Custom «A Critical Analysis of the Incoterms 2010» Essay Paper

INTRODUCTION

The contracts are the basis for running business. There are different forms of contracts - partnership agreements, leases, franchise, supply contracts, exclusive agency agreements etc. It is obvious that in many cases there is a possibility of the disputes between the contract parties. The key reason for such disputes may be the disregard of a provision or a breach of the contract by one of the parties. In addition, there is a probability of the disputes between the parties in the case if the terms, applied in the contract, are interpreted incorrectly. That is why there was a need of defining the commonly accepted terms for the international contracts and for the international commercial transactions in particular.

The International Commercial terms (or also called the Incoterms rules) are the set of pre-defined commercial terms which have been published by the International Chamber of Commerce (ICC) in order to be applied to the international transactions of goods. This is the series of three letter terms, which are used in trade. These terms are widely used in the common sales practices.

The initial objective of the Incoterms regulation practical implementation is to improve and simplify the common sales practices. In other words, these terms are applied for clarifying the communicative tasks, which are related to the allocation of costs and risks, related to the transportation of goods and their delivery process.

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It is important to make an emphasis that these rules are worldwide accepted by the legal authorities, governments and practitioners for the interpretation of the terms. Incoterms are commonly applied to the international trade relations. The core purpose of the Incoterms practical application is to remove the uncertainness which may have place due to the different approaches of the contract interpretation in the different countries.

It is important to emphasize that the basic contract principle implies the complete and precise statement concerning the fact that the contract obligations are agreed between the parties.

The main purpose of the contact interpretation is giving the effect for the commercial purposes for the parties to the contract. The key difficulty in this issue is that in the case of disputes, this interpretation is not always possible.

It is important to mention in the scopes of this research the fact that the Incoterms are not the law and that is why they are not related to the ownership determining, they do not transfer the title of goods, and the payment terms are not evoked by the Incoterms.

These terms are applied only to the delivery process, but at the same time they cannot be applied to the service contracts and to the definition of the contractual obligations, rights, and the remedies, related to the breach of the contract, and are also not covered by the Incoterms.

The parties are not protected from their own risk or loss by the Incoterms, and the goods are also not covered by the Incoterms.

That is why the interpretation of the contract obligations by the law is carried out as the process of the careful interpretation of exact words and terms in order to determine the exact meaning of the bargain between the parties. The additional attention should be paid to the way the words are written in the contract.

The civil law pays less attention to the precise interpretation of the contract in comparison with the common law, which strongly emphasizes the fact that the commercial parties should carry out their obligations properly.

The complex contract wording is alike to the strict interpretation implied by the common law. Also, it is important to pay additional attention to the problem of the language, used in the contract, especially in the case when it is English, because this language is considered to be the most flexible language in the world and that provides the lawyers with an opportunity of interpretation the contract in the different manner.

That is why, in the dispute settlement process, the judge can decide which meaning of the word is appropriate to apply due to the basis of the evidence and legal argument. As an example, it is possible to consider the US civil code and the statement that “The words of a contract are to be understood in their ordinary and popular sense, rather than according to their strict legal meaning;” in majority of the US trade organizations such as ASTM (American Society for Testing and Materials) in particular, there is a set of trade standards, which are developed for reviewing and determining of the custom and practice in the construction industry.

While taking in account the Incoterms, it is possible to define them, as the set of rules and regulations, which predefine the terms published by the International Chamber of Commerce (ICC), and these terms are applied to the international commercial transactions. The core objective of defining the terms implies the following issues: reducing costs and risks, clarifying the communicative issues and, in addition, they are widely associated with the transportation and delivery of goods.

That is why it is possible to define the integrated objective of the Incoterms as the reducing and removing of the uncertainness, which may take place in the case of the different approach towards the contract interpretation. These different approaches arise for the different rules of the contract interpretation in the different countries.

