Why are Trade Terms so important? Short Expressions

Over the years, sellers and buyers of goods have used certain trading terms, expressed as initials. Examples are F.O.B., C.I.F., etc. None of these initials have any legal definition or status at law. When the courts have been asked to interpret them, the decisions have varied depending upon the court's findings as to the intentions of the contracting parties, surrounding circumstances, and the customs in that particular trade. If there have been previous sales of the same commodity in the same jurisdiction, between the same two bodies, a pattern has been set, i.e. a trade custom has been established.

These abbreviated terms should only be used to designate a type of sale and then only when there has been a definite understanding between the buyer and seller as to the meaning of the term used. When such initials are used, the contract should contain a clause binding the parties to the definitions provided in the source document. The source document should be one that is in common use and has acceptance in the trade.

The use of some of the sets of initials is a bit dated today. "F.O.B." (named origin point) was satisfactory if goods were sold in carload lots, which would be loaded by the seller on a private railway siding. Thus, the following two questions arise:

• If the goods have to be hauled twenty miles to be put on board an aircraft, who pays for it?
• Does the packing of goods in a container constitute putting the goods on board anything?

One excellent source of trade terms, discussed below, is Incoterms 2000. For example, if instead of the term mentioned above "F.O.B. named origin" the contract used the trade term "F.C.A. named origin"; then the questions raised above would be answered by the text of Incoterms. Furthermore, the term identifies "who will contract for transportation, pay freight charges and take responsibility for risk of loss or damage. The 'F' and 'C' Incoterms are categorized as shipment (sales) contracts whereas the 'D' Incoterms contracts are deemed to be arrival (sales) contracts. Therefore, if the contract of sale includes an 'F' or a 'C' term then the seller completes their obligation as soon as the carrier has been contracted to move the goods and they have in fact received them. The 'E' Term is also a shipment (sales) contract.

Incoterms in and of themselves do not have legal status, unless they are incorporated in the offer of sale, and in turn become part of the contract of sale. Furthermore, for good order sake the use of Incoterms should be clearly identified as "Incoterms 2000". In negotiating the contract of sale, both seller and buyer should ensure that they understand and interpret the Incoterms in the same way. In case of conflict, the contract of sale and or local customs will override Incoterms.

While the use of Incoterms is optional, trade terms are, in fact, key elements of international contacts of sale.

• It should be particularly noted that Incoterms 2000 brought forward some important differences in substance between the 1990 and 2000 versions and these are:
• the placing of the export clearance obligation under FAS on the seller (previously on the buyer).
• the specification of the seller's obligation to load the goods on the buyer's collecting vehicle and the buyer's obligation to receive the seller's arriving vehicle unloaded under FCA; and
• the placing of the import clearance obligation under DEQ on the buyer (previously on the seller)

Why are Trade Terms so important?

Trade terms are the key elements of international contracts of sale. They tell the parties what to do with respect to:

• Carriage of the goods from seller to buyer, and
• Export and import clearance
• They also explain the division of costs and risks between the parties.

Incoterms do not deal with:

• Transfer of property rights in the goods,
• Relief from obligations and exemptions from liability in case of unexpected or unforeseeable events; or
• Consequences of various breaches of contract, except those relating to the passing of risks and costs when the buyer is in breach of their obligation to accept the goods or to nominate the carrier under an 'F' term.

Incoterms are only rules for the interpretation of terms of delivery and not of other terms of the contract of sale. This explains why - apart from the seller's fundamental obligation to make the goods available for the buyer or to hand them over for carriage or deliver them at destination, and apart from the buyer's obligation to take delivery - Incoterms deal only with obligations, procure insurance, and pack the goods properly and clear them for export and import.

Incoterms and a clearly worded sales contract are essential. A wrong term creates unnecessary risks. For example, the F.O.B. seller may be unpleasantly surprised if something happens to the goods after the point when they have been duly delivered for carriage BUT before they have passed the ship's rail. This will be the case particularly if they have not taken out insurance to protect the goods all the way to the "F.O.B. point"

Though the buyer may have taken out insurance which covers loss of or damage to the goods before the F.O.B. point has been reached (so-called warehouse to warehouse insurance), the insurer may still refuse payment, since the F.O.B. buyer has no "insurable interest" before the goods have arrived at the F.O.B. point. Moreover, the insurer may not be inclined to pay someone who is not the insured party under the insurance policy.

In this respect, the C.I.F. seller is better placed, since the insurance is to their benefit before the F.O.B. point (i.e. the ship's rail) and to the benefit of the buyer thereafter.

Short Expressions

Because merchants have tended to use short expressions, such as F.O.B. and C.I.F., to clarify the distribution of functions, cost and risks related to the transfer of goods from seller to buyer, in the 1920's the International Chamber of Commerce conducted a study on the interpretation of the more important trade terms. The outcome resulted in the first publication of "International Rules for the Interpretation of Trade Terms" in 1936.

Incoterms were subsequently amended in 1953, 1967, 1976, 1980 and 1990. The main reason for successive revisions of Incoterms has been the need to adapt them to contemporary commercial practice. Thus, in the 1980 revision the term Free Carrier (now FCA) was introduced in order to deal with the frequent case where the reception point in maritime trade was no longer the traditional FOB-point (passing the ship's rail) but rather a point on land, prior to the loading on board a vessel, where the goods were stowed into a container for subsequent transport by sea or by different means of transport in combination (so-called combined or multimodal transport).

Further, in the 1990 revision of Incoterms, the clauses dealing with the seller's obligation to provide proof of delivery permitted a replacement of paper documentation by EDI-messages provided the parties had agreed to communicate electronically. Needless to say, efforts are constantly made to improve upon the drafting and presentation of Incoterms in order to facilitate their practical implementation.

Incoterms 2000 when compared with Incoterms 1990 may appear to have effected few changes. It is clear, however, that Incoterms now enjoy worldwide recognition and avoid change for change's sake. The wording in Incoterms 2000 clearly and accurately reflects trade practice and includes substantive changes in two areas:

• The customs clearance and payment of duty obligations under FAS and DEQ, and
• The loading and unloading obligations under FCA.

Other possible variances in Incoterms 2000 are:

• Has the added obligation for the seller to load the goods on the buyer's collecting vehicle
• CIF/CIP - The buyer's need for additional insurance coverage
• DEQ - The added obligation for the seller to pay for costs after discharge.

The International Chamber of Commerce publishes two very helpful books on Incoterms. One is the "ICC official rules for the interpretation of trade terms - Incoterms 2000" and the other the "ICC Guide to Incoterms 2000" publication numbers 560 and 620 respectively.