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.[2] 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.

INCO Terms 2016

Rules for International trade as defined by Incoterms® 2016

Duties of buyer/seller according to Incoterms® 2016

EXW – Ex Works (named place)

The seller makes the goods available at its premises. This term places the maximum obligation on the buyer and minimum obligations on the seller. The Ex Works term is often used when making an initial quotation for the sale of goods without any costs included. EXW means that a seller has the goods ready for collection at his premises (works, factory, warehouse, plant) on the date agreed upon. The buyer pays all transportation costs and also bears the risks for bringing the goods to their final destination. The seller doesn’t load the goods on collecting vehicles and doesn’t clear them for export. If the seller does load the goods, he does so at buyer’s risk and cost. If parties wish seller to be responsible for the loading of the goods on departure and to bear the risk and all costs of such loading, this must be made clear by adding explicit wording to this effect in the contract of sale.

FCA – Free Carrier (named place)

The seller hands over the goods, cleared for export, into the disposal of the first carrier (named by the buyer) at the named place. The seller pays for carriage to the named point of delivery, and risk passes when the goods are handed over to the first carrier.

CPT – Carriage Paid To (named place of destination)

The seller pays for carriage. Risk transfers to buyer upon handing goods over to the first carrier.

CIP – Carriage and Insurance Paid to (named place of destination)

The containerized transport/multimodal equivalent of CIF. Seller pays for carriage and insurance to the named destination point, but risk passes when the goods are handed over to the first carrier.

DAT – Delivered at Terminal (named terminal at port or place of destination)

Seller pays for carriage to the terminal, except for costs related to import clearance, and assumes all risks up to the point that the goods are unloaded at the terminal.

DAP – Delivered at Place (named place of destination)

Seller pays for carriage to the named place, except for costs related to import clearance, and assumes all risks prior to the point that the goods are ready for unloading by the buyer.

DDP – Delivered Duty Paid (named place of destination)

Seller is responsible for delivering the goods to the named place in the country of the buyer, and pays all costs in bringing the goods to the destination including import duties and taxes. This term places the maximum obligations on the seller and minimum obligations on the buyer.

Rules for international trade conducted entirely by water defined by Incoterms® 2010

FAS – Free Alongside Ship (named port of shipment)

The seller must place the goods alongside the ship at the named port. The seller must clear the goods for export. Suitable only for maritime transport but NOT for multimodal sea transport in containers (see Incoterms 2010, ICC publication 715). This term is typically used for heavy-lift or bulk cargo.

FOB – Free On Board (named port or place of shipment)

The seller must load the goods on board the vessel nominated by the buyer. Cost and risk are divided when the goods are actually on board of the vessel (this rule is new!). The seller must clear the goods for export. The term is applicable for maritime and inland waterway transport only but NOT for multimodal sea transport in containers (see Incoterms 2010, ICC publication 715). This Term has been greatly misused over the last three decades, ever since Incoterms 1980 explained that FCA should be used for container shipments.

CFR – Cost and Freight (named port of destination)

Seller must pay the costs and freight to bring the goods to the port of destination. However, risk is transferred to the buyer once the goods are loaded on the vessel (this rule is new!). Maritime transport only and Insurance for the goods is NOT included. This term was formerly known as CNF (C&F).

CIF – Cost, Insurance and Freight (named port of destination)

Exactly the same as CFR except that the seller must in addition procure and pay for the insurance. Maritime transport only.