The first the Incoterms was published in 1936 and then, the periodical updating of these terms has been going on taking place. The last Incoterms 2010 version has been issued in January, 2011. In addition, it is important to make an emphasis that "Incoterms" is a trademark, registered by the ICC.

CHAPTER 1. GENERAL BACKGROUND OF THECONTRACT INTERPRETATION AND INCOTERMSINTRODUCTION

Difficulties of interpretation as to the place of the contractual obligations performance of

While talking in account all the above listed issues concerning the contract interpretation, it is possible to develop the following basic principles of the contract construction. In order to develop the contract which may be interpreted in the proper manner, the clause should be considered in the context of the whole document but not in the individual way. In the process of the document construction, all its parts should be given with an effect and it is obviously that no part should be left inoperative or surplus. Also, it is not acceptable to take the worlds out of the context in the process of the contract interpretation.

In the case when the contract consists of two parts: the standard contract and the special conditions, the additional attention should be paid to the special conditionings rather than to the basic terms of the contract: both in the process of its development and interpretation. In the case of the disputes occurrence between the general conditions and the special terms, the last prevail.

In the case when some things are expressed in the special manner, it is considered that the rest aspects are deliberately omitted. While applying the Latin tag to this case “expressio unius exclusio alterius,” it is possible to make a conclusion that one thing excludes the others.

The next issue implies the listing of some quantity of things, related to the general category, and at the same time some other things are included into this list -e.g. force majeure circumstances, in such situation the other things may be considered as the included ones in the case when they are of the same nature with the listed ones.

The contract should be constructed in such manner that one party should not be provided with a possibility of taking ones’ advantages. Also it is important to pay additional attention to the fact that the statement of the document may be considered as ambiguous in the case when there are two or more meanings of this statement and each of these meanings may be applied into the practice without words distortion.

In the case of the ambiguity latency (when the hidden problem may be indicated only in the case of carrying out the contract), it is possible to take the external evidence for the trial of the ambiguity resolution. When there is no possibility of ambiguity resolving, it is possible to consider the contract as an invalid one due to the fact of its uncertainty.

The next important issue to be taken in account, while developing the contracts and interpreting them, is the fact that the existence of the patent ambiguity is possible only in the case when there are two or more meanings of the document form in the very beginning. In the case when the part of the document is formed by the patent ambiguity, the court is provided with a possibility of referring to the subsidiary, while taking in account the fact that these documents are of the lower-ranking nature and may be applied in the case if the ambiguity resolution may be achieved.

Finally, it is possible to consider the whole contract or its clause as the uncertain one in the case when there is no possibility for making a decision, concerning its real meaning. That is why it is possible to make a conclusion that in the case of the uncertainness existence in the clause of the contract; such contract may be considered as an invalid one.

2. Differences between contracts for the sale of goods and contracts for the provision of services in the light of the Incoterms 2010

First of all, it is important to define the contract for sale of goods and to outline its key features in order to consider the difference between the interpretation of the contracts for the sale of goods and contracts for the provision of services.

Contract of sale is such contract, which regulates the sellers’ transfer or the sellers’ consent to transfer the property to the buyer for the monetary consideration, which may be also called as price. It is important to make an emphasis on the fact that there is an option of referring the “property” as the title to the goods or not the goods themselves.

There are the following transactions, which are not included into the contract, are important in the process of its interpretation and which are not the sales: contract of hire purchase, contract of bailment, security interests, contract for work and materials, agency contracts.

Under the contract of bailment lawyers consider the case when the delivery of goods is carried out on such terms, which require the return of these goods to the owner or to another party. Even while taking in account the fact that the person, who holds the goods, is provided with some certain rights and obligations, the property cannot be passed to the holder of goods.

