Meaning of Incoterms

There are a number of common sale or trade terms used in international trade to express the sale price and corresponding rights and obligations of the seller and buyer.

These terms are defined by the International Chamber of Commerce, which are known as ‘Incoterms.


Purpose of Incoterms

The purpose of Incoterms is to provide common interpretation for the different trade terms used in international trade.

In international business, parties are from diverse nations. Different meanings exist for different terms, due to different trade practices followed in those countries. Specific terms are to be interpreted by all parties in a similar manner; otherwise disputes are bound to arise. This can create misunderstandings and disputes. They may lead to litigation resulting in wastage of time, money and strained relationship, disrupting the long- standing mutally beneficial business contacts. In order to remedy the problem, International Chamber of Commerce has developed Incoterms. The uncertainties of different interpretation have been greatly avoided or atleast reduced by these Incoterms. These terms have been revised several times with the changes in international commercial practices, from time to time. The current version of Incoterms has been issued in 1990. They define the rights and responsibilities of importers and exporters in international trade.


Types of Contracts

Type of contract depends on the basis of price quotation. Mainly, there are three types of contracts, which are often used in international market.

Ex Works Contract: The seller fulfills his obligation by delivering the goods at his factory/shop/warehouse. The buyer bears all the costs and risks in taking the goods from that place to the desired destination. This term represents the minimum obligation on the part of the seller. In this type of contract, the obligations of the seller are the lowest and contract price is always the lowest.

Free on Board (FOB): The seller fulfills his obligation when he delivers the goods on the ship rails at the named port of shipment. The buyer has to bear all costs and risks from that point of time. Cartage up to the port, inland insurance, port dues and loading charges into the ship are to be borne by the seller. The seller has to take care of all these expenses.

The term can only be used for sea or inland water transport.


Duties of the Exporter

(A) Supply the contracted goods in conformity with the contract of sale and deliver the goods on board the vessel named by the buyer at the named port of shipment;

(B) Bear all costs and risks of the goods until such time as they shall have effectively passed the ship’s rail. In other words, once goods are placed on ship’s rail, title to the property passes to the buyer and so risks too;

(C) Provide at his own expense the customary clean shipping documents as proof of delivery of goods;

(D) Provide export licence and pay export duty, if any; and

(E) Pay loading costs.


Duties of the Importer

(A) Reserve the necessary shipping space and give due notice of the same to the exporter;

(B) Bear all costs and risks of the goods from the time when they shall have effectively passed the ship’s rail;

(C) Pay freight;

(D) Pay unloading costs and

(E) Pay the price as provided in the contract to the exporter.


Cost Insurance Freight (CIF): In addition to the responsibilities associated with FOB contract, exporter has to arrange shipping space, bear the ship freight and marine insurance charges from his contract price.


Duties of the Exporter

(A) Supply the goods in conformity with the contract of sale, arrange at his own expense, for shipping space by the usual route and pay freight charges for the carriage of goods;

(B) Obtain at his own risk and expense all documentation regarding government

authorization necessary for the export of goods;

(C) Load the goods at his own expense on board the vessel at the port of shipment;

(D) Procure at his own cost in a transferable form a policy of marine insurance for a value equivalent to C.I.F. plus 10%;

(E) Bear all risks until the goods shall have effectively crossed the ship’s rail and furnish to the buyer a clean negotiable bill of lading;

(F) Provide export licence;

(G) Pay export duty if any and

(H) Insure the goods.


Duties of the Importer

(A) Accept the documents when tendered by the exporter, if they are in conformity with the contract of sale and pay the price;

(B) Receive the goods at the port of destination and bear all costs except freight and marine insurance, incurred in respect of carriage of the goods;

(C) Pay unloading costs and

(D) Bear all risks of the goods from the time they shall have effectively passed the ship’s rail at the port of shipment.



In ex works contract Seller’s plant

In FOB contract Port of Export

In CIF contract Port of Import

If the price quotation is on FOB basis, it is a FOB contract. Similarly, if the price quotation is on CIF basis, then it is a CIF contract. The rights and responsibilities of importer and exporter in both the contracts are different. The International Chamber of Commerce has described the rights and responsibilities in ‘INCO’ Terms.


