The ICC’s Incoterms® rules only reflect the most commonly used commercial practice.
Therefore, where a situation demands and parties are in agreement, the rules may be amended to deviate from the default provisions or add to the rules to bring more precision.
The variation of Incoterms, if agreed to by parties, is reflected in the sales contract.
Letter of credit (LC) specialists, inter alia, should have an understanding of these variations to make sure that the terms of the LC reflect these variations.
For instance, the status of freight charges to collect which transport documents routinely are required to show; similarly the insurance document with regards to the insured value and the type of cover.
Also, some banks collateralise imported goods and therefore have an interest in the goods.
The applicant submits the sales contract with their LC opening request which is reviewed by LC specialists.
LC specialists must ensure that their bank’s interests are protected.
What is a variation in the context of Incoterms and why is it done?
Incoterms 2020, Incoterms 2010, and Incoterms 2000 recognise this and do not prohibit alterations/variations of the rules.
Wording to this effect can be found in the Introduction section of Incoterms 2020, which is a replica of Incoterms 2010 except for the phrase: “… to vary the point at which delivery is made and risk transfers to the buyer” which in 2010 was “… to vary the point at which the risk passes from the seller to the buyer”.
Incoterms 2020 states:
Caution with variants of Incoterms® rules
Sometimes the parties want to alter an Incoterms® rule.
The Incoterms® 2020 rules do not prohibit such alteration, but there are dangers in so doing.
In order to avoid any unwelcome surprises, the parties would need to make the intended effect of such alterations extremely clear in their contract.
Thus, for example, if the allocation of costs in the Incoterms® 2020 rules is altered in the contract, the parties should also clearly state whether they intend to vary the point at which delivery is made and the risk transfers to the buyer.
In the rules, (both Incoterms 2020 & Incoterms 2010), the words “Unless otherwise agreed …” appear several times in the context of cost allocation.
Incoterms 2000 discusses ‘variants’ succinctly.
Unlike 2020 or 2010, examples of those variants and their usage in the shipping industry are also addressed.
The most common reason for alterations/variations is triggered by the need to change the allocation of costs in contrast to what INCOTERMS prescribes as applicable local customs at the place or port are typically the reason for this change.
How are variations done?
Variations are done by expressly stating in the sales contract the Incoterm to be used along with the variation: Incoterm <port/place> <variant>
Discussed here are some commonly used variants which are still occurring with Incoterms 2020.
EXW <place> <loaded>
Allowing the buyer or buyer-nominated personnel to access the seller’s premises and use its equipment to load the goods opens up an array of issues and risks for the seller.
Owing to the above, it is more practical for the seller to load the goods and this variant caters for those situations.
‘Delivery’ in ex-works occurs when the seller places the goods at the disposal of the buyer.
The seller bears the risk of loss or damage to the goods until such time ‘delivery’ takes place.
With EXW <place> <loaded>, it puts the obligation on the seller to load the goods on the buyer’s collecting vehicle.
However, it is unclear as to when ‘delivery’ happens.
Therefore, it is important to clearly express the intentions of the parties by suffixing the desired wording.
For example, if the parties do not want to change the risk allocation, they could add after the word ‘loaded’ the words ‘at buyer’s risk’ or even more precise wording such as ‘at buyer’s risk after the seller’s notice that goods have been placed at the disposal of the buyer’.
FCA< <place> <variant>
When FCA is used instead of FOB (which is unsuitable for containerised shipment) the point of delivery is shifted from the ship to an inland point in or outside the port area in the country of shipment.
A number of charges arise in connection with handling and storage of the goods in cargo terminals called terminal handling charges (THC) which buyers anecdotally do not wish to accept.
This explains why parties continue to use the inappropriate FOB incoterm.
An FCA variant can solve this problem: FCA <place> <THC for sellers account> or FCA <place> <50% of THC for sellers account> if parties wish to divide the costs.
DAP <place> <cleared>
In addition to the usual obligations of a DAP sale, the seller is also responsible for import clearance which is specifically excluded from the original DAP Incoterm.
DDP <place of destination> <VAT unpaid> or DDP <place of destination> <VAT excluded>
The seller bears the costs of import clearance but without accounting for VAT.
The use of this variant is justified by the difficulties that the seller has in recovering tax paid on the value of merchandise in the country of destination.
