Unpacking The Performance Of Contracts And Liability Of Indian Parties Under The Incoterms 2020

14th February, 2022 - 12:22 pm Categories: Corporate Law 0 Comments

Introduction and nature of Incoterms

The word “Incoterms” refers to the list of guidelines laid down by the International Chambers of Commerce for the sale of essential items of goods across the world. The Incoterms are a ready to use guiding principles which can be used during the agreement between international parties about their purchase of goods, their origin port for the shipment of goods, the freight rates etc. It is important to remember that the nature of the Incoterms is such that they are not rules in themselves and therefore the existence of incoterms alone cannot be a replacement for a contract of sale between the parties. On the contrary, they are a reflection of the trade practices for particular types of goods ranging from bulky cargo to fragile flowers etc.

The Incoterms become an inseparable part of the contract of sale between the parties only when they are incorporated within the contract of sale and the parties themselves expressly agree to abide by them. Thus for the Incoterms to be utilized in an agreement, the contract of sale must be present and is a necessary prerequisite for the usage of incoterms. Incoterms do not provide for the jurisdiction of a particular law that would apply to the contract. Instead they are a purely private decision between the parties. There are legal regimes in addition to the incoterms such as the Convention on the International Sale of Goods (CISG)” or the domestic and international law ratified by the respective state, which is also applicable to the contract.

Furthermore, Incoterms do not become applicable by default to an international contract of sale between a foreign company and other international entity, if the contract of sale does not specify so. It is mandated according to the Incoterms 2020 that If parties want the Incoterms® 2020 rules to apply to their contract, the safest way to ensure this is to make that intentions clear in their contract, through words such as “[the chosen Incoterms® rule] [named port, place  or point] Incoterms® 2020”.

Liability for quality of the goods as well as risk of loss/ damage during transit under Incoterms

According to the F and the C rules of the Incoterms 2020, placing the goods aboard the vessel for the purpose of transit is the moment when they are understood to be “delivered” to the purchaser by the seller. Hence the transfer of risk from the seller to the buyer shifts at the point when the goods are safely placed aboard the vessel for transit. It is the obligation of the parties to identify the exact mode of transit i.e through sea, land or air as deemed necessary for the contract and separate classes must be incorporated for the liability arising out of each of those means of transport, In the cases where there is no such “through” carriage contract, the goods are to be handed over the the rail-company for the further transmission, the risk is also transferred at that particular instance.

Thus even if a seller engages a road haulier to take the goods to the agreed delivery point, risk would transfer not at the place and time where the seller hands the goods over to the haulier engaged by the seller, but at the place and time where the goods are placed at the disposal of the carrier engaged by the buyer. This is why the naming of the place or point of delivery as precisely as possible is so important in FCA sales. It is important to note that the risk transfer from the seller to the buyer happens only when it is in the knowledge of the buyer that the respective goods are “in transit”. If the buyer has no knowledge of the transitory nature of the goods, then the risk is not transferred to the buyer.

Any risk of Loss/ damage is qua the goods during transit till delivery made to buyer is the liability of the buyer alone. According to the rules Risk would transfer from seller to buyer in CPT and CIP sales when the goods are handed over to the first carrier. The buyer does not know at that stage whether or not that first carrier is responsible for loss of or damage to the goods under the relevant carriage contract. The buyer is not a party to that contract, has no control over it and will not know its terms. Yet, despite this, the buyer would end up bearing the risk in the goods from the very earliest moment of handing over, possibly without recovery against that first carrier.

While the buyer would end up bearing the risk of loss of or damage to the goods at an early stage of the transport chain, it would, on this view however, have a remedy against the seller. In essence, the seller should make a contract of carriage to the destination named under the contract of sale.

With respect to the responsibility regarding the quality of the goods, the Incoterms rules do not form part of those other contracts. Where incorporated, the Incoterms rules apply to and govern only certain aspects of the contract of sale but the same are not extended to the responsibility qua the quality of the goods per se i.e. defect free goods are not covered within the ambit of Incoterms.

Rejection of goods for want of quality under Incoterms 2020 if one of the parties in from India

For the purpose of understanding the rejection of goods for want of quality by one of the parties, we have to examine the Indian Contract Act defines a Contingent contract as “31. “Contingent contract” defined.—A “contingent contract is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen.”

“The basic rule in these types of contracts is that the promisor must perform exactly what he has undertaken to do. The obligation to perform is absolute”. (Magnum Films v. Golcha Properties Pvt. Ltd., AIR 1984 Del 162, 1983 SCC OnLine Del 114) The party must perform, within the time specified and the standard/quality required by the contract. The standard of obligation may vary according to the type of contract.

The case of In re Andrew Yule & Co, 1931 SCC OnLine Cal 263 becomes especially relevant in this regard.

The plaintiff in this case had purchased Goods described in the contract as of “Standard Milk Make”. They were resold by the buyers to sub-buyers in America and were shipped without examination at Calcutta. After arrival in America, the sub-buyers purported to reject a portion of the goods on the ground of their peculiar odour which rendered them unfit for the packing of foodstuffs, one of the principal purposes for which such goods are used.

The Court held that: (1) that the words “Standard Mills Make” constituted part of the description of the goods and that the goods by reason of their peculiar odour due to a process of manufacture recently adopted by the mills in question (the sellers) did not conform to such description;

(2) that, although the sellers were aware that the goods in question are extensively used for the packing of foodstuffs, yet, since such goods are also used for various other purposes, there was, in the absence of express communication by the buyers that the goods were required for the packing of foodstuffs, no implied warranty of fitness for that particular purpose: Indian Sale of Goods Act (III of 1930), section 16(1);

(3) that the buyers’ right to reject on the ground that the goods did not conform to description had been lost by reason of (a) acts of ownership, e.g., shipment and delivery to sub-buyers; (b) delay in giving notice of rejection; (c) part retention of the goods;

(4) that the acts of ownership referred to in (3) above constituted an “acceptance” of the goods, because they were exercised after the stage for examination had been reached;

(5) that only in the case of a severable contract can a portion of the goods be rejected. In the case of an entire contract, the buyer cannot reject part of the goods, even if the goods, which conform to description, can be separated from those which disconform.

Hence the court concluded that: “It is my belief that neither section 30(3), Sale of Goods Act, nor section 119, Contract Act, were intended to provide a right to reject part of the goods under an indivisible contract of sale”. The liability in case of quality of goods can only be imposed through the concept of contingent contract which has the prerequisite of having a particular quality of the goods.

Thus, the usage and application of Incoterms 2020 is gaining transaction between the parties to an international contract due to their clarity and ease of understanding.

Author: Shradha Pandey – a student of Tamil Nadu National Law University (Tiruchirapalli), currently an intern  at Khurana & Khurana, Advocates and IP Attorney,  in case of any queries please contact/write back to us via email vidushi@khuranaandkhurana.com.