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Many companies have complex agreements with their counterparties and service providers, which will be time-consuming to redraft.
Therefore parties are free to continue to refer to Incoterms 2010, Incoterms 2000 (or any other revision!) – provided that this is specified unambiguously in their agreements.
Where possible use CIF, CIP, CFR or CPT.
For all these rules, delivery takes place before the main carriage. The carrier gives the seller a transport document which (usually) serves as a mechanism for control of the goods – it will be presented to a bank under the letter of credit, and then passed on to the buyer so that the goods can be claimed.
All the other rules are potentially problematical in one way or another.
For example with FCA, the buyer is in control of the main transport, and there are circumstances in which the buyer may be able to frustrate the transaction.
Conversely with DAT, the buyer can be at risk, because seller may be able to get paid under the letter of credit before fulfilling the delivery obligation.
More on letters of credit and the Incoterms rules
Use of the rules is not limited to cross-border trading.
The Incoterms rules are also applicable to transactions where the buyer and seller are in the same country, or both within a customs union such as the European Union.
All the provisions of the rules are written with this in mind, e.g. if there are issues with import duty or taxes, they need only be considered where appropriate.
The Incoterms rules are silent on the issue of when title in the goods passes from seller to buyer. This should be dealt with elsewhere in the commercial agreement.
The issue of title to the goods is related to that of revenue recognition, which matters to those organisations who want the best figures in their financial reports.
Revenue recognition is defined by accounting standards such as GAAP, and the point of delivery (as defined by the Incoterms rule) is one factor in the decision on this matter.
Hence rules such as DAP and DAT would tend to be disadvantageous in this respect.
Since 9/11 and incidents such as the oil tanker bombing in the Gulf of Aden in 2002, cargo security is now high on the transport industry agenda.
The Incoterms 2020 edition analyses responsibilities by reference to activities associated with the export clearance process, the transport process and the import clearance process.
In practice, the most relevant security framework is often the International Ship and Port Security code ISPS Code, which is an amendment to the International Convention for the Safety at Sea (SOLAS).
Responsibility for security policy rests with designated persons both at the ship level and for shipping terminals. Carriers will often levy a small charge for security/ISPS, which will be borne by whoever contracts with the carrier.
It is possible to add extra words to an Incoterms rule, so as to cater for special situations and/or to achieve more precise definition of obligations
For some types of cargo, costs arise from stowing the cargo on the vessel. So the Incoterms rule “FOB stowed” will make it clear that the seller is responsible not only for loading the cargo on board, but also for stowing it.
The rule “DDP, VAT unpaid” – seller is responsible for paying import duty, but not for paying VAT
The rule “EXW, loaded” – seller loads goods onto vehicle
By qualifying a rule, there is the danger of introducing ambiguity. Examples: expressions such as “Liner terms” and “Liner out” are open to different interpretations. “EXW, loaded” – there are different views as to whether loading is at buyer’s or at seller’s risk.
In general, the rules are silent on the matter of insurance – the buyer and the seller each decide whether they wish to insure the cargo for that part of the journey for which they bear the risk of loss or damage.
However the CIF and CIP rules have specific provisions.
In both cases, the seller is required to buy cargo insurance for the portion of the journey where the seller is “off risk”, once the goods have been delivered to the carrier.
This insurance is for the benefit of the buyer, who must claim from the insurer if necessary.
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