In the case of the hire purchase contract, the purchasing of goods for making the defined payments over a period of time is implied. At the same time, it is not possible to consider such action as the sale due to the fact that the intension of the buyer of owning the goods would be met only in the case when all the payments are made. After that, the process of passing the property takes place. At the same time, it is important to pay additional attention to the fact that the property passing issue should be discussed in the contract; otherwise, passing of the property rights won’t take its place. In other worlds, the sale would occur only in the case if the property passes are stipulated in the contract. The security interests are included into the process of granting the interest in goods by the chargor in favor of the chargee due to the fact that these goods are applied and the security of the loan or of the credit is guaranteed. The charge is provided with the proprietary interest in goods until the debt is paid.

The next issue to be outlined in the scopes of this chapter is the memorandum of the terms and conditions of the transportation contract.  It is interrelated with the Incoterms 2010.

The initial functions of the Bill of Loading (BOL) have included only the control over the cargo shipment and the goods quantity. Time passed and several new terms along conditions of the contract of carriage have been incorporated into the BOL. That has been done in order to assist in resolving of the arising disputes between the shipper of the goods and the ship owner. It is important to make an emphasis that the terms mentioned above do not constitute the contract of carriage because they only provide merely evidence of it.

The contract of carriage is signed between the shipper of the goods and the ship owner, and only after that the BOL is issued. The BOL is issued only after the goods have been actually placed on the board of the ship and after this ship has left the port of loading, it may be considered as the memorandum of the contract of carriage executing, and the terms and conditions of this contract are merely included into the BOL.

In addition, due to the Section 3 of “Jurisdiction in matters relating to insurance” of the Council Regulation (EC) No 44/2001 on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters, Article 16 “A consumer may bring proceedings against the other party to a contract either in the courts of the Member State in which that party is domiciled or in the courts of the place where the consumer is domiciled” in the cases of damaging the shipped goods.

3. Eight core reasons of revision the Incoterms 2010 revision in the beginning of 2011

This section would be dedicated to the outlining of the key reasons of the Incoterms 2000 revision in the beginning of 2011.

1. The ICC has been tending to create the universal set of shipping terms, which are acceptable, both for the purposes of international trade and domestic shipment relations regulation.
2. The recommendation of the US national council, which oversees the Uniform Commercial Code to delete the sections of the Incoterms 2000, which have been addressed to the shipping terms: the Free On Board (FOB) terms.
3. The adaptation of the Sarbanes-Oxley Act in USA required greater verification, concerning ten financial reports, in such case the Incoterms may have impact on the revenue and payable recognition.
4. The EU has been tending to modify and simplify the shipping terms.
5. China has become one of the key players in the global economy after joining the World Trade Organization (WTO). In addition, China has been tending to impact the ICC in the area of shipping terms in particular.
6. The inter modalism has increased in the international trade relations, and that is why the need for a broader scope of shipping terms has occurred. The key purpose for the shipping terms extension was the addressing of the urgent needs of the land/ocean/air movements.
7. The European public companies have practically implemented the International Financial Reporting Standards (IFRS), and that is why the need for the standards for recognition of the revenue and expense, which are primarily tied to point/time of the delivery has occurred.
8. The pressure of the Generally Accepted Accounting Principles (GAAP) in the USA in terms of the Financial Reporting Standards.

The desire of many Fortune 500 companies in the USA to have the universal and standardized shipping terms both in the scopes of the US and in the international scope. Such requirements may be supported by the currently existing business practices and transportation facilities.

 The Background of the Incoterms 2010 review process

On September 28, 2009, the first meeting, concerning the development of the revised version of the Incoterms 2000, has been carried out by the Incoterms drafting committee. The U.S. Delegate to the International Chamber of Commerce's was Frank Reynolds.

After the ICC National Committees have issued the set of requirements to the new version of the development, the second draft version has been accomplished by the Incoterms Drafting Committee. After the submission of these comments by all the national committees, which have participated in the formation of the revised version, the Incoterms 2010, several meetings have been completed by the Drafting Committee in order to develop the Incoterms final draft version.

The committee has set a goal of the practical implementation of the Incoterms on January 1, 2011. The approval of the final version has been carried out by the ICC.

