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Client Question:

When would I not use Incoterms?


You would not (or cannot) use Incoterms Rules whenever a law prohibits them; or your contract terms avoid them; or in those cases where the underlying circumstance of the model contradicts them.

It is the last of these that generally proves to be the most common reason.

Law: I am not aware of any legal prohibition on Incoterms Rules anywhere in the world currently, but of course the nature of international trade is that the buyer and the seller are always dealing with at least one foreign jurisdiction and they cannot always anticipate what may apply in the ‘other’ country.

But if a law directed that you cannot use the system, then you cannot use the system.

Contract: As Incoterms Rules are a voluntary contract language they could only be said to apply if the agreed term is incorporated into the sale contract.

By exception then, if the Rules are not incorporated into the contract they do not apply and are avoided by exclusion.

Equally, if the contract incorporates another system then Incoterms Rules would be avoided by reference to that alternate preference.

As an example, the model contracts used worldwide by The Grain and Feed Trade Association (GAFTA) members exclude Incoterms by direct reference i.e., Incoterms may not be used in these very popular contracts, ever. Different commercial terms apply.

Of course, no shorthand term from any system need be used in the written agreement.

The parties may decide that they will express their intentions longhand and in detail, in their own manner.

Further, as there is no law compelling the parties to have a written record of their agreement, the ‘contract’ need not be tangible, in which case Incoterms Rules are avoided as there is no certain means to express and record them in a verbal agreement.

On this point, it is my experience that very few merchants have written contracts. In the absence of a written agreement writing a Rule on a commercial invoice, for example, is futile.

As the great Bob Marley might have sung, had he lived long enough to get that job in exports; No Contract, No Rule.

Circumstance: This is generally the commonest example of when Incoterms Rules are not to be used or perhaps I should say, when Incoterms Rules are not applicable.

My experience is that Incoterms Rules are over-used as sellers and buyers (and third-parties) will automatically refer to them in the mistaken belief that a Rule always applies, and without regard to the meaning of the Rule.

This is a precarious trading position in that the seller and buyer often feel they are protected by (or have recourse to) the Rules for assistance, when in fact they do not.

For example, using an unmodified FOB Rule with seafreight containers, or making use of a freight forwarder with an unmodified CIF Rule, or using transport documents to trigger payment in all forms of FCA contracts and so on.

In these common examples the way the parties act and execute the contract contradicts the Rule to some or other degree.

Remember too that when they are applied Incoterms Rules regulate part of the relationship between a seller and buyer.

If there is no seller and buyer, then there is no possible application for Incoterms, and there are many relationships where there are no seller and buyer.

For example, there would be no seller or buyer in a transaction involving samples, free-of-charge advertising materials, demonstration equipment, temporary exports and imports, return and repair events, warranty work, consignment stock and so on.

In such cases, the clear division of risk and cost that the Incoterms Rules would describe for the parties must be expressed longhand in the contract terms (a return and repair procedure, a warranty agreement, a consignment stock contract etc).

Incoterms Rules address some of the commoner ways of doing business: but they do not cover all the ways of doing business.
The Rules are “11 ready-made suits” and they won’t always fit you. Sometimes you will need to go to a tailor i.e. sometimes you will need to write out the detail of your intentions longhand.

In summary: you would not use an Incoterms Rule when the law prohibits you from doing so, or when a contract prohibits you from doing so, or when what the parties wish to do physically and/or administratively is not described by any given Incoterms Rule.

It is this final point which is the common prohibition and the one which gives rise to most misunderstanding and dispute.

Having said this, many merchants use the Rules regardless of the above cautions. For as long as this helps the parties achieve an end result, fine, but I doubt if there would be legal support for either party, should they ever require it, if they do not adhere to correct usage.

The problem with using experience as your teacher is that the final exam can come before your first lesson ends.

Source: Freight Training