FOB < port> <variant>
Incoterms do not recognise many specific terms used by the shipping industry for instance terms used with maritime transport stowed/trimmed/lashed/dunnaged, etc, and therefore do not have any reference of costs arising out of such operations.
Parties, therefore, seek more precision by adding those words to the Incoterm.
- FOB <port> <stowed>
Under which the seller is also responsible for the correct placing of the goods in the cargo space.
- FOB <port> <trimmed>
Under which the seller is responsible for the levelling of the cargo.
- FOB <port> <stowed and trimmed>
Under which the seller is responsible for the correct placing of the goods in the cargo space and also levelling the cargo during or shortly after loading so that it is evenly distributed in each hold and throughout the entire ship.
This process applies to dry bulk cargoes to ensure the stability and structural strength of the vessel.
- FOB [(SLSD) stowed, lashed, secured, and dunnaged] load port terms.
Under which the seller is responsible for the correct placing of the goods in the cargo space, ensuring that the goods are held in position (by ropes, wires, chains, traps, etc), and dunnaged, (i.e. timber or other material placed among the cargo for separation and protection from damage).
Generally, using these variants shifts the expenses for stowing and trimming to the seller.
If parties agree on a variant in their contract of sale by adding “stowed, secured, trimmed”, then the costs for the buyer would most likely be understood to begin only when the goods were safely stowed/secured/trimmed, as set out in the contract, and passage of risk would likewise be delayed.
Again in this regard, it is not clear whether variants refer not only to functions and costs, but also to risks, and intend that both go hand in hand.
Clarifications similar to those suggested for EXW would then be appropriate. For example, “stowed and trimmed but at buyer’s risk after the goods have been placed on board” or similar.
CIF <port> <variant>
- CIF <port> <Institute cargo clauses (a) insurance>
The minimum insurance cover in case of CIF sale is risks covered under institute cargo clauses (C) which is a “bare-bones” cover.
In a CIF sale, delivery occurs at the seller’s side and risk transfers at the seller’s end of the main carriage.
The buyer may therefore ask for a higher cover (i.e institute cargo clauses (A)) so as to be able to recover losses should the ship fail to reach the destination.
If agreed to between the parties, this can be amended and the variation noted in the sales contract will override the default provision of the rules.
This variant, unlike others, does not present any complications since it does not introduce changes to the ‘delivery’ and ‘risk transfer’ clauses of the CIF incoterm.
- CIF <port> <landed>
This variant places responsibility with the seller for the unloading costs, including lighterage and wharfage charges or fees included in the sea freight which the seller has to pay.
B9 (c) of CIF rules is altered in this instance.
- CIF <port> <undischarged> or <free out>
This variant limits the seller’s obligation to those that are to be affected inside the ship’s hold in the port of discharge.
Costs of unloading should be borne by the buyer.
- CIF <port> <out-turn> or <landed weight>
Particularly used in the oil trading industry, this variant results in the seller bearing any loss arising out of transportation (i.e., evaporation, sludge, accumulation, spillage) and therefore the buyer pays for the weight of goods received (landed weight) and not the weight that is shown on the bill of lading at the load port.
For the avoidance of doubt, it is advisable to expressly state that no changes are intended to ‘transfer of risk’ and ‘delivery’ clauses of Incoterms.
‘Transfer of risk’ and ‘delivery’ which are two key reasons for litigation are very well defined in Incoterms leaving very little to no room for interpretation.
Contracts which use Incoterm variants are often ill-conceived, lack necessary detail, and are therefore prone to costly litigation, defeating the whole purpose of altering the rules in the first place.
In international sales contracts, parties have to deal with different legal systems should any disputes arise.
In the absence of a well-drafted contract, the use of Incoterms variants often results in an unpleasant outcome (i.e., not what the contracting parties had intended).
Proceed with caution
Contracting parties should be well aware that by incorporating trade term variants in their contracts, they are operating outside the scope of the Incoterms rules and contracting at their own risk.
The ICC does not give any guidance on variants which depart from the rules, leaving it to the parties to clarify the content of such deviations.
The ICC cautions that there are dangers in doing so and advocates for the need to use express contractual terms which are extremely clear and explain their intentions to avoid any unwelcome surprises.
Contracting parties should therefore thoroughly consider why variation is needed and use variations sparingly, limiting them to occasions where customs applicable at the place or port are amply clear in their application.
This article was published on Documentary Credit World.