Incoterms 2000 are a set of 13 delivery terms universally used in international trade transactions published by the International Chamber of Commerce (ICC). Despite the fact that the current set of terms are nearly 10 years old, they are not as well understood as might be wished. That may be a problem since the selection of a specific Incoterm may affect the documentary requirements of Letter of Credit (L/C) transactions. 

Incoterms 2000 do not deal with:

The whole of the contract of sale. Incoterms 2000 are delivery terms only and consequently their scope is limited by their very nature.

Transfer of title (ownership) at law. The convention for the international sale of goods (commonly referred to as the Vienna Convention 1980) does not deal with the issue of ownership either because there are too many legal variations across international borders. Transfer of title matters are determined by either the intention of the parties or the explicit clauses in a written contract. As the intention of the parties is much more open to interpretation and challenge, a written contract is preferred. The contract should at least stipulate:

the choice of law (seller’s, buyer’s or a third country),

the forum for dispute resolution, and

the courts that will have jurisdiction over any disputes. This is an important consideration for countries that are federations of states, such as the Unites States of America or Australia.

Product liability, as this is beyond the scope of delivery terms.

Payments and their risks—the actions resulting from the choice of a particular delivery term will impact on the documentary requirements of L/C’s, which is the focus of this article.

Incoterms 2000 do:

Outline the rights, obligations, responsibilities and risks of the seller and the buyer in the actions associated with movement of goods from origin to destination.

Apportion the costs to the seller or the buyer, depending on the Incoterm chosen.

Provide a risk transfer point for any one of the 13 Incoterms chosen.

Specify which party has the obligation to enter into a contract of carriage.

Detail which Incoterms place an obligation on the seller to provide cargo insurance.

Subsidiary Contracts

The obligation to deliver a product to an agreed location may give rise to a number of contracts that we may refer to as subsidiary contracts. These contracts are subsidiary to, but also separate from, the sales contract. Figure 1 below represents some of the subsidiary contracts resulting from the use of Incoterms 2000 contracts. For example, as a result of a CIP Incoterms 2000 contract, the seller has to enter into both a contract of carriage and a contract of insurance to fulfil the Incoterms 2000 obligations, but clearly neither the carrier nor the insurer are a party to the contract of sale.

Figure 1: Possible subsidiary contracts resulting from the use of Incoterms 2000

<img src=http://www.bearing.com.cn/direc/myimg/201202097.bmp>

Depending on the term chosen, the seller, or buyer, will be responsible for all, or only some of the above.

Source: Bergami, R. (2009), International Trade: A Practical Introduction, 3rd edn., Eruditions Publishing, Melbourne, p. 244.

Letters of Credit 

If care ought to be taken in the selection of an Incoterm for any sales contract, extra care ought to be taken when such a contract involves an L/C. Indeed, it is the discharge of the Incoterms 2000 obligations that need to be carefully considered in the context of L/C transactions. This needs to take place during the pre-contractual negotiations between the seller and the buyer as it is too late once the contract has been signed and the L/C is being established. As a result of choosing a particular Incoterm, the L/C will make documentary demands in relation to a number of documents. 

Table 1 below outlines the seller’s responsibilities against each term in relation to contracts of carriage and the provision of evidence of insurance. 

Table 1: Incoterms 2000 seller's contract of carriage and provision of insurance obligations

<img src=http://www.bearing.com.cn/direc/myimg/201202098.bmp>

It is generally accepted that the most commonly used terms are:

FOB, CFR and CIF. These terms are used for traditional sea transport (including inland waterways such as rivers and lakes) and rely on the transfer of risk from seller to buyer at ship’s rail. Importantly these terms should not be used for sea container traffic, roll-on roll-off (RO-RO) traffic and airfreight traffic, as the ship’s rail plays no significant role in the transfer of risk from seller to buyer for in transit cargo.

FCA, CPT and CIP. These terms are used for multimodal transport and rely on the transfer of risk from seller to buyer once the consignment has been placed at the disposal of the first carrier, which is the buyer’s agent for the purpose of transporting goods. These terms are recommended for sea container traffic, roll-on roll-off (RO-RO) traffic and airfreight traffic.

The term FOB is an interesting one because the seller is under no obligation to enter into a contract of carriage. In practice, however, FOB contracts are often arranged so that the seller provides the transport document (e.g., bill of lading, non-negotiable sea waybill, or inland waterway document). The same comments may also apply to FAS. FCA contracts may be structured with similar arrangements but with a wider choice of transport documents opportunities, reflecting the multimodal application of this term (e.g. air waybill, railway consignment note or road consignment note). 

Whereas the FCA and FOB terms require the buyer to pay for the carriage of the goods, the terms CFR, CIF, CPT and CIP place this responsibility on the seller, and consequently the provision of a transport document to the buyer becomes a mandatory step for the seller. 

The terms CIF and CIP are the only two terms requiring the additional provision of evidence of insurance. This evidence is by way of a policy (the insurance contract itself) or a certificate (typically issued by the seller under an open cover policy). For a regular exporter, the certificate is normally the usual document tendered as evidence of insurance. Cover notes, as evidence of insurance, are not accepted by bankers and traders alike. 

The D terms present their own peculiarities as the seller must enter into a contract of carriage to get the goods to a particular agreed location, but the transport document provided will vary with the mode of transport chosen. In DAF contracts it would only be possible to provide railway or road consignment notes and inland waterway transport documents. In DES and DEQ contracts, the transport document would be either the bill of lading or the non-negotiable sea waybill. With DDU and DDP, the type of documents required by the buyer would depend on the type of transport mode chosen. However all of the D terms potentially require “proof” of delivery, and this may be problematic in L/C transactions as discussed next time in Part 2 of this article.

 

( linda )09 Feb,2012

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