[From LC VIEWS Issue 7, Voulme 3, July 2006]

A SOURCE OF INCOTERMS DEFINITIONS

A PLACE OF  INCOTERMS APPLICATION

Editor note:

INCOTERMS IN BANKING WORLD – MISUNDERSTANDING OF INCOTERMS AND MISMATCH BETWEEN DEFINITION AND STIPULATION OR DOCUMENTATION

The 7oth anniversary of INCOTERMS offers an opportunity to discuss whether INCOTERMS have worked well in trade  world; whether the INCOTERMS concept is showing signs of aging and indicating need for refreshing/reenergizing  it; whether they are understood well in banking world. Jia Hao says bankers find mismatch between what an INCOTERM defines and what the LC stipulates or what the document complies. The occurrence of mismatch shows INCOTERMS are not well understood. Jia Hao guides how to prevent or fix the mismatch.  It must be emphasized that INCOTERMS 2000 does concern the banker and therefore he must understand its definitions and implications. He must develop  skill to apply INCOTERMS 2000 in combination with UCP and ISBP. 

INCOTERMS IN TRADE WORLD - A POPULAR LANGUAGE; A POPULAR METHOD

Coming to the question of how INCOTERMS are working in the trade world, Marek Dubovec’s research shows that even where local laws are available to govern commercial trade preference, however, is given to the international INCOTERMS 2000 considering it a better alternative. INCOTERMS 2000 is very helpful to traders in contract formulation, in dispute prevention, in dispute resolution. INCOTERMS is a better way. It is a right way. It is an effective way. So it is a popular way.  But though popular, there may be misunderstanding and mismatch in trade world too, as Jia Hao tells. Kim Christensen gives an example of confusion.

RAVI MEHTA

MISMATCH BETWEEN DEFINITIONS AND STIPULATIONS

By Jia Hao

JIA HAO Bank of China China   Contributing Editor, LC VIEWS   There is a problem of mismatching in documentation/LC stipulation. But as banking community is getting more and more familiar with the INCOTERMS the bankers are now able to identify the mismatches and inconsistencies and thus are making  their LC practice more professional. The INCOTERMS are designed well but their interpretations and applications may not be appropriate.

INCOTERMS - A BETTER ALTERNATIVE

By Marek Dubovec 

MAREK DUBOVEC  Research Attorney National Law Center for Inter-American Free Trade, USA Contributing Editor, LC VIEWS In some 40 countries where there are though local laws to govern LC and commercial trade, yet international rules like UCP 500 and INCOTERMS 2000  get preference for observance in trade and banking transactions. INCOTERMS is a successful experiment in international commerce law and practice

Since the adoption of the 1980 Vienna Sales Convention, INCOTERMS have been expressly or impliedly (through the interpretation of courts) incorporated into many sales contracts entered into subject to this widely accepted law of international sales. For years, before the adoption of the Vienna Convention, they had been resorted to by merchants and referenced in their contracts to supplement the chosen local law. Article 9(2) of the Vienna Convention provides that “parties to a contract are bound by any usage of which they knew or ought to have known, and which in international law is widely known to, and regularly observed by, parties to similar contracts in the particular trade.” For instance, a U.S. court in the BP Oil International case invoked this provision and referred to INCOTERMS as widely know and regularly observed practice that had been incorporated in the contract binding the parties. [1]

INCOTERMS are not a binding set of rules. They must be incorporated into the contract, either expressly or impliedly through a rule similar to Article 9 of the Vienna Convention. Their customary nature also precludes the establishment of any mechanism for enforcement. Similar to trade terms, no enforcement mechanism exists for UCP and other banking customary rules. Docdex is an unofficial resolution-making body whose proceedings are voluntary. I looked into the database of U.S. case law (Westlaw) to see whether issues related to INCOTERMS have been litigated or their validity questioned. Surprisingly, I got only 22 hits. That is an exceptionally low number when we consider they we celebrate their 70th anniversary.

The ICC regularly revises INCOTERMS to harmonize written rules with living law and practice. The drafting process involves both sides of commercial deals - buyers and sellers - thus it is unlikely that the final product will be one-sided. We may draw a parallel from the UCP drafting process where, issuers, confirmers, advisers as well as negotiating banks are represented. The balance, certainty and fairness that flow through the ICC rules makes them attractive in trading communities and promotes their role as facilitators of international commerce.

