North Vancouver Chamber of Commerce


Pg.2: Incoterms 1990 continued... Why Use Incoterms 1990? When a company deals across international borders, there is always the risk that the meaning of a term or customary practice differs. What the seller understands to be a certain position may be interpreted differently by the buyer due to differences in domestic laws and business custom. Although Incoterms 1990 does not completely alleviate these types of problems they are an important step in that direction. For example, FOB in the United States is interpreted by reference to the Uniform Commercial Code which refers to the 1941 American Foreign Trade Definitions so that "FOB Vancouver" may be interpreted by the US buyer to mean that the seller is obligated to contract for carriage, and "FOB Los Angeles, ship name" may be interpreted by the US seller to mean that payment is required as soon as the goods are loaded. Under Canadian law or Incoterms 1990, a different interpretation would result. General Description and Issues Incoterms 1990 do not attempt to deal with all aspects of an international sale of goods. For example, none of the Incoterms 1990 address the issue of when title to the goods passes to the buyer. Therefore, the parties need to address this issue in their contract if it is important to them. For example, retaining title to the goods until full payment is received, particularly for goods sold over a period of time, may be a useful tool for the seller to use to protect itself against the potential insolvency of the buyer. However, other issues such as "permanent establishment" under applicable tax treaties must also be considered. Incoterms 1990 set out the obligations of the seller and buyer in a "mirror" fashion for easy comparison of the respective obligations however, they do not completely set out the obligations of the parties when the goods are loaded or unloaded. Therefore, the parties should address their minds to cost allocation, responsibilities and whether a modification is required for when risk transfers to the buyer. For example, FOB Incoterms 1990 requires that the seller deliver the goods "on board" the vessel. However, the custom of the port may be that all of the costs of loading plus stowing costs on the vessel are allocated to the seller. The converse may also be the case. The situation is further complicated by whether a charter contract or liner terms includes or excludes these costs. If the parties agree that the seller will be both responsible for loading and stowing the goods on the vessel and will bear the cost of doing so, the parties need to consider when risk to the goods passes to the buyer. In a straight FOB 1990, risk passes to the buyer when the goods pass over the ship's rail. However, if the seller is responsible for stowing the goods on the vessel, it is unclear who would be responsible in the event that the goods are damaged during the stowing activity. In the international sale of goods, 4 major relationships must be kept in mind: 1) seller - buyer 2) carriage company - seller, buyer 3) bank - seller, buyer 4) insurance company - seller, buyer	Although Incoterms 1990 relate to the relationship between the seller and buyer, they must also be kept in mind when looking at the other major relationships. For example, whomever is arranging the contract of carriage (either the seller or buyer) must keep in mind the terms of the sales contract, which includes the Incoterms 1990 to ensure that the terms of the contract of carriage and the contract of sale are consistent. The Seller Must: A1 Provision of goods in conformity with contract A2 Licenses, authorisations and formalities A3 Contract of carriage and insurance A4 Delivery A5 Transfer of Risks A6 Division of Costs A7 Notice to the Buyer A8 Proof of Delivery, transport document or equivalent electronic message A9 Checking, Packaging, Marking A10 Other Obligations The Buyer Must: B1 Payment of the Price B2 Licenses, authorisations and formalities B3 Contract of carriage and insurance B4 Taking Delivery B5 Transfer of Risks B6 Division of Costs B7 Notice to the Seller B8 Proof of Delivery, transport document or equivalent electronic message B9 Inspection of Goods B10 Other Obligations When insured goods are damaged or lost through no fault of either of the parties, the insured party may be limited to claiming under the insurance policy or potentially against a third such as the carrier. In documentary transactions (that is where payment is made on the presentation of documents to the paying institution irrespective of whether the goods have been received by the Buyer and even where they have been destroyed if risk has passed to the Buyer), the parties must ensure that they abide strictly with the terms of the contract. For example, a seller under a contract of sale FOB Incoterms 1990 who provides a bill of lading without an 'on board' notation will potentially be both in breach of the contract as well as be unable to obtain payment in a documentary transaction. Certain of the Incoterms 1990 are suited for maritime transport only (such as FAS, FOB, CFR, CIF, DES, and DEQ) whereas others are suitable for containerised, multi modal and general transport (EXW, FCA, CIP, CPT, CAF, DDU and DDP). Maintaining these distinctions are important. For example, a seller shipping goods from ...Incoterms 1990 continued

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