Despite not being themselves comprehensive contracts or the applicable law, Incoterms have been a short and convenient way to refer agreements on important legal issues, namely delivery method, insurance, cost allocation and the passing of risk. Therefore, it is necessary to investigate the approach of Incoterm toward the issues of the passing of risk in international sale contracts.
There are eleven terms in the Incoterms 2010. In this version, the terms are divided into two groups. Firstly, it is the group containing terms used for all modes of transport, namely FCA, CPT, CIP, DAT, DAP, DDP and EXW. The terms for transport by sea or waterway including FAS, FOB, CFR and CIF are in the second group. Differently, the trade terms were grouped in the C-terms, the D-terms, the F-terms and E-term in the previous versions of the Incoterms.
Similar to the CISG Convention, Incoterms only mentions the price risk. The Incoterms thus traditionally does not resolve the ‘risk’ in other cases such as the consequences of non-performance of parties. Besides, the notion of ‘risk’ under the Incoterms is also referred to as any accidentally physical loss or damage occurred to goods. That means such the loss or damage must be an ‘act of God’ or omissions of third parties.
The main rule under the Incoterms 2010 is that the passage of risk is connected with the delivery of goods as an obligation of the seller. In other words, the seller will bear the risk of loss or damage until the time the goods are delivered in compliance with the specific trade term. After that, the risk occurring to the goods will be in the responsibility of the buyer. Thus, it can be argued that the risk rules under the Incoterms 2010 and the CISG share the same theory.
Regarding the terms of FCA, FAS and FOB, the seller must deliver the contract goods to a carrier who is nominated and paid by the buyer. In FCA term, the passing of risk will occur from the time when the contract goods have been loaded on the transportation means at the seller’s premises or placed at the disposal of the carrier in the case the delivery place is different from the seller’s premises. Under the terms of FAS and FOB, the seller is obliged to respectively place the goods alongside a ship and on board of a ship. Consequently, the risk will pass at those moments.
In terms of the FOB term, it is necessary to further discuss this term which is considered one of the oldest and most popular trade terms utilized in foreign trade. In the previous version of Incoterms, this instrument takes the ship’s rail as a decisive line where the risk is passed from the seller to the buyer. However, this consideration has been significantly changed from Incoterms 2010. In this version, the risk passing line has been moved from passing the ship’s rail to placing the goods on the board ship. This change has been resulted from the fact that ship’s rail approach is apparently inefficient and uncertain. The new risk passing line is thus seemed to be more accurate and clearer. The same changes can be also observed in the CIF and CFR rules below.
In the group of terms including CPT, CIP, CFR and CIF, the seller has the contractual obligation to conclude and pay for the contract of carriage. Similar to the above F-terms, the risk is transferred from the seller to the buyer at the moment of loading. In more detail, in CIP and CPT term, the risk is passed from the time the goods have been handed over to the carrier. This approach is sooner than the ‘maritime’ terms of CIF and CFR in which the risk of loss and damage occurred to the goods will transfer when such the goods are placed on board of the ship by the seller.
Under the D-terms consisting of DAT, DAP and DDP, the contract goods have to be delivered at the point of destination by the seller. Generally, it means the seller will bear the risk during transit. In the first term of DAT, the seller completes their delivery obligation by placing the goods at the named terminal. Consequently, the risk will transfer to the buyer when seller unloads the goods from the transportation means at the named place. By contrast, the sellers in DAP and DDP contracts have to bear the risk of loss of or damage to goods until the moment the goods are available in the means of transport for the either party to unload them. These terms are comparable with the situations regulated in Article 69(2) CISG. Finally, the obligation of the seller under EXW is to deliver and place the goods at the agreed disposal of the seller rather than loading on any collecting vehicle. Thus, when the delivery obligation of the seller is completed at the said moment, the risk will subsequently transfer to the buyer.
Nonetheless, those aforementioned rules are not absolute. Accordingly, in several cases, the risk passing might be occurred even before the time when the goods are delivered. Indeed, these are the situations in which the risk is transferred from the seller to the buyer at a previous moment such as the agreed date or the end moment of an agreed period providing that (i) there is non-performance of the buyer to conduct steps to enable the seller to implement his delivery or (ii) the buyer fails to timely take delivery of the goods.
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This article is for general information only and is not a substitute for legal advice.