I am not saying that INCOTERMS “rule the waves” in every single trade sector and region. Some local laws provide for country-specific trade terms and merchants operating in those regions incorporate them into contracts. However, smooth flow of goods and functioning of cross-border transactions requires a certain degree of uniformity. The uniformity embodied in INCOTERMS puts merchants at ease and instills trust into international trade. Users know what to expect and how to react to various issues. Similar to the letter of credit law, where some 40 countries have local rules governing letters of credit, local trade terms are not as widely resorted to as INCOTERMS (perhaps, with the exception of English trade terms). UCP with the backing of INCOTERMS are strong alternatives to local, frequently uncertain, rules on in (dependent) undertakings and trade terms. Let us hope they will continue their successful ride for another 70 years.

[1] BP Oil International, Ltd v Empresa Estatal Petroleos de Ecuador, 332 F3d 333 (5th Cir 2003).

A STORY OF INCOTERMS CONFUSION

Kim Christensen Trade Finance Specialist, Nordea, Denmark Associate Editor, LC VIEWS

I had more or less decided not to offer an opinion on this one. First of all it is probably totally impossible to answer without being so general that it would only make little sense. Secondly I have had the chance to sneak peak Jia Hao's answer – and would in any case have very little to add to that.

So why are you reading those lines? Well – it is because yesterday I stumbled on an LC case where the Incoterms – and their part in the deal as such and in the LC – is an interesting case story. So what I will do here is to share this one with you:

Type of LC

Irrevocable Transferable

The description of goods read:

Goods model XX, as per order no. YY, Amount USD ZZ.ZZZ,ZZ

DDP Lindkobing

For transportation to:

Lindkobing

Required Documents:

• Invoice
• Packing list
• Full set on board marine bills of lading issued to order, blank endorsed, notify applicant marked freight prepaid.
• Negotiable insurance policy or certificate covering institute cargo clauses A (Alt. All Risk) including war and strike risk clauses for 110 percent of the CIP/CIF value.

Had it not been for the insurance document, I would most likely not have giving this a second thought. First of all – why require an insurance document on a DDP consignment? Secondly how to determine the CIP/CIF value – does this add an additional requirement to the invoice?

After talking to the LC beneficiary – I found that the purpose was the following:

The LC beneficiary is a middleman buying goods in South America and selling on to Scandinavia – using transferable LCs.

The purchase is done on FOB terms (South America Port) – and the sell it on DDP terms; and of course neither the producer nor the ultimate buyer may know of the others existence.

The idea was to transfer this LC to the seller. One may however expect that he will be a bit surprised having sold on FOB terms – and then receiving an LC:

• On DDP terms
• Calling for “freight prepaid”
• Requiring an insurance document – and that one being based on CIP/CIF value.

Linkobing is by the way an inland destination – so one may really wonder if a marine B/L would do the trick here, as it will ultimately be a multimodal transport – which again will “rule out” FOB.

The reason for the requirement of an Insurance document was that the buyer (LC applicant) want proof that the goods are in fact insured – as he may – based on the documents alone – be obliged to pay, while goods (arriving much later) may be damaged. This does not seem unreasonable – but would of course never work as a part of the LC under this construction.

So one can in any case conclude that “Incoterms confusion” still exists, and should you by the way have an idea or two as to how the LC should be structured in order to facilitate this deal please let me know. Thanks in advance.

• The ICCs page on Incoterms
  Incoterms are standard trade definitions most commonly used in international sales contracts. Devised and published by the International Chamber of Commerce, they are at the heart of world trade.
   
• eTradestone.com
  Incoterms are standard trade definitions most commonly used in international sales contracts. Devised and published by the International Chamber of Commerce, they are at the heart of world trade.
• On this page you can download an incoterms wall chart as well as descriptions of all the Incoterms
   
• Incoterms 2000 on www.nordea.com
  Incoterms is a set of trade terms published by the International Chamber of Commerce (ICC). Incoterms define the rights and obligations of buyers and sellers in international sales contracts. At 1 January 2000 Incoterms 2000 replaced the previous Incoterms dated 1990. Some terms can be used only for sea and inland waterway transport, whereas others can be used irrespective of the mode of transport. Incoterms 2000 describe the respective responsibilities of buyers and sellers in international trade. Click on any incoterm to see the definition.