Delivery by Incoterms

The International Chamber of Commerce has published its latest revision of Incoterms for use in contracts after 1 January 2000. It is the first revision of these internationally known terms for 10 years, reflecting the end of a lengthy consultation procedure with a number of international trade bodies.

What are Incoterms?

There are 13 Incoterms which define the rights and obligations of parties to a contract for the sale of goods. They can be relevant, for example, where plant, machinery or equipment is procured from a foreign source for incorporation into a construction project. The Incoterms apply to the underlying contract for sale and not to any contract of carriage. So, if you have a contractor working in the UK who orders electrical switchgear equipment from a manufacturer or supplier in Germany, Incoterms can be used to determine when risk transfers from the supplier to the contractor; but Incoterms will not apply to any contracts of carriage with the carrier, whether by road, rail or sea.

Some of the best known Incoterms are FOB (free on board), CIF (cost, insurance and freight) and EXW (ex-works). These Incoterms, as with all others, do not govern any insurance or financing arrangements that may have been put in place, only the underlying sale and purchase contract. However, the choice of Incoterm will necessarily have implications for other types of contracts, such as insurance and financing.

The History of Incoterms

Incoterms are a product of the ICC who, back in 1936, published a set of international rules for the interpretation of trade terms. Subsequently, Incoterms have been amended on six occasions including the latest version; Incoterms 2000. Over the years, revisions have been introduced to reflect contemporary changes to commercial practices in international trade. More recently, an obvious example reflected in the Incoterms is the move away from paper records to electronic communication. Incoterms 2000, however, is more of a consolidation than a version introducing radical change; to the extent that there are changes, they relate principally to customs clearance, payment of duty, loading and unloading obligations under specific Incoterms.

Structure of Incoterms

The essence of any Incoterm is to focus on the delivery obligation of the seller. Under all Incoterms, the risk of loss or damage to goods generally passes from seller to buyer when the seller has fulfilled his delivery obligation. Hence, each Incoterm provides clearly when and how delivery is to be effected. However, it also caters for the possibility that risk may be transferred before delivery, in specific circumstances, principally to deal with the situation where a buyer tries to delay the passing of risk by refusing to accept delivery.

The Incoterms themselves are split into four groups with Incoterms in each group starting with the same prefix. Group E contains only one Incoterm (EXW - ex works) and reflects a position when the seller’s obligation is at its minimum. Under this arrangement, the seller has to do no more than place the goods at the disposal of the purchaser at the agreed place, which is usually the seller’s own premises. The next group (the F terms) require the seller to deliver the goods for carriage as instructed by the buyer. For example, free on board (FOB) requires delivery to a named port of shipment, whereas free carrier (FCA) relates similar concepts to carriage by means other than sea or water.

The C terms, of which there are four, deal with situations where the seller has to enter into the contract for carriage but without assuming the risk of loss or damage to the goods occurring after shipment or despatch.

Finally, there are the D terms under which a seller has to bear all costs and risks needed to bring the goods to the intended place of destination. Group D Incoterms place the greatest risk and burden on the seller. The ICC refers to them as arrival contracts; as opposed to the C Incoterms which are departure/shipment contracts. Under D Incoterms, delivery is completed when goods are cleared for import and placed at the buyer’s disposal at the named place of destination.

Incorporation into Contracts

Obviously, complex construction contracts can and do provide for allocation of risk in relation to plant, equipment and materials which form part of the works. Therefore, there may not be a need to refer to specific Incoterms. However, more straightforward sale and purchase arrangements, which involve passage of goods over land or water, can be regulated by reference to a chosen Incoterm. When referring to a particular Incoterm, don’t forget to specify that the contract is governed by “Incoterms 2000” so as to incorporate the up-to-date version of Incoterms. Incoterms 2000 is available in a bi-lingual English-French booklet from the ICC. It will come as no surprise to learn that the booklet recommends the use of ICC arbitration as the appropriate disputes resolution mechanism to govern the underlying purchase contract, thus working in tandem with Incoterms themselves.