What is meant by Incoterms and what is its significance? What are the different Incoterms used in industry?

ICOTERMS are  widely used for International Commerical transactions or for procurement / freight processes. The Incoterms are intended primarily to clearly communicate the tasks, costs, and risks associated with the transportation and delivery of goods. The different Incoterms used in the industry are EXW- Ex-works, FCA- Free Carrier, FOB - Free on Board, CIF - Cost Insurance and Freight, CFR - Cost and Freight, DDP - Delivery Duty Paid and DDU - Delivery Duty Un-paid.

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.

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.

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.

The eleven Incoterms have been grouped in two categories for Incoterms 2010:

Rules For Any Mode Or Modes Of Transport

EXW                EX WORKS

FCA                 FREE CARRIER

CPT                 CARRIAGE PAID TO

CIP                  CARRIAGE AND INSURANCE PAID TO

DAT                DELIVERED AT TERMINAL

DAP                 DELIVERED AT PLACE

DDP                 DELIVERED DUTY PAID

Rules For Sea And Inland Waterway Transport

FAS                 FREE ALONGSIDE SHIP

FOB                 FREE ON BOARD

CFR                 COST AND FREIGHT

CIF                  COST INSURANCE AND FREIGHT

The terms which fall within the class entitled ‘rules for any mode or modes of transport’ may be used without regard to the mode of transportation. The second class has been updated to address the point of delivery and the place to which the equipment is carried are both ports. Under the last three terms of this class, the point equipment is being delivered when it is “on board” the vessel.