Trade terms

Trade terms and INCOTERMS are not exclusively used in shipping as, for example, are charterparties.

They are also not primarily meant for use in contracts of carriage of goods. However, they do have a bearing on shipping and shipping documents. They also influence the rights and responsibilities of the persons who enter into contracts to carry goods by sea.

For example, the connection between INCOTERMS 1990 and shipping can be identified when considering the seller’s obligations related to the carriage of goods. Some INCQTERMS require the seller to arrange for the contract of carriage and specify the type of contract of carriage, for example, a bill of lading. INCOTERMS may also state the seller’s obligations concerning the delivery of goods, provision of documents and packaging. If the seller delays in delivering the goods to the ship, he may become liable to demurrage. The correct provision of transport documents, such as bills of lading, influences the right of the buyer (who may be the consignee or endorsee) to bring an action against the carrier under the Bills of Lading Act 1855. There may be special packaging requirements for certain cargoes which if not complied with by the seller could make him liable to the shipowner if damage or risk of damage occurs to the ship.

Therefore discussion of trade terms and JNCOTERMS is considered to be relevant in a book on shipping.

Trade terms. In every international trade transaction certain questions must be answered:

-who will arrange and pay for the carriage of the goods from one point to another?

-who will bear the risk if these operations cannot be carried out?

-who will bear the risk of loss of or damage to the goods in transit?

All of these questions are concerned with actually transporting the goods from the seller to the buyer. It is possible to imagine many ways of dividing up the costs, risks and responsibilities of the transport of the goods between the two parties. That is exactly what trade terms do. They are shorthand expressions that set out the rights and obligations of each party when it comes to transporting the goods.

Each term means a different division of costs, risks, and responsibilities between the buyer and seller. They range from a situation in which every activity is the responsibility of the buyer to the other extreme every activity is the responsibility of the seller. These trade terms grew up as a result of the requirements of different times and places and trades.

Because of this somewhat mixed development, it has not always been clear just what should be covered by these trade terms.

Under some systems of law, trade terms have, at least traditionally, been used only to determine the division of costs between the parties. However, in present international custom the main purpose of trade terms is to determine at what point the seller has fulfilled his obligations so that the goods in a legal sense could be said to have been delivered to the buyer.

That is the main function of a trade term. But there are also several “details” that must be resolved. The most important of these are outlined below.

Uncertainty about these obligations could be very harmful for the contracting parties. Lack of precision would almost inevitably lead to disputes, including litigation, and to a considerable increase in “overhead” expenditures in everyday operations.

Moreover, the parties in different countries would be very unwilling to subject themselves to the laws and practices of the other. They would probably feel secure using the laws of their own country but would find it difficult to assess the consequences of rules or interpretations used in a foreign country.

In order to be genuinely useful, trade terms should have international application and should make the obligations of both parties very clear and explicit. This is the aim of INCOTERMS and it is carried out very admirably.

Trade terms – main function. In present international trade the main purpose of trade terms is to determine the nature of the relationship between the seller and the buyer. This includes the obligations of each party. In particular, the INCOTERMS seem to simplify this purpose by establishing the paint in time when these obligations are performed. When the obligations of the seller are performed, for example, at that instant it may be considered that the goods are legally delivered to the buyer. At this “critical point” the division of the risk and costs related to the sale, transport and insurance of the goods are shifted from the seller to the buyer.

Trade terms – secondary functions. These are more or less “operational” in nature and can include, among others:

1.The duty to provide export and import licences.

2.The nature and type of documents.

3.The extent of insurance protection.

4.The duty to pack the goods.

5.The duty to notify the other party of any arrangements made.

6.The duty to pay for checking operations.

(Trade terms do not deal with such matters as breach of contract and their consequences. They do not also specify when property or “ownership” is supposed to “pass” or be transferred from the seller to the buyer. For these complex legal issues there are many text and reference books on the law of contract and the law of the sale of goods.) 


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