly – thereby avoiding dispute as best as possible. Even when the actual spoken language used by the buyer and seller is the same, using a set standard for Commercial Terms minimizes the possibility of misunderstanding.
It is important to realize that, while these are available to use in any sales situation, they are by no means universally enforced. Traders therefore have the freedom to engage in trade without using INCOTERMS. The impact of this freedom of practice results in assumptions and misunderstandings using similar expressions. These lead to lengthy, unwanted disputes.
Of further importance, the prudent trader needs to recognise that INCOTERMS cannot deal with everything. They therefore need to be used in conjunction with the International Contract of Sale – possibly mentioned more than any other document within the text of INCOTERMS 2000 and yet arguably one of the most underused documents in trade today. Another prominent exclusion is the issue of ownership or title – the moment of transfer of title must be clearly established within the International Contract of Sale, as this is not within the scope of INCOTERMS 2000.
Any tool can be used correctly or incorrectly. In order to use INCOTERMS 2000 effectively, and enjoy the recognition of an International body such as the ICC, these codes need to be used according to their individual design. Incorrect usage can actually work against the trader and/or service provider, because they may have disregarded a particular term’s spirit and should have either used it in a different way, or changed their term altogether. An obvious example of this is using a mono-modal term for a multimodal shipment. Should they fall into dispute, traders may risk the exposure of judgment against them in a court of law, as the term has not been properly utilised.
Another case in point was described by an eBSI graduate in the Czech Republic in relation to a shipment to Moscow under the CIP INCOTERM. Under INCOTERMS 2000, ICC Publication 560, CIP means CARRIAGE AND INSURANCE PAID TO (… named place of destination). Under the case in question the shipment had been loaded on a truck in Prague, Czech Republic, but had been stopped and stolen just prior to arrival to Moscow, its named place of destination. The buyer in Russia refused to pay for the goods claiming that the Czech Exporter had not fulfilled their delivery obligation under INCOTERMS 2000. However, upon closer examination of the wording of the CIP INCOTERM, the Czech Exporter was able to clearly establish to his buyer that his delivery obligation had been fulfilled as soon as the goods were placed at the disposal of the first carrier, ie. loaded upon the carrier’s truck in Prague, and it was therefore up to the Russian importer to claim against the insurance policy the Czech Exporter had contracted and paid for on his behalf.
It can be seen from this case study that clear reference to the particular INCOTERM in the international contract of sale can avoid costly misunderstandings or even misinterpretations further down the line.
In order to make clear reference and indication that the shipment concerned is governed by the parameters of a particular INCOTERM, the following should be reflected in the International Contract of Sale and on all related documents:
- The three letter INCOTERMS code
- An unambiguous physical address of delivery
- Specific reference to INCOTERMS 2000
- Any agreed modification (if appropriate)
Some examples :
- FOB Liverpool Incoterms 2000
- DDU Frankfurt Schmidt GmbH Warehouse 4 Incoterms 2000
- CPT Smith Carriers, Inc. Main Warehouse New York Incoterms 2000
This binds the parties concerned to the regulations of that particular INCOTERMS publication and thereby provides:
- clarity on what the indicated code used is actually meant to imply, thereby minimizing assumptions
- protection for any party against any variation from these terms
- recognition from the ICC
General notes of Caution
INCOTERMS 2000 are NOT the only commercial terms used in International Trade. For example, in America, the Foreign Trade Definitions, which were created in 1919 and then re-drafted in 1941, are widely used throughout all the States. America has traded largely with itself (inter-state trading) and US traders are accustomed to the “language” of these terms and expressions. Here are some of them to watch out for:
“C.I.F.&C.”: Known as “Free Harbour”, it involves Cost, Insurance, Freight and Commission. An extension of this is C.I.F.C. & I – which includes the above plus “Interest”. Another variation in the “C” terms is “C.I.F. landed”
“Ex”: This prefix is used for a number of different expressions: Ex- Mill; Ex-plantation; Ex-Factory; Ex- Warehouse…all these offer a similar flavour in concept to the INCOTERM EXW, but the warning to note is what EXACTLY do they mean in terms of risk and cost between buyer and seller? Additionally, there is one “Ex” term used that is called “Ex-Dock”, which does not correlate even remotely with the term EXW, but rather means something along the lines of DEQ!
“FOB”: This expression can virtually mean anything in America. It has at least six different variations, which range from an indication close to that of EXW – right across to mean something close to DDP! In-between are some four variations along the supply chain. So FOB can be highly confusing and would need accurate interpretation in order to clarify whether the transaction is worthwhile or not.
We would strongly recommend that every trade practitioner buy a copy of INCOTERMS 2000, ICC Publication 560, from their local chamber of commerce, as these are the best tools to use in International Trade. Like any tools, they can be misused. The challenge to every trader and service provider is to practice using these tools in harmony with what they are physically and contractually trying to achieve. Make sure to use an INCOTERM that is appropriate to the mode of transport being used; the insurance organised; and the relationship between Buyer and Seller (to mention just a few factors). INCOTERMS are the single most important and influential rules in trade Practice. We encourage everyone involved in global Trade to use them, and to use them appropriately. If this is practiced, both exporter and importer can be confident they will be able to identify risks and costs, and manage them effectively.
NOTE SINCE THE PUBLISHING OF THIS ARTICLE INCOTERMS HAVE BEEN UPDATED TO INCOTERMS 2010 ICC PUBLICATION 715 AND THEREFORE THAT PUBLICATION SHOULD BE USED FOR REFERENCE AND WHEN CONTRACTING INTERNATIONALLY.