International Judicial Monitor
Published by the International Judicial Academy, Washington, D.C., with assistance from the
American Society of International Law

Summer 2015 Issue
 

SPECIAL REPORT – Special to the International Judicial Monitor

 

International Sales Transactions – A Commentary on Terms of Usage

Starkeisha Tucker
By: Starkeisha Tucker, Intern, International Judicial Academy

International transactions make up some of the daily activities of public and private businesses. With the recent economic changes there has been a deficit in the number of transactions between the United States and the rest of the world. This article discusses the essential part of Incoterms in the language of trade and how the terms are intertwined with international sales transactions.

According to the U.S. Department of Commerce, good imports decreased by $26.4 billion in the first quarter of 2015. Could the developing movement for local transactions effectuate this change; are consumers and businesses developing creative ways to acquire goods and services in-house? This is an interesting question, although there may be a developing movement for more local transactions, international sales transactions are still an important component of many businesses.

International commercial terms or Incoterms set the tone for risk, costs, and obligations for parties in bi-coastal sales transactions. The ICC published the eighth revision in January 2011.  The revisions have streamlined the commonly used terms to mirror ever-growing shipping standards. New revisions allow parties to substitute paper communications with electronic equivalents. Transactions between the buyer and seller are more efficient and communication is smoother.

INTERNATIONAL SALES TRANSACTIONS--Incoterms

With any international transaction it is necessary to assign the foreseeable risk clearly to all parties involved. This includes the contracting parties, vendors, partners, distributors, and the banks.  It is necessary to assign the appropriate terms in the sales contract and the appropriate payment terms in the letter of credit. The sales contract includes necessary details such as the good, quantity, cost, delivery, and governing law. 

There are eleven most commonly used “incoterms,” separated into two broad categories of transportation, according to the International Chamber of Commerce. The Incoterms are explained in the order of increasing responsibility on the seller for any mode of transportation followed by the rules for sea and inland waterway transport. The terms selected depends on the nature of the good and the agreement between the parties. With either term the buyer is responsible for adhering to international packaging regulations when preparing goods for transit. Now most exporters aim to use environmentally friendly packaging.

COMMONLY USED TERMS

Ex-Works (EXW)

The seller has the least amount of responsibility under this term. The seller as agreed by contract has the goods available for the buyer to retrieve at a previously agreed place or at the seller’s location. At the point of pick up the risk and cost passes to the buyer. The buyer will load, transport and clear customs for export. The seller is only responsible for export packaging, marking, and labeling the goods for transport. The packaging regulations implement

Free Carrier (FCA)

Seller retains the same responsibilities as EXW but the responsibility extends to the export clearance. Export clearance means the buyer’s liability does not begin until the goods are cleared to enter the buyer’s country. The buyer will be responsible for resolving issues with clearance documents or product damage.

Carriage Paid To (CPT)

The buyer covers title, risk, and insurance cost when the goods are delivered to the carrier by the seller, and the buyer. The seller will choose the freight forwarder, cover document fees, cover loading, freight (air or ocean), and choose an export forwarder. This term assigns much responsibility to the seller—the seller is liable for safe transit until the goods arrive to the agreed destination.

With CPT and the terms above, the Incoterms does obligate the buyer or seller to insure the goods during transport. The parties may address this issue in the sales contract.

Carriage Insurance Paid To (CIP)

The seller assumes responsibility for insuring the goods for transport, unlike other terms where either party can handle the cost of insurance. Seller covers this cost along with the additional responsibilities under CPT.

Delivered at Terminal (DAT)

The seller becomes more generous as we move through the terms. Here, the goods are covered from the seller’s location until the goods are unloaded at the main carriers location, with the exception of insurance cost. When the goods are unloaded the risk and cost pass to the buyer unless otherwise agreed in the sales contract. The buyer expressly covers the broker clearance fees, duty, custom fees, delivery to his destination, and unloading at his destination.

Delivered at Place (DAP)

This term explains the seller is liable for all cost and expenses except insurance to the buyer’s destination terminal. Once the product reaches the agreed location, not the final destination, risk passes to the seller.

