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Incoterms are international trade terms in the dictionary format, International Commercial Terms. The purpose of incoterms is unambiguous interpretation of the most widely used trade terms in the field of foreign trade. As a result of their use, it is possible to significantly reduce the uncertainty of interpretation of trade terms in different countries, since the contracting parties are often unfamiliar with various trading practices in the trading partner's country, and this can eventually cause misunderstandings, disagreements and litigation.

Who invented and created Incoterms when and why?

Since its foundation in 1919, the International Chamber of Commerce has promoted international trade. In 1936, the International Chamber of Commerce ICC published a set of international rules "Incoterms 1936" for the precise definition of trade terms. This was done to eliminate the possible difficulties described above.

Amendments and additions were issued in 1953, 1967, 1976, 1980, 1990, 2000, 2010 years to bring these rules in line with modern international trade practice. International trade terms are standard terms of international sales contracts, which are defined in advance in an internationally recognized document, in particular, they are used in a standard sales contract developed by the International Chamber of Commerce.

In connection with the celebration of its 100th anniversary, the International Chamber of Commerce is pleased to announce the preparation andnew publications Incoterms®2020. This latest edition of the rules will help prepare businesses for the next century of world trade. But in this article we will consider the Incoterms 2010 edition.

The basic principles laid down in terms of Incoterms are

  1. Distribution between the seller and the buyer of transportation costs for the delivery of goods, that is, determining which costs and for how long the seller bears, and which, starting from what point, the buyer.
  2. The moment of transfer from the seller to the buyer of risks (liability) for damage, loss or accidental loss of cargo.
  3. Determining the date of delivery of the goods, that is, determining the moment when the seller actually transfers the goods to the buyer or his representative.

INCOTERMS 2010 infographics 2019 Factory or warehouse of the manufacturer or seller seller Delivery from the factory or warehouse to the departure terminal Placement of goods at the cargo terminal Placement of goods on board the vessel State border Sea transportation to the port of discharge Placement in a temporary storage warehouse at the port of arrival (unloading) Order of goods storage The image belongs to the IMPORT40 group of companies INCOTERMS 2010 EXPLANATIONS - VINCULUM.RU © Delivery of goods ready for unloading from the vehicle Delivery of the goods to the recipient's warehouse buyer EXW - the goods are picked up by the buyer from the seller's warehouse specified in the contract EXW FCA - the goods are delivered to the main carrier of the customer specified in the contract FCA FAS - the goods are delivered to the buyer's vessel, the contract specifies the port of loading, transshipment and loading are paid by the buyer FAS FOB - the goods are shipped to the buyer's ship, transshipment is paid by the seller FOB CFR - the goods are delivered to the buyer's destination port specified in the contract CFR CIF is the same as CFR, but the seller insures the main transportation CIF CPT - the goods are delivered to the main carrier of the customer, the main transportation to the arrival terminal specified in the contract is paid by the seller CPT CPT - the goods are delivered to the main carrier of the customer, the main transportation and minimum insurance up to the arrival terminal specified in the contract are paid by the seller CIP DAT - delivery to the import customs terminal specified in the contract has been paid for THAT DAP - delivery of goods ready for unloading from a vehicle arriving at the specified destination DAP DDP - the goods that have passed customs clearance are delivered to the customer at the destination specified in the contract DDP The moment of transfer from the seller to the buyer of the risks of damage, loss or accidental loss of cargo during EXW ! The moment of transfer from the seller to the buyer of the risks of damage, loss or accidental loss of cargo under FCA ! The moment of transfer from the seller to the buyer of the risks of damage, loss or accidental loss of cargo in CFR ! The moment of transfer from the seller to the buyer of the risks of damage, loss or accidental loss of cargo during FAS ! The moment of transfer from the seller to the buyer of the risks of damage, loss or accidental loss of cargo in CFR ! The moment of transfer from the seller to the buyer of the risks of damage, loss or accidental loss of cargo during CIF ! The moment of transfer from the seller to the buyer of the risks of damage, loss or accidental loss of cargo in CFR ! The moment of transfer from the seller to the buyer of the risks of damage, loss or accidental loss of cargo during CIP ! The moment of transfer from the seller to the buyer of the risks of damage, loss or accidental loss of cargo at DAT ! The moment of transfer from the seller to the buyer of the risks of damage, loss or accidental loss of cargo during DAP ! The moment of transfer from the seller to the buyer of the risks of damage, loss or accidental loss of cargo during DDP !

