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.
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