 

Delivery Duty Paid (DDP)

This is the most generous term on the part of the seller. The buyer is only responsible for unloading goods at named final destination and supplying the security information requirements. Seller is responsible for every aspects of transport from getting the package ready for shipment and everything in between the buyer’s destination.

Moving to other forms of transport, the rules are slightly different for sea and inland.

Free Alongside Ship (FAS)

The seller’s responsibilities last until the goods are placed on the vessel alongside the ship. The buyer will generally include this cost in the price. The cargo is covered until   it reaches the named port or destination chosen by the buyer. Then risk and cost then pass to the buyer from the named port to the final destination.

Free on Board (FOB)

The price is inclusive of EXW but also includes all export related cost, such as clearance dues, weight measurement fees, and quality inspection. Buyer chooses the vessel and pays the freight from the port to the buyer’s warehouse.

With this term the seller is responsible for providing commercial invoices, export license if necessary, and usual transport documents. The same applies for the CIF term.

Cost and Freight (CFR)

Seller agrees to pay the cost and freight from his location to the destination port.  This includes the cost of forwarding and all export formalities. The buyer covers the cost of unloading at the named destination and transporting to the final destination.

Cost, Insurance, and Freight (CIF)

This is a hybrid of the FOB and CFR. The seller covers all of the expenses covered by FOB and CFR including marine insurance. The seller delivers goods on board the ship arranged by the buyer. Generally, the sales contract addresses which party will insure the goods. The buyer is responsible for the same risk as assigned under CFR. The risk transfer to the buyer at the time goods are “on board the vessel” at port. If the goods are unloaded improperly it is the buyers responsibility.

DISPUTE RESOLUTION

When a U.S. distributor contracts with a non-U.S. seller issues may arise based on conformity of goods, damages, carriage of goods, improper examination of goods or issues with payment. The same issues and more may arise with buyers and sellers of foreign countries. The parties will generally agree to the substantive law when the sales contract is initiated.

Generally, international sales contracts are automatically governed by the International Sale of Goods or CISG if the place of business for each party is a CISG country. But parties are allowed to opt-out of using the CISG in whole or in part under Article 6.  If this is the case, the contract should clearly indicate this intention. A standard choice of law clause is insufficient to opt out of CISG. See In Easom Automation Sys v. ThyssenKrupp Fabco, Corp. 2007 U.S. Dist. Lexis 72461 (E.D. Mich. 2007).

The other international law principles such as UNCITRAL Model Law of E-Commerce, and the UNIDROIT Principles may also govern the contracts. The parties may also agree to apply the law of the principal place of business or agree to be bound by US law entirely.

One of the most recent cases applying the CISG Article 6 as a key provision at issue is known as the cereal case. This case involved the buyer, a German manufacturer of baked goods and the seller, a Swiss dried tropical fruit importer. The buyer filed suit against the seller because the poppy seeds purchased had a “strong musty, rancid flavor and smell.” The buyer had to cease all production using the products. The buyer and seller tested the seeds in separate laboratories which confirmed the seeds were unfit for sale.

Although the seller reimbursed buyer for the purchase price, the buyer was still at a loss for the items produced with the rancid seeds. The seller contended if the buyer had properly examined the product it would have identified the defect.

In this case, even though the Supplier Cost Sheet stated the applicable law to the transaction was the NZV Conditions, the court held CISG applied because both countries ratified the CISG and it was not clear from the letter confirmation which law would apply. Additionally, both parties were okay with arbitration under Netherlands law but neither had taken any steps to prove the existence of an arbitration agreement stating this.

This is an example of the importance that the parties equally agree to the choice of law. The parties can agree to arbitration. Arbitration, depending on the case, may be a less expensive options that litigation. Arbitrary tribunals have different methods of procedure, the ultimate goal is to understand the parties and reach a just decision.

With most sales events the parties want to reach a favorable agreement to satisfy each parties needs. Applying the proper terms may not avoid all potential issues but it will ensure parties to the transactions are transparent in their expectations.

ASIl & International Judicial AcademyInternational Judicial Monitor
© 2015 – The International Judicial Academy
with assistance from the American Society of International Law.

Editor: James G. Apple.
IJM welcomes comments, suggestions, and submissions.
Please contact the IJM editor at ijaworld@verizon.net.