The scope of the Incoterms is limited to issues related to the rights and obligations of the parties to the contract of sale in relation to the supply of goods sold (the word goods here means "tangible goods", excluding "intangible goods", such as computer software).

Beyond the Incoterms are the rules for the transfer of ownership from the seller to the buyer, as well as the consequences of the parties' failure to fulfill their obligations under the contract of sale of goods, including the grounds for releasing the parties from liability, which is regulated by the applicable law or the Vienna Convention. The structure of the terms is formed in the sequence of increasing the volume of the seller's obligations with respect to the basic terms of delivery.

The key condition for the application of Incoterms: is that the regulation of the moment of transfer of ownership should be regulated separately in the contract, it is important that the transfer of ownership coincides with the transfer to the buyer of the risk of accidental death or risk of damage to the goods.

In practice, two variants of misunderstanding of Incoterms are most common.

  1. Incorrect understanding of the Incoterms terms as having more to do with the contract of carriage, and not with the contract of sale.
  2. The misconception that they should cover all the obligations that the parties would like to include in the contract.

Incoterms regulates only the relations between sellers and buyers within the framework of purchase and sale agreements, moreover, only in certain aspects. At the same time, it is important for exporters and importers to take into account the actual relations between the various contracts necessary for the implementation of an international sale transaction - where not only a purchase and sale agreement is needed, but also contracts of transportation, insurance and financing.

Incoterms relate to only one of these contracts, namely the contract of sale. It should be emphasized that Incoterms are not intended to replace the terms of the contract required for a complete purchase and sale agreement either by including regulatory conditions or individually agreed terms.

Incoterms does not regulate the consequences of breach of contract and exemption from liability due to various obstacles, these issues should be resolved by other terms of the contract of sale and relevant laws. Incoterms were originally always intended for use in cases where goods were sold for delivery across national borders.

Incotrems are not an international agreement. But in case of reference to the basis of Incotrems delivery in the contract, various state bodies, primarily customs, as well as state courts considering foreign economic disputes, are obliged to take into account the provisions of Incotrems.

In some countries, Incotrems has the force of law, and this is especially important when concluding supply contracts with residents of these countries, in terms of determining the applicable law to the transaction. For example, when concluding a contract for the supply of goods between a Russian company and a Ukrainian company, when determining the applicable law - the law of Ukraine, Incotrems is subject to mandatory application even if it is not specifically stipulated in the contract. Therefore, having concluded a deal with partners from these countries and not wanting to be guided by Incotrems, you should specifically specify this circumstance.

In Russia Incotrems is advisory in nature, and only the provisions of the contract that have a reference to Incotrems have legal force. However, if a reference is made in the contract to the Incotrems delivery basis, but other clauses of the contract contradict the terms of delivery used according to Incotrems, then the relevant clauses of the contract should be applied, and not Incotrems: it is believed that the parties have established certain exceptions from Incotrems in the interpretation of individual delivery bases.

When choosing a particular delivery basis, it is necessary to strictly adhere to the terminology of Incotrems. It is better to specify a specific term in English. When applying one or another term, it is necessary to specify a specific geographical point (and sometimes the exact place, such as in the case of delivery on the basis of EXW), in which the seller is considered to have fulfilled its obligations to transport cargo, bear the risk of accidental loss or damage to the goods, etc.

Be sure to refer to the editorial office of Incotrems. When concluding a foreign economic contract, it is necessary to clearly define the details of the basic terms of delivery. Thus, before specifying the delivery basis in the contract, for example FOB, it is necessary to carefully study the customs of the port specified in the basis, the chartering contract, in order to accurately allocate costs between the buyer and seller. All delivery bases requiring the seller to provide insurance, in the event of insured events, are covered by insurers on minimum terms (the cost of the goods + 10%).

Unfortunately, they still continue to use the term FOB where it is completely inappropriate, while forcing the seller to bear the risks due to the transfer of the goods to the carrier named by the buyer. FOB can be used only where the goods are intended for delivery "through the ship's handrails" or, in extreme cases, to the ship, and not when the goods are transferred to the carrier for subsequent loading onto the ship, for example, loaded into containers or loaded onto trucks or wagons in the so-called "ro-ro" transport.

Thus, in the introduction to the term FOB, an urgent warning was made that the term should not be used when the parties do not intend to deliver the goods through the ship's handrails.

There are cases when the parties mistakenly use terms intended also for the carriage of goods by sea, when another type of transport is assumed. This may put the seller in a position where he cannot fulfill his obligation to provide the buyer with an appropriate document (for example, a bill of lading, a sea waybill or an electronic equivalent). To do this, the introduction to each term indicates whether it can be used for all types of transport or only for sea transportation.

