Incoterms and International Sales Contracts
Incoterms are all the rage right now because the International Chamber of Commerce issued its latest version called Incoterms 2010. Incoterms are shorthand in international sales contracts, namely risk of loss and responsibility for delivery. If the merchandise is lost at sea, for example, who bears the loss? Where are you supposed to deliver the merchandise to? Who is handling export and customs clearance, and things like that. These issues are important, but they are seldom litigated because Incoterms do not deal with the transfer of title of the goods. They do not deal with who owns the goods or issues like whether the goods are conforming or whether you even get paid. These issues are dealt with by the sales contract, which can and should include Incoterms if you have them.
Incoterms are also not law. They are not treaty. They are conventions or suggestions. You are allowed and encouraged, when you do use them, to modify them and supplement them to suit your particular transaction.
Let’s see how Incoterms actually were litigated in a 2002 court case out of the federal district court, Southern District of New York. The case is St. Paul Guardian Insurance Company. vs. Neurod Medical Systems. A US company bought medical equipment from a German manufacturer. The parties agreed on an ocean shipment, but the medical equipment was damaged during the ocean voyage. The insurance company paid the US purchaser $285,000 because of the damages, and as subrogee, the insurance company sued the German producer to recover that amount. The German company said it did not owe the money because this was a CIF shipment, which placed the risk of loss was on the buyer. The insurance company argued, incorrectly, that the German supplier had to pay because the German company still owned the medical equipment when it was damaged. The Court warned against confusing risk of loss with title. Incoterms only deal with risk of loss, not title. You can own a shipment and, depending on the Incoterms you choose, the risk of loss is on the other party, as was the case here. The court concluded that the insurance company didn’t have a case and dismissed the lawsuit.
The biggest problem with Incoterms is that people confuse them with ownership rights. Incoterms can provide a false sense of security that all the important issues in an international sale have been dealt with.
Incoterms can be great. Incoterms do all sorts of things, like allocating risk of loss and responsibilities for paying insurance and freight. They were recently amended by the International Chamber of Commerce. But Incoterms are conventions or standards. Actually, they are suggestions. They are not law. They can’t be law because the buyer and seller can massage them to fit their particular contract. Often parties don’t even use Incoterms as intended or even at all. Thus, we can say that when a contract between foreign seller/exporter and the importer of record specifies that foreign seller/exporter pays for freight and insurance, and if those charges are set out separately in the invoice and elsewhere to CBP's satifsaction, then the importer of record can deduct those charges and make sure it doesn’t pay duty on them regardless of what the Incoterms say.
Take HQ 547826 for example, a 2002 ruling issued by CBP. Here we have an instance where the parties wrote on their contract: FOB Miami, which CBP complained was nonsensical. But it isn't nonsensical if the parties knew what they meant. That’s what a contract is. The meeting of the minds. Who cares who else understands, right? Well, it matters if an outside arbiter, like CBP or a court, has to resolve a contractual dispute between the parties. In this ruling, FOB Miami didn’t make sense because traditionally FOB means that the exporter/seller’s responsibilities end at the foreign port, but it was clear that the exporter/seller paid all the freight and insurance costs all the way to the US port. Because the importer supplied sufficient, itemized backup to support this, CBP ignored the FOB and allowed the importer to deduct those costs from the transaction value.
Principal and a founding member of GRVR Attorneys.