What Do Incoterms Determine in a Sales Contract?

Question from Jenny, What Do Incoterms Determine in a Sales Contract?

Answer from AI:

Understanding Incoterms

Incoterms, short for International Commercial Terms, are a set of predefined commercial terms published by the International Chamber of Commerce (ICC). They are widely used in international and domestic trade contracts to clearly communicate the tasks, costs, and risks associated with the transportation and delivery of goods. The latest version, Incoterms 2020, includes 11 terms such as EXW (Ex Works), FOB (Free on Board), and DDP (Delivered Duty Paid).

Key Functions of Incoterms

Incoterms primarily determine three critical aspects in a sales contract:

1. Ownership Rights: The delivery place and time specified by Incoterms determine when the buyer can exercise all ownership rights over the goods. For example, under the term FOB, the buyer assumes ownership once the goods are loaded onto the shipping vessel.
2. Sales Revenue Recording: The point at which sales revenue must be recorded is also influenced by Incoterms. Generally, revenue is recognized when the seller has fulfilled their delivery obligations as per the agreed Incoterm. For instance, under DDP, the seller records revenue once the goods are delivered to the buyer’s location, including all customs duties paid.
3. Risk of Loss or Damage: Incoterms specify when the risk of loss or damage to the goods passes from the seller to the buyer. This is crucial for determining liability in case of any issues during transit. For example, under CIF (Cost, Insurance, and Freight), the risk passes to the buyer once the goods are loaded onto the shipping vessel, even though the seller pays for insurance and freight.

Legal Framework and Case Law

In the United States, the Uniform Commercial Code (UCC) governs domestic sales contracts, while international sales are often governed by the United Nations Convention on Contracts for the International Sale of Goods (CISG). Both frameworks recognize the use of Incoterms to define the responsibilities and risks of the parties involved.

Relevant Legal Provisions

• Uniform Commercial Code (UCC) Article 2 – Governs the sale of goods in the U.S.
• United Nations Convention on Contracts for the International Sale of Goods (CISG) – Governs international sales contracts.

When to Seek Legal Advice

While Incoterms provide a standardized framework, the specific terms and conditions of a sales contract can have significant legal and financial implications. It is advisable to consult with a legal professional to:

• Ensure the chosen Incoterm aligns with your business needs and risk tolerance.
• Understand the implications of the Incoterm on your contractual obligations and rights.
• Resolve any disputes that may arise regarding the interpretation or application of Incoterms.

Additional Resources

For more detailed information, you can refer to the following resources:

• Incoterms 2020 by the International Chamber of Commerce
• Export.gov Guide to Incoterms

Understanding Incoterms is crucial for anyone involved in the sale and transportation of goods. For personalized advice, always consult with a legal professional.