Major Laws having bearing on Export Contracts

Export contracts are private contracts and Government does not interfere with them so long as the provisions of the contract do not go against the provisions of various laws, which have been enacted for the export-import business contracts in India. The provisions of the export contracts should not flout the existing laws of the land. The following are the major laws:


(A) Foreign Trade Development & Regulation Act, 1992: Under this Act, Director General of Foreign Trade brings out the export-import policy and lays down the procedures, from time to time. While entering into a contract, exporter has to draft the provisions of the contract in pursuance of the provisions of the Act. To illustrate, where there is a price regulation and a floor price is fixed in respect of a product, exporter should not enter into a contract with a foreign buyer for supplying that product below the price fixed. If a product is banned for export, contract should not cover export of that commodity. If Government releases certain goods on quota basis, it is necessary for the exporter to provide a clause in the export contract that the supply will be dependent on the release of quota from government. If the contingent clause is incorporated and quota is not released to that exporter and in consequence there is breach of contract in his performance, exporter would not be liable for default in performance.

(B) Foreign Exchange Management Act, 1999: As per the provisions of the Act, export proceeds are to be brought into India within a period of 180 days from the date of shipment. Exporter is not to enter a contract providing a period of credit of more than 180 days to the importer unless the exports are made on deferred payment basis or goods are sent on consignment basis. Further, an exporter is not permitted to pay commission more than 12.5% to his agent, abroad for the sales made by him and so provision for payment of commission is not to be made at a higher rate in the contract, unless prior permission of RBI has been obtained.


(C) Pre Shipment Inspection and Quality Control Act, 1963: In the larger interests of the international trade and in order to protect the image of the exporter as well as nation, certain products have been brought under the Act. Once a notification is made under the Act, certificate about pre-shipment inspection & quality control has to be obtained by the exporter. Quality norms have to be complied with while entering into the contract with the importer. Contract can stipulate higher quality norms but does not allow to mention a lower norm than the one mentioned in the Act. Even if the importer does not insist on the certificate, it is obligatory on the part of exporter to obtain the certificate from the approved agency before shipment of goods.


(D) Customs Act, 1962: No goods can be sent out of the country without the customs clearance. All consignment of goods can be checked by the customs to ensure that the goods stated in the invoice only are leaving the country and that there has been no over/under invoicing in this process. The authority to check the cargo involved is vested with the customs, under this Act.


(F) International Commercial Practices: Indian laws, basically, govern the export import contracts. In addition to these laws, there are International Commercial Practices, which also have a significant bearing on these contracts. The International Chamber of Commerce, Paris has prepared two documents, in the context of international business. The documents are Uniform Customs and

Practices for Documentary Credits (UCP) 1993 and Incoterms, 1990. Banks use

UCP in the negotiation of export-import documents. Virtually, it is a bible to bankers for negotiation of documents.



Meaning and Significance

The term “Elements” is a bit confusing that refers to the general conditions in contracts.

Export contracts invariably refer to the subject matter of the contract. In addition to the subject matter, it is advisable for both the paties to incorporate several general conditions in the contract, in particular, rights of the parties in case of failure of performance or other contractual obligations. The goods may be lost, stolen or damaged during transit. Who would bear the risk in such a situation? If the contract specifies the position clearly, lot of litigation and approaching the court can be avoided. Physical movement of goods involves cost. Who has to bear the costs and up to what point? These issues are resolved by incorporating the elements (general conditions) in export contracts.

Most exporters have developed standard general contracts. It simplifies the day to day operations and also reduces the possibility of missing certain items. The complexity of the conditions depends on what is exported. If the items exported are common items such as handicrafts, garments or normally used consumption items, standard general conditions contract is sufficient. However, if the goods exported are complex item such as petrochemicals, the export contract has to be drafted with a great deal of care, which may turn to be voluminous running into hundreds of pages. For a majority of products being exported from India, the following elements have to be incorporated in the export contracts:

  1. Names of the Parties
  2. Description of the Products
  3. Quality
  4. Price per unit
  5. Total value
  6. Currency
  7. Tax and Charges
  8. Packing
  9. Marking and Labelling
  10. Mode of Transport
  11. Delivery: Place and schedule
  12. Insurance
  13. Inspection
  14. Documentation
  15. Mode of Payment
  16. Credit period, if any
  17. Warranties
  18. Passing of risk
  19. Passing of property
  20. Availability/non-availability of export-import licence
  21. Force Majeure (Factors beyond the control of the parties that makes the performance of the contractual obligations impossible e.g. Wars, floods, fire, civil war. Once this specific clause is incorporated, parties are relieved of their mutual obligations, on the happening of the event. Contract comes to an end and no party is liable for damages)
  22. Settlement of Disputes
  23. Proper Law of the Contract
  24. Jurisdiction.

