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What are Incoterms and why are they relevant in relation to international contracts?
Incoterms are international commercial clauses published by the International Chamber of Commerce (ICC) and are referred to in international contracts for the sale of goods. They provide specific rules in relation to the buyer and seller’s responsibilities when dealing with loss, damages and the costs of transport. In fact, they are only commercial in nature, and are used widely during international commercial transactions, so they do not constitute any form of legislation. Incoterms have been reviewed and edited in 2010 and were previously reviewed in 2000 and 2009.
ICC has codified these terms and published them, in order to establish uniform procedures relating to the subdivision of the responsibilities of parties in international transports. In mere terms, Incoterms are binding only if expressly stipulated by parties in their contracts.
It is evident that parties can choose reviewed Incoterms of 2010 or older ones, if preferred. There are two major classifications: one refers to four letters, such as group E, group F, group D and group C and the other refer to the contractual nature, such as generic transport or maritime and inland waterway transport.
Each term establishes different rules regarding the subdivision of responsibilities between buyer and seller, as explained below.
Little prospect of major clauses
These classifications answer several questions: when there is a transfer of risk, which one will pay transport and custom fees and taxes, which one will set up the invoice, which one will organize transport and package goods sold, who will fulfil necessary formalities and arrange relative documents, such as waybill.
Group E: in this group, the terms provided are favourable to the seller and transfer risks and costs to the buyer.
- EXW – Ex works : this means the place of manufacturing, which provides the majority of responsibility for the buyer; in particular, he has to load and collect the cargo from the point of unloading to the delivery point. The seller is favoured here, because he has only to provide goods on his premises.
Group D: in these terms, the seller supports all costs for transport, custom fees and he has the responsibility for loss or damage; for this reason, parties will rarely choose this clause, considering also that the seller will ask the buyer for a higher price when he will negotiate with him:
- DDP – Delivery Duty Paid: it is the most disadvantageous clause for the seller, because he has to deliver the goods to the final destination at the disposal of the seller, organise transport and accounting for all costs, including custom ones or taxes for import/export;
- DAP – Delivery At Place: the seller has to deliver the goods to the final destination, selected by the buyer and at his disposal, organising the transport to the selected place and supporting the risks for transport;
- DAT – Delivery At Terminal: the seller delivers the goods to the Terminal, that is the place chosen by the buyer for his disposal, such as quay, warehouse, container yard or road, rail or air cargo terminal, the seller bears all risks until this moment;
Group F: in this case, the seller has to provide goods to the carrier indicated by the buyer. This means that the buyer will pay transport fees; the transfer of risk to the buyer begins when the seller provides goods to the carrier. Parties very often use this clause.
- FOB – Free on Board: the seller has delivered the goods when he has provided all goods to the carrier (as the goods are on board); it is used for maritime and inland water transport;
- FCA – Free Carrier: the same as FOB for all other transports;
- FAS – Free alongside Ship: The seller has delivered when he has placed the goods alongside the vessel and by this moment passes the transfer of risk for loss or damage;
Group C: those clauses are the most fair considering the transfer of risks and payment of fees.
- CFR – Cost and Freight: the seller has to provide the goods to the carrier and he has to the pay the relative costs, but he does not have the responsibility for loss or damage when the goods are on board;
- CIF – Cost Insurance and Freight: the same as CFR, plus a contractual clause for insurance against loss or damage, which is intended as a minimal cover: if the buyer needs more protection, he has to request for it expressly;
- CPT – Carriage Paid To: the seller has to provide goods to the carrier or other persons nominated by the buyer and he has to contract for transport to the final destination, paying relative costs;
- CIP – Carriage and Insurance Paid to: the same as CPT, but here the seller has also to negotiate insurance, covering risks for loss or damage (a minimum cover, or plus if requested expressly by the buyer).
EU caselaw and Article 5(1)(b) of Council Regulation (EC) No 44/2001 Article 7(1,a,b) of Regulation (EU) No 1215/2012
The EU Court of Justice has recently decided to use Incoterms in order to identify the place of delivery, in light of recent caselaw dated 9th June 2011, Electrosteel Europe SA v Edil Centro SpA.
In particular, the term EXW was used and accepted as a contractual clause capable of identifying the place for delivering under article 5(1) of Reg. 44/2001, which determines, between other parameters identifying special jurisdiction, the place where the goods were or should have been delivered pursuant to the contract.
The Court expressly explains that “In order to verify whether the place of delivery is determined ‘under the contract’, the national court must take account of all the relevant terms and clauses of that contract which are capable of clearly identifying that place, including terms and clauses which are generally recognised and applied through the usages of international trade or commerce, such as the Incoterms drawn up by the International Chamber of Commerce in the version published in 2000.”
The EU legislation has approved this interpretation and set it up in article 7(1,b) EU Regulation 1215/2015, which provides that :
(Links to EU Regulations and sentence of ECJ:
It is evident that parties of an international sale of goods can evaluate this legislation as a way to determine themselves, through an express stipulation of a specific Incoterms clause, the place of delivery, which means consequently they can identify the place where a proceeding will occur under article 7 of EU Regulation 1215/2012 regarding special jurisdiction.
Parties have to also observe some other practical prescriptions, as follows.
Conclusion: necessity of an explicit clause
In order to validate and apply an Incoterms clause, it is necessary to respect the recommendations suggested by ICC. For example, it will be necessary to stipulate in writing the clause and to assure that parties have precisely stated and accepted that specific clause.
The interpretation of clauses can depend by the intention of the parties (or purpose) and not under national law. Using an Incoterm clause do not imply arbitration under ICC but ICC recommends inserting a clause providing application of Rules of Arbitration by ICC to settle any a controversy or dispute.