According to the opinion of Mr. Reynolds, the process of drafting was a continuous one due to the fact that the small amount of the specific information, which should have been taken in account, was available. At the same time, on the stage of the first draft versions, Mr. Reynolds has made the following predictions concerning the changes implemented into the Incoterms 2010.

• Reducing the quantity of the terms in comparison with the Incoterms 2000 version.
• The Incoterm FAS was expected to remain in the latest version, even while taking in account the opinions of several experts in the international trade law area that this Incoterm is widely applied in the bulk and break-bulk trade.
• The expected title of the latest version was the Incoterms 3000, but it has been objected by the commission according to the decisions, made by the majority of the National Committees, so in such case the expected title was the Incoterms 2011. According to the opinion of the author, the Incoterms 2011 might address the effective year and, in addition, there has been the possibility of removing the ten-year revision cycle expectation.
• Finally, the Incoterms 2011 have been expected to be more user friendly both in scopes of the domestic trade operations and in the scopes of the international trade.

On December 9, 2009, the next meeting concerning the Incoterms 2010 confirming has been carried out in Washington, DC.

The following speakers have participated in this meeting with the next themes:

• Frank Reynolds, the Delegate International Projects and U.S. to the Incoterms Revision has presented the topic “Incoterms”;
• The outbound program manager of US Customs and Border Protection (CBP), Robert C. Rawls has issued the  topic “CBP Outbound Programs”;
• The Best Practices Roundtable has presented the Expanding U.S. Compliance Programs Globally.[14]

On April 14, 2010, the standardized version of the trade terms has been provided by the U.S. Delegate to the International Chamber of Commerce's (ICC) Incoterms Committee (Frank Reynolds) to the International Trade Law News official web site.

Frank Reynolds is the author of several versions of Incoterms, including the adapted version for the US (Incoterms for Americans) export and import operations.

This has been the revision of the Incoterms 2000. These standardized trade terms were widely used in the international trade operations and sale contracts. According to the information, presented by Mr. Reynolds, the result of the third version of the Incoterms 2010 (the finally accepted name of the Incoterms) included 51 single spaced pages of comments from 23 countries.

All the comments have been reviewed and taken in consideration while developing the fourth version of the Incoterms 2010, which has been accomplished in late March. Furthermore, this draft has been submitted in May by the ICC's Commercial Law and Practice (CLP) Commission. This step may be considered as the first stage of the Incoterms 2010 approval process.

After the draft proposal had been made through the CLP, the approval process was passed to the ICC™s Executive Board, and it was ready for the approval in September, 2010. After the successful approving, the Incoterms 2010 was released and their effective date was anticipated on the 1 January, 2011.

As it has been noted above, the new title for the latest version of Incoterms was the Incoterms 2010.

The core difference of the Incoterms 2010 from the previous version implies the following issues: first of all, the title has been changed, the Incoterms 2010, which is the registered trade mark of the ICC. The title has been changed three times (the Incoterms 3000, the Incoterms 2011, and the Incoterms 2010) and the final version has been approved. The interesting fact is that the title reflects not the date when the terms come into the force (otherwise, it must have been the Incoterms 2011), but the date of release. In addition, the core features, which differentiate the last version of the Incoterms, defined by Mr. Reynolds, are the following:

• The clear differentiation between the omnimodal terms, applied to all the types of shipment and those, which are applied to the marine use only.
• The different regulatory systems are developed for the cargo security covering.
• The preamble of each term includes the extended explanation of the possibility of its practical application to the particular case. In other words, the intended use of the Incoterms is outlined in the latest version, the Incoterms 2010.

Finally, the last innovation in the Incoterms 2010 is the including of the new term, which is applied to facilitation of the domestic transactions using and also to clarifying those transactions which are carried out within the Customs Unions (the areas, where the export or import clearance obligations are not applied). At the stage of the development, the authors of the Incoterms 2010 have decided to reduce the total quantity from 13 Incoterms to 11 Incoterms, and that issue, in turn, has simplified the entire process of the cargo transportation.

