What is the legal status of Incoterms?

It is important to note the limitations of Incoterms. They do not replace the many and varied legal systems that apply in the world’s countries and trading blocs: and it is these often infuriating legal minefields that freight forwarders encounter daily and in so doing, fully justify their fees.

Incoterms are designed to codify basic concepts of risk, the allocation of costs, the point at which delivery takes place, and the responsibility for insurance. This has been hugely beneficial to world trade: it allows insurers to operate effectively at a global level and for all the countries which adhere to the Incoterms rules (that is, most of them) it oils the wheels (and keels) of trade.

What International Commercial Terms do not cover are the issues like who covers the goods before and after the delivery process; who pays VAT or other sales taxes; the precise nature of the contract between buyer and seller (although ICC does have model contracts and clauses, these are not legally binding); or when things go wrong, how alleged breaches of contract are settled. The sales contract will state which country’s legal system will apply in that event.

International legal harmonisation on trade law issues is something that UNICTRAL has been working on for many years, with some success, but much remains to be done.

Other moves that will help international trade have come from the Rotterdam Rules, endorsed by 22 countries accounting for 25% of world trade – they allow for multi-modal door-to-door shipments to have built-in liabilities and insurance issues contained within individual contracts. Another potential step forward towards contractual uniformity comes from the 59 countries (including France, China and the United States but not yet the UK) that are signatories to the U.N. Convention on Contract for the International Sale of Goods (“CISG”).