It will be appropriate to consider all these details, as indicated above, when entering into an international sale of goods contract; if necessary it would be favourable to ask for a legal advice, so to be assured of the meaning of terms stipulated.
As indicated above, an Incoterms clause can become relevant when dealing with rules of special jurisdiction, a very important aspect to comprehend from the beginning of an international sale of goods contract.
INTERNATIONAL CONTRACTS: ARE THERE LIMITS TO THE PARTIES’ POWER OF CHOICE OF APPLICABLE LAW?
(EU regulation Rome I, Nikiforidis, necessary application of rules, lois de police (rules of application))
1) How do you identify the law applicable to an international contract?
When there is a foreign element in the creation of a contract (i.e. one of the parties is foreign, there is a foreign object or the execution of the contract could potentially be carried out in accordance with foreign law) national law cannot always be said to be applicable. For this reason it is useful to analyse the different methods of identifying the applicable law when signing international contracts, and what limits are imposed on the signing parties.
a) Firstly it is necessary to clarify what is meant by the law applicable to the contract: it is the legal order which regulates the interpretation, execution, the consequences of the non-execution or the invalidity of the contract itself. This law must not be confused with the law that applies to the forum, i.e. the set of rules governing the procedure should a dispute arise.
b) In principle, it is the parties who determine freely and in agreement which law will be applicable to the contract, which law will be the lex mercatoriae. the applicable national law of one of the parties.
c) If the aforementioned principle is valid, it is also true that there are priority rules that place themselves above the free determination of which national law can apply, which often leads to doubts as to which is the applicable national law of the contract.
2) Mandatory and non-mandatory material rules
a) The first rule that arises from the choice that the parties have, is the material rule of national origin, or the rule which results from the instruments of international payment, such as money, based on the principle of monetary sovereignty. Payment can be accepted in foreign currency, but the object of the contract must be based on this.
b) Other types of material rules are conventions, such as the Vienna Convention on International Sales. In the field of transport, for example, specific rules are set on the responsibility of the transporter, for fault or presumed fault.
c) Simple values of recommendation are the Unidroit principles, these are principles that regulate international commercial contracts and which have as their objective the unification of the applicable law. These principles, if adopted by the parties, can overcome the difficulties inherent in the application of the law that regulates the contract or when the parties are in disagreement in the choice of the law itself. See 2010 draft principles or website https://www.unidroit.org/.
3) Limits on the freedom of choice of the parties: EU regulation 593/2008 (Rome I)
a) With the approval of the European Regulation (Rome I), which came into force on 17 December 17 2009, a more regular method was suggested as to how to deal with the problem of identifying the applicable law to the contract. (Please note that for the period prior to the date indicated above, the rules of the Rome Convention, issued in Italy with Law no. 975/1984 apply.)
This Regulation applies specifically to contractual obligations. Article 1 provides which matters are excluded (state and capacity of persons, matrimonial and succession regimes, food obligations etc). In such cases one should refer to other European regulations or directives, such as Rome 2 on non-contractual obligations.
b) In Article 3 of Rome I, the principle of freedom of choice of the parties is confirmed, either expressly or tacitly, i.e. resulting from the contractual provisions or the relative circumstances; part of the contract may be regulated by a specific applicable law, as long as this is in accordance with internal public order rules.
c) The constraints that arise from Rome I are present in the absence of choice of the parties in some cases, (Articles 4 – 8) and which has been discussed in caselaw, for example in relation to consumer rights, insurance, transport. These limits are imposed only in circumstances where strictly necessary, as defined in Article 9: “provisions in which respect is considered crucial by a country for the protection of its public interests, such as its political, social or economic organization, to the extent that it is required to apply it to all situations that fall within their application, whatever the law applicable to the contract under this Regulation. “
d) In such cases, therefore, the national judges and international judges can refer to the public order rules, both in domestic and foreign law, which is different from the law chosen by the parties.
In particular, two judgments on this point have specified the importance of the necessary enforcement rules.
The French Supreme Court’s ruling of 6 March 2010 has in fact examined a case of transportation of goods (beef) from France to Ghana.
This transport had been subject to an embargo under the laws of Ghana, but the French company had requested compensation for the loss of the goods and therefore for the resale to recuperate loss, since the embargo was an external element to the contract, this request would not affect its validity.
In this case the Supreme Court applied the Article 9 of the Rome 1 regulation and specified that the application should be rejected because it would have to consider the application of the Ghanaian law on the embargo and would also have to reference to the contract.
Similarly, the European Court of Justice, with the Nikiforidis ruling of 18 October 2016, applied the same rule as the regulation in question. In this the parties sought to determine the amount due as compensation for dismissal of a Greek employee by a Greek employer and a contract executed in Germany. The Greek State, the employer, wanted to apply the Greek law and not the German law, because in the first instance the amount would have been lower and in accordance with the decision held in the European Court of Justice, the law of the country should apply. In relation to the execution of the contract, Greek law was also considered, as the law applicable to the contract.
The reason is precisely the provision of Article 9 of the Rome I, which does not oppose taking into account the law applicable to the contract or other rules that have facts in the contract.
Paragraph 3 of Article 9 expressly declares that: “the provisions of the country in which the obligations deriving from the contract must be or have been carried out may also be effective, insofar as such necessary rules of application render the fulfillment of the contract illegal. In deciding whether these rules should be effective, their nature and purpose should be taken into account as well as the consequences of whether they are applied or not. “
4) In conclusion, through the necessary rules of application, also called lois de police, the law applicable to the contract is not easy to determine, even in the presence of specific choices available to the parties, as it allows the courts to consider further different rules that are based on factual elements of the contract, as happened in the two sentences analysed above.
Therefore it is always be necessary to take these aspects into consideration when drafting an international contract.