Mr. Reynolds has defined the new version of the Incoterms 2010 before its practical implementation in the following manner: "net result will be a more user-friendly set of terms reflecting the up-to-date trade practice." Also, the author of the changes has noted that even while taking in account the fact that the changes are substantial and require some additional time for being mastered, their impact on the improvement of the international cargo delivery process is significant and, this time required for mastering the new rules will be compensated by the process and convenience of their practical implementation.

Finally, it is important to make an emphasis on the fact that before the practical implementation of the revised version of the Incoterms (2010), several professional trainings have been carried out in the US Council for International Business.

The background of Incoterms2010 final draft 2010.

First of all, it is important to take into consideration the background of the Incoterms 2010 formation and development.

The development of the first version of the Incoterms was in the 1920-s, and the first published version was issued in 1936 by the International Commercial Terms (ICC). At the moment, there are 11 Incoterms and the previous version (2000) included 13 Incoterms. There are 8 revisions of the Incoterms. All of them reflect the development of the international trade relations.

CHAPTER 2: CHANGES IN THE INCOTERMS 2010 RULES

The the Incoterms 2010 core aspects

In the scopes of this chapter, it is important to pay additional attention to the fact that the Incoterms 2010 is the eighth revised version of Incoterms, which was initially issued in 1936. In this version, there are 11 rules defined instead of 13, which were developed in the previous version, the Incoterms 2000. Two additional rules have been introduced- DAT- “Delivered at Terminal" and DAP - "Delivered at Place." These two innovations have replaced the four rules of the previous version - DAF “Delivered at Frontier", DDU - “Delivered Duty Unpaid," DES - "Delivered Ex Ship," and DEQ - "Delivered Ex Quay."

In addition, in the Incoterms 2000, the rules have been divided in four categories and the last version (2010) implies the classification of two categories. The main factor of this classification is the method of delivery. The first group covers all the transportation methods, and the second one covers only those sales, which are transported over water.

The first part of the Incoterms 2010 implies seven rules. They may be applied to every transportation model. They are the following:

1. EXW – Ex Works (named the place of delivery). This regulation implies that the goods are available at the premises of seller. According to this term, the core obligations are placed on the buyer and, at the same time, the minimal requirements are established for the seller. The practical application of this regulation mainly takes its place in the case when the initial quotation for the sale of the goods is made and the costs are not included. In other words, it is possible to define EXW in the following manner: the seller has prepared the goods for the collection due to his/her premises. These premises are the following: works, plant, factory, and warehouse. In addition, the date is also agreed by the seller. The role of the buyer, in such case, implies issuing the payment for all transportation costs and bearing the risk for the delivery of the purchased goods to the designation point. In such case, the seller is not responsible for loading the goods, for the vehicle collection, and for clearing these goods for the export. In the case when the seller is asked to load the goods, all the risks and costs lie on the buyer. In the case if both parties are willing to make the seller responsible for loading the goods and for their departure, the additional explicit wording should be added to the sale contract.
2. FCA – Free Carrier (named place). This term regulates the relationships between the seller and the buyer in the case when the goods are handed over by the seller into the disposal of the first carrier (which is usually named the buyer) at the named place. The carriage to the destination point is paid by the seller and, at the same time, the risk is passed at the moment when the goods are handed over to the buyer (the first carrier).
3. CPT – Carriage Paid To (named place of destination). The carriage expenditures are paid by the seller, and the risk lies on the buyer up to the moment when the goods are handed over to the first carrier.
4. DAT – Delivered at Terminal (named terminal at port or place of destination). The carriage to the terminal expenditures are paid by the seller. The import clearance costs are not covered by these payments. All the risk is assumed to the seller up to the point when the goods are uploaded at the terminal.
5. DAP – Delivered at Place (named place of destination). The carriage to the named place expenditures is paid by the seller; the import clearance costs are not covered by these payments. All the risk is assumed to the seller up to the point when the goods are ready for the uploading at the terminal - the risk is passed to the buyer.
6. DDP – Delivered Duty Paid (named place of destination). Under this regulation, the maximal rate of responsibility lies on the seller. It includes the following issues: responsibility for the delivery the goods to the named place and destination point (import duties and taxes are also covered by the seller) and payment of all the expenditures, related to the delivery.
7. CIP – Carriage and Insurance Paid to (named place of destination). In this case the expenditures for the carriage and the insurance are paid by the seller, and the risk is passed at the moment when the goods are delivered to the destination point and passed to the first carrier.

