Deciding the Right Trade Term
Understanding the correct
trade terms matters because they define geographical
point where the risks and costs of the buyer and seller
begin and end. Needless to say that it becomes critical
to select trade terms that avoid misunderstandings
and disputes that result from a misuse of trade terms
during drafting stages of the contract. For example,
in a container shipping agreement, a choice of trade
term FOB could be a misuse because the seller remains
at risk even after the goods have left his control.
Under those circumstances, the drafters should have
selected FCA because the risk of loss passes at a
point where the seller hands over the goods to the
carrier rather than FOB.
In addition, even though assigning
risks and costs appropriately is imperative, electing
trade term requires understanding many other factors
that can affect their delivery obligations such as
commercial practices of the respective countries since
commercial practices vary from country to country
and port to port. In European countries, the standard
practice is to sell goods on "delivered"
basis but that is not the case everywhere. Another
example would be seller's obligation to load under
trade term FOB as well as seller's obligation to unload
under the term CFR or CIF, which can vary based on
commercial practices of that country. Thus, parties
must learn about the customs of the country and port
involved before signing the agreement.
Commercial practices can also
vary based on location. RO/RO (Roll On and Roll Off)
vessels are preferred method of transport to the United
States or European countries because RO/RO vessels
are equipped with ramps that make loading and unloading
possible. Barge-carrying vessels, on the other hand,
are preferred method of transport to European countries
that are landlocked or countries that have canals
since barge-carrying vessels are for short-haul to
and from rivers and canals.
The choice of the trade terms
must fit the transaction. For example, the trade term
FOB would be appropriate to transport everyday items,
i.e., toilet paper. However, the term FOB would not
be appropriate to transport urgently needed vaccine
supply. The trade term FCA would be better suited
under those circumstances. In addition, parties must
understand the critical points for different types
of transport. Traditionally, ship's rail has been
the critical point for maritime transport. Whereas,
containers are delivered to the carrier, ship's rail
has no meaning. Thus, the trade terms meant for maritime
and inland waterway transport would be inappropriate.
The lack of clear definitions
of basic terms can also influence delivery obligations.
For example, traders have used the term FOB+I. Although
the inference is that parties intended to add seller's
insurance obligation, it is unclear to what extent.
There are several other examples of inconsistent usage
of trade terms such as C& F or C+F instead of
CFR.
In an attempt to circumvent
this problem of inconsistent and varied interpretation
of trade terms in the international trade market the
International Chamber of Commerce (ICC) in 1936 drafted
international commercial terms what is now known to
be called ‘Incoterms’. It was done with
the goal of lending a universally accepted understanding
of international trade terms to avoid misunderstanding
and is now commonly used in agreements to determine
as to when the responsibility for transporting the
goods switch from the seller to the buyer, who is
responsible for insuring the goods and at what point
does the liability transfer. Contrary to the common
belief Incoterms do not deal with the transfer of
title of goods.
In order to ensure that the Incoterms 2000 terms apply,
buyers and sellers should specify
Incoterms 2000 on all contractual documents. It should
also be noted that whenever a trade term is cited
on a document the wording "Incoterms 2000"
should be referred to along with the specific location.
For example, the term "Free on Board" (FOB)
should always be accompanied by a reference to the
port of shipment. (Example of correct use: FOB Savannah
Incoterms 2000).
Incoterms correspond closely
to the U.N. Convention on Contracts for the International
Sale of Goods and the English version is endorsed
by the United Nations Commission on International
Trade Law (UNCITRAL). Authorized translations into
31 languages are available from ICC website (Web Link
http://www.iccwbo.org). The latest version of these
terms is ‘Incoterms 2000’ and is copyrighted
by the International Chamber of Commerce, Paris, France.
To assist businesses in the basic understanding the
13 Incoterms, preambles to the 13 Incoterms 2000 is
available on the ICC website in ‘read-only’
format for the visitor to review. (Web Link http://www.incoterms.org)
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