Everything Transportation Companies Always Wanted to Know About Incoterms, But Were Afraid to Ask Because the Carrier Is Liable Anyway

Incoterms, an acronym for “International Commercial Terms,” are a series of commercial terms developed and published by the International Chamber of Commerce (“ICC”). Following two studies conducted by the ICC, in 1923 and in 1928, that highlighted disparities in the interpretation of commercial trade terms, the ICC published its first version of the Incoterms in 1936.[1] The ICC’s intent with Incoterms was the introduction of a set standard of rules and interpretations that may be referred to in agreements, leading to greater certainty and predictability, with the ultimate objective of facilitating transactions.

Incoterms: What are They?

Each of the 11 Incoterms consists of a three-letter trade term representing a list of terms and conditions, and is designed to have a universal meaning for trade participants worldwide. Incoterms are not meant to represent the entire contract between parties, but are rather meant to complement transportation and sales agreements, by clearly defining the obligations of each party as well as costs and risks associated with the delivery of goods from origin to destination. Though the ICC has announced that it will unveil a 2020 version, Incoterms were last updated in 2010.

Incoterms that Apply to Any Mode of Transportation

Incoterms 2010 is composed of 11 defined terms, some of which apply to any mode or modes or transport, and some of which apply specifically to sea and inland waterway transport. One example of an Incoterm that applies to any mode of transportation is the Incoterm EXW (Ex Works). When a sales contract states that the term EXW applies to a sale, “delivery” is defined as the moment where the seller places the goods at the disposal of the buyer, either at the seller’s premises or at another named place (for example, the seller’s “works” – factory or warehouse – hence the title of this Incoterm). If the sale agreement provides that making the goods available to the buyer determines the transfer of title, then title is transferred well before the final destination. As is apparent from this example, Incoterms can help parties clarify transfer of risk and of title, without adding pages to an already dense purchase and sale agreement.

Incoterms that Apply Only to Marine Transportation (Don’t Use Them on Land)

The 11 Incoterms are divided into two categories: (1) rules for any mode or modes of transport and (2) rules for sea and inland waterway transport. Whereas terms contained in the “any mode” category can be used for shipping, those belonging to the “shipping” category are not to be used for any other mode of transportation. Indeed, while the first category is mainly tailored towards the transportation of containers, the second category should be favoured for bulk cargo and non-containerized goods.[2] When goods are containerized or delivered inland to a carrier, the reception point differs from situations where goods are delivered alongside or on board a ship.

To address these differences, the two categories of rules set varying points at which risk transfers from seller to buyer.[3] For instance, under the “FOB” (Free on Board) term designed for sea or inland waterway transport, delivery is satisfied when goods are placed on board the vessel nominated by the buyer at the named port of shipment.[4] The “FCA” (Free Carrier) Incoterm, which may be used at sea or on land, defines delivery as occurring when the seller delivers goods to the carrier or another person, nominated by the buyer.[5] By offering different conditions for delivery, both rules delineate the moment at which risk transfers from seller to buyer.

What Do Incoterms Mean For the Carrier?

As our title implies, on one level Incoterms do not affect carriers, in the sense that a carrier’s liability will be determined by regulated aspects of a transportation agreement, whether evidenced by a bill of lading, a written agreement, or sometimes in cases where an agreement is deemed to have been concluded by statute or regulation. However, Incoterms can affect remedies for carriers wishing to recover freight charges. For example, the Court of Quebec has recognized that the term “FOB” (Free on Board) inserted into an agreement between shipper and carrier constituted a condition of said agreement, allowing a carrier to recover freight charges from a consignee (at the point of delivery).[6] Conversely, in a case where the “DDP” (Delivered Duty Paid) term had been used between seller and consignee, a United States District Court found that the total cost of freight was allocated to the seller, irrespective of the method of transportation.[7]  The Canada Border Services Agency during audits has also been known to rely heavily on Incoterms strictly, even in the face of contrary evidence regarding the conduct of the parties.

Incoterms are powerful tools – a shorthand way of incorporating detailed terms and conditions in an agreement, often simply by scribbling three letters on a bill of lading. It is also not uncommon for parties to use Incoterms that are incompatible with the desired mode of transportation – for example using FOB Incoterms for goods sent by truck.  Parties that use Incoterms should ensure that they know what they mean and that the risk allocation is appropriate for the transaction at hand. For transportation companies, Incoterms do not do much to alter liability for loss of or damage to cargo, but they can be game-changers when the carrier seeks payment.

This article was prepared by McCarthy Tétrault’s Transportation and Logistics Group. For more information, please contact David F. Blair or Brian Lipson.

Summary of Incoterms 2010

Mode

Term

Full name

Definition[8]

Any mode of transport

EXW

Ex Works

The seller delivers when it places the goods at the disposal of the buyer at the seller’s premises or at another named place (i.e. works, factory, warehouse, etc.). The seller does not need to load the goods on any collecting vehicle, nor does it need to clear the goods for export, where such clearance is applicable.

FCA

Free Carrier

The seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises or another named place. The parties are well advised to specify as clearly as possible the point within the named place of delivery, as the risk passes to the buyer at that point.

CPT

Carriage Paid To

The seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.

CIP

Carriage And Insurance Paid To

The seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.

‘The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIP the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.”

DAT

Delivered At Terminal

The seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named terminal at the named port or place of destination. “Terminal” includes a place, whether covered or not, such as a quay, warehouse, container yard or road, rail or air cargo terminal. The seller bears all risks involved in bringing the goods to and unloading them at the terminal at the named port or place of destination.

DAP

Delivered At Place

The seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. The seller bears all risks involved in bringing the goods to the named place.

DDP

Delivered Duty Paid

The seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport ready for unloading at the named place of destination. The seller bears all the costs and risks involved in bringing the goods to the place of destination and has an obligation to clear the goods not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities.

Sea and inland water transport

FAS

Free Alongside Ship

The seller delivers when the goods are placed alongside the vessel (e.g., on a quay or a barge) nominated by the buyer at the named port of shipment. The risk of loss of or damage to the goods passes when the goods are alongside the ship, and the buyer bears all costs from that moment onwards.

FOB

Free On Board

The seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment onwards.

CFR

Cost and Freight

The seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. the seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.

CIF

Cost, Insurance and Freight

The seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.

‘The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIF the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.”

[1]Incoterms® rules history”, International Chamber of Commerce

[2]The logic of the Incoterms 2010 rules”, IncotermsExplained.com.

[3] Ibid.

[4] “The Impact of Incoterms 2010”, Glen Gibbons, 4 IBLQ 15.

[5] Ibid.

[6] Fedex Trade Networks Transport & Brokerage CDA Inc. c. Transcontinental Sales Inc., 2004 CanLII 6370 (QC CQ), paras 50-51.

[7] Tian Long Fashion Co., Ltd. V. Fashion Avenue Sweater Knits, LLC, 2016, United States District Court, S.D. New York, No. 13 Civ. 8258. The authors are lawyers in Canada, and this reference to United States law is for informational purposes only.

[8] The following definitions are from “Incoterms® rules 2010”, published by the International Chamber of Commerce.

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