While taking in account the second part of the Incoterms 2010, which covers only the Sea and Inland Waterway Transport cases, there are four rules, implied by the Incoterms. They are the following:

1. FAS – Free Alongside Ship (named port of shipment). According to this regulation, there is a requirement to the seller to place the goods alongside the ship at the named port. The goods should be cleared for export by the seller. This regulation may be applied to the maritime transport only but not to the multimodal sea transport in containers. The practical application of the term usually takes place in the case of the bulk cargo or heavy-lift.
2. FOB – Free on Board (named port of shipment). According to this regulation, the goods should be put on board of the vessel by the seller, which is suggested by the buyer. The innovative feature of this regulation is the fact that the risks and costs are divided between the buyer and the seller at the moment when the goods are actually on the board of the vessel. The goods should be cleared for the export by the seller. Again, this regulation may be applied to the maritime transport only but not to the multimodal sea transport in containers.

The seller should be informed by the buyer about the vessel and the port of delivering the goods. There is no requirement for involving the carrier or forwarder to the delivery process.

1. CFR – Cost and Freight (named port of destination). Under this regulation, the seller is required to pay the costs and is responsible for the freighting and bringing the goods to the destination port. The risk is transferred to the buyer at the moment when the goods are loaded on board of the vessel. This issue is the one mote innovation of the Incoterms 2010. In addition, it is important to pay attention to the fact that the insurance is not included into this regulation and this term may be applied to the marline transportations only.
2. CIF – Cost, Insurance and Freight (named port of destination). It is almost alike to the CFR, but there is an additional requirement to the seller - to procure and pay for the insurance. This term may be applied to the marline transportations only.

The last issue to be discussed in the scopes of this section is to outline the previous four terms, which have been included into the Incoterms 2000 and eliminated from the version of Incoterms 2010. They re the following:

1. DAF – Delivered At Frontier (named place of delivery). This term has been applied to the cases when the shipment of goods has been carried out by the rail and road. The seller has been required to pay at the frontier for the transportation of goods to the named place. The buyer has been required to arrange the customs clearance and to pay the transportation costs from the frontier to his/her factory (destination point). The risk has been passed from the seller to the buyer at the frontier.
2. DES – Delivered Ex Ship (named port of delivery). In this case, the goods are delivered ex ship; the risk is passed form the seller to the buyer at the moment when the ship arrives to the destination point (named place) and the availability of unloading the goods to the buyer occurs. In addition, the seller is required to pay the same freight and insurance as in the case with the CIF arrangement. Usually, the term has been applied in the cases of the bulk commodities shipment - such as coal, dry chemicals or grain.
3. DEQ – Delivered Ex Quay (named port of delivery). This term implies the same requirements as the DES, but the risk is passed at the time when the goods are uploaded in the port of destination.
4. DDU – Delivered Duty Unpaid (named place of destination). Under this term, the delivery to the named place of destination, which has been discussed in the sale contract, is carried out by the seller. There is no requirement for clearing the goods for the import or for uploading them into the any kind of transport at the place of destination. At the same time, in the case if the buyer wants the seller to bear the risks and costs, related to the unloading and subsequent delivery to the import clearance or to the duty beyond the destination point, such issues are to be discussed additionally in the sale contracts.

Finally, it is possible to represent the Incoterms 2010 and the allocation of responsibilities, implied by the Incoterms in the form of a chart.