What Incoterms Are and Various Definitions

Flash Global’s top goal for our global clients is to mitigate risk using our Trade Compliance program. This program operates within our overall service supply chain solutions which ensure our customer’s supply chains are disruption free and maintain the specific KPIs set within each client’s service level agreement. Our global operations customers who operate 24/7 require correct trade compliance to keep vital parts replaced. Delays could lead to serious revenue loss anywhere from a thousand to millions and even incur hefty fines if products are classified incorrectly or the wrong Incoterms are used. This crucial Incoterms topic has two parts. In part one we will detail Incoterms overall plus various definitions in common use. In part two we cover who needs the most awareness of Incoterms and the deeper importance of Incoterms.

Incoterms Background

Globally, a total of fifty-nine countries are signatories to the U.N. Convention on Contract for the International Sale of Goods (“CISG”) including major parties like the U.S, China, and France [1]. CISG brings global transactions for international business into unison on common trade term use. Remember that the CISG can rule for international trade if you fail to add opt-out clauses within your contracts if you live in a CISG country. Reference CISG Article § 1(1)(a), reprinted in 15 U.S.C.A. The CISG often incorporates implicitly common international business terms like the Incoterms.

What Are Incoterms?

Starting in 1939, Incoterms have been created by the International Chamber of Commerce (“ICC”) to explain carriage, insurance, and risk of loss terms and are globally accepted by countries and traders.[2] The CISG has been interpreted to incorporate the International Chamber of Commerce’s Incoterms provisions.

As you will see by this example, Incoterms can be crucial to how much a company must pay upfront for incidents of damaged equipment if terms are not specified as to who is responsible for the shipment’s risk of loss. When an American firm bought medical equipment from an E.U. business that was damaged while en route, the U.S. court ruling was the E.U, seller was responsible under the Incoterms to pay the freight expense and insurance coverage to fulfill the delivery. One would assume the seller would also file the insurance claim and wait for reimbursement, however, the U.S. court also ruled the U.S. buyer pay the full sale price and seek insurance restitution for the equipment damages. This was because the court deemed the risk of loss was passed to the U.S. buyer upon sale despite the equipment title not transferring until the buyer made full payment.

Practice Tip: Choose who will cover: 1) Port Transport; 2) the product’s journey from risk of damage or loss port to destination ; and 3) customs liability for clearance of the medical units since the arrival country’s domiciled party is usually obliged to under the Incoterms.

 Why Use Incoterms Instead of Simple Trade Terms?

The same “clear” contractual terms in different countries may mean different things. Incoterms relate to the terms between exporters and importers. Since there can be “implied” contractual terms you aren’t aware of, the U.S. and the majority of the fifty States and recognized Territories have adopted the Uniform Commercial Code (“UCC”) for the sale of goods (including medical equipment). Implied warranties of merchantability and fitness of purpose are constructed with respect to every sale under the UCC, absent clear and conspicuous language disclaiming the same. Implied covenants of good faith and fair dealing are likewise often incorporated into most every contract. However, for international transactions, the UCC may not apply. By using international Incoterms rules to interpret the most commonly used terms can help avoid or at least reduce, uncertainties on terms and their use between countries.

Incoterms mostly pertain a contract’s “delivery” terms and it is critical that no company presume all the sale contract’s terms are covered by them. For instance, Incoterms have nothing to do with the insurance contract and do not apply to the negotiated financing or carriage or transportation of the equipment terms. Instead, the main Incoterms use is for international delivery of equipment sales and does not cover breach of contract consequences or exemptions of liability.

Key Concepts – Incoterms Terminology

It is vital when incorporating Incoterms into a sale contract that parties make an express Incoterms reference and preferably further detail contracts to the specific version of the Incoterms to be incorporated (i.e., Incoterms 2010).

Practice Tip: You may desire to continue referencing Incoterms 2000 until you are fully apprised of new Incoterms versions.

 Understanding Incoterms

For 2010, a grouping of eleven Incoterms into two categories apply 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

Transport Rules For Sea And Inland Waterways

FAS                 FREE ALONGSIDE SHIP

FOB                 FREE ON BOARD

CFR                 COST AND FREIGHT

CIF                  COST INSURANCE AND FREIGHT

The second class is for dual port situations (point of delivery and the place to which the equipment is carried) and the last three terms refer to the point equipment is being delivered when it is “on board” the vessel.

[1] Great Britain is not currently a signatory.

[2] The ICC has revised the Incoterms six times to reflect international commerce.  The seventh revision was made effective on January 1, 2011.

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