The Ministry of Commerce, Government of India, has set up Indian Council of Arbitration.

It has developed a model set of Contracts for the benefit of exporters. These model contracts are suitable, in case of most small and medium enterprises.



There are several legal dimensions in implementation of export contracts which form part of corporate export marketing plan. These legal dimensions or issues can be broadly classified into four categories:

(i) Those Relating to export-import contracts

(ii) Those Relating to Relationships between exporter and agents/distributors

(iii) Those Relating to Products

(iv) Those Relating to Letters of Credit


(i) Relating to Export-Import Contracts

They relate to the general conditions of export contracts and different types of contracts.

Both the areas have been, already, dealt above.


(ii) Relationships between Exporter and Agents/Distributors

To promote overseas market, most of the exporters enter into Export Agency agreement.

Export Agency agreement is a legal document, which establishes and defines the relationship between the principal (exporter) and agent. The conditions mutually agreed upon between both the parties are incorporated in the agency agreement. While drafting the export agency agreement, care is to be exercised in respect of certain points. They are summarized as under:


(1) Parties to the Contract: Names and identities of the parties must be made clear.

It is also to be made clear whether the agent has the right to assign contract in

favour of a third party.


(2) Contractual Products: Scope of the agency agreement must be explicit, indicating the names of the products for which the agency agreement is entered into. If this clause is silent, it implies that the agent is working for all products of the exporter, both present and future. This situation may not be favourable and suitable to the exporter. That may turn to be a cause for strained relationship, in future, and may affect the prospects of the existing product.


(3) Contractual Territory: The area for which the agency agreement is entered into must be specified. In the absence of specific mention in the contract, the agent may develop business plans, anticipating the other areas for expansion. Exporter may not intend to appoint him for the additional areas that may cause unintended problems in relationship.


(4) Customers: Customers located in a particular territory automatically come under the agency agreement and business dealings with them entitle the agent for commission. However, problems may crop up with the concept of ‘International Buying Groups’ that has been growing rapidly, recently. The exporter develops the business dealings with that group from India, directly, and executes them without the involvement of the agent in the agent’s territory. As both identification of the group of clientele and contract execution are made by the exporter, exporter would be unwilling to pay commission while the agent stakes his claim as the clientele are located in his territory. Whether the agent would be eligible for the commission or not in such situations, matter has to be made clear in the contract, initially, to avoid future disputes.


(5) Acceptance or Rejection of Orders: Whether the principal has the right to accept or reject the orders secured by the agent has to be clear in the agreement.

This matter assumes importance where the goods are to be sold on credit, when principal is not sure of the creditworthiness of the potential buyers and agent does not have any responsibility in respect of bad debts.


(6) Payment of Commission: Payment of commission is a crucial issue as it is revenue to the agent while it is an expense to the exporter. Commission, basis for calculation and when it becomes due are significant issues that are to be made abundantly clear in the contract. Rate is a percentage while base may be the invoice value or net realized proceeds, after deduction of expenses, incurred by the agent. Normally, agent is entitled to commission soon after exporter accepts the order. There is every possibility that the realization of proceeds may not materialize, after payment of commission. It is desirable to incorporate that the agent would be entitled for commission only after the receipt of proceeds in India. Such clause is necessary in view of the regulations of RBI.


(7) Settlement of Disputes: In international trade, most of the business is transacted on the basis of written orders and well-drafted contracts. Notwithstanding the clarity of the detailed clauses, occurrence of disputes cannot be totally ruled out.

Contract should have a clear clause for the mechanism for settlement of disputes. Referring the matters to arbitration is the most acceptable solution as it is least expensive, with minimum strained relationship. Above all, both the parties have faith in him. Venue of the arbitrator and applicability of the law are very important issues as both the exporter and importer may insist their own country and law for arbitration. Arbitration clause should be comprehensive enough dealing with these issues in the contract.


(8) Renewal and Termination: The contract should provide suitable clauses for renewal of the period, on expiry of the originally agreed period and equally grounds for termination. No principal would be interested, in the normal course, to terminate the agent when the going is good. When the business does not show up as anticipated, principal may desire to terminate the agent and agent may demand compensation for the premature termination. Minimum turnover clause can be a good solution to overcome the contingencies of the poor performance of the agent and get rid of the situation.



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