The on-board bill of lading is the only acceptable document that the seller can submit in accordance with CFR and CIF terms. The bill of lading performs three important functions:

  • Proof of delivery of the goods on board the vessel;
  • Certificate of the contract of carriage;
  • A means of transferring the rights to the goods in transit to the other party by transferring a document to it.

Other transport documents, in addition to the bill of lading, will perform the first two specified functions, but will not control the delivery of the transit goods to the destination or enable the buyer to sell the transit goods by transferring the documents to its buyer. Instead, other transport documents will name the party entitled to receive the goods at the destination. The fact that possession of a bill of lading is necessary to receive goods from the carrier at the destination makes it particularly difficult to replace it with an electronic document.

Usually several originals of the bill of lading are issued, of course, it is very important that the buyer or the bank acting in accordance with its instructions when paying to the seller ensures that the seller transfers all the originals ("complete set"). This is a requirement of the rules for documentary credits of the International Chamber of Commerce /ICC Rules for Documentary Credits/ (Uniform Traditions and Practice of the International Chamber of Commerce /ICC Uniform Customs and Practice, "UCP"/.  ICC publication number 500).

Transport documents must indicate not only the delivery of the goods to the carrier, but also that the goods, as far as the carrier can confirm this, were received in full working order and good condition. Any entry in the transport documents that would indicate that the goods were not received in this condition will make the document "unclean" and thus unacceptable in accordance with the UCP.

Despite the special legal nature of the bill of lading, it is already often replaced by an electronic document. The 1990 version of Incoterms duly took into account this expected improvement. In accordance with articles A.8. of the terms, paper documents may be replaced by electronic information, provided that the parties have agreed to carry out electronic communication. Such information may be transmitted directly to the interested party or through a third party providing additional services.

One such service that can be usefully provided by a third party is the register of successive owners of the bill of lading. Systems providing such services, such as the so-called BOLERO service, may require further support by relevant legal norms and principles, as confirmed by the Rules of Electronic Bills of Lading 1990 CMI and Articles 16 - 17 of the UNCITRAL Model Law on Electronic Commerce.

In recent years, documentary practice has become much simpler. Bills of lading are often replaced by non-transferable documents similar to those used for other modes of transport besides maritime transport. These documents are called "sea waybills", "container waybills", "cargo receipts" or variants of such expressions. Non-transferable documents can be used quite satisfactorily, except in cases when the buyer wants to sell transit goods by transferring a paper document to a new buyer. For this to be possible, the seller's obligation to submit the bill of lading in accordance with CFR and CIF must be maintained. However, if the Contracting Parties know that the buyer does not intend to sell the goods in transit, they can specifically agree to release the seller from the obligation to provide a bill of lading, or, otherwise, they can use the terms CPT and CIP, where there is no requirement to provide a bill of lading.

The buyer paying for the goods in accordance with the "C" term is obliged to ensure that upon receipt of payment the seller does not dispose of the goods by issuing new instructions to the carrier. Some transport documents used for certain types of transport (air, road or rail) provide the Contracting Parties with the opportunity to prevent the seller from issuing new instructions to the carrier by providing the buyer with a certain original or duplicate of the waybill. However, documents used instead of bills of lading in maritime transport usually do not contain such an "obstructive" function.

The International Maritime Committee corrected this shortcoming of the above documents by introducing in 1990 the "Uniform Rules of Sea Waybills", which allow the parties to insert a condition "without an order", according to which the seller, by means of instructions, transfers to the carrier the right to dispose of the goods in relation to the delivery of the goods to any other person or to another place other than that specified in the waybill.

Contracting Parties wishing to be able to apply to the Arbitration of the International Chamber of Commerce in case of disagreement with their partner under the contract of sale must specifically and clearly agree on the Arbitration of the International Chamber of Commerce in their contract of sale or, in the absence of a single contractual document, when exchanging correspondence, which is a contract between them. The fact that one or more variants of Incoterms are included in the contract or related correspondence does NOT in itself constitute an agreement on the possibility of applying to Arbitration.

The International Chamber of Commerce recommends the following standard arbitration clause:"All disputes arising out of/or in connection with this agreement shall be finally resolved in accordance with the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with these Rules."

Each of the Incoterms rules are grouped into4 basic categories, each of which has its own clear direction, defined as a term. Each term is an abbreviation, the first letter indicates the point of transition of obligations and risks from the seller to the buyer.