What are Incoterms?
We’re going to take a look at Incoterms—what they are and how they originated. Next time, we’ll discuss how to apply Incoterms, how exporters benefit from them, and why they matter, so stay tuned!
What are Incoterms, and who uses them?
International Commercial Terms are the official International Chamber of Commerce (ICC) rules that explain trade terms. They are a voluntary, authoritative, globally-accepted and adhered-to text for determining the responsibilities of buyers and sellers for the delivery of goods under sales contracts for domestic and international trade. Incoterms closely correspond to the U.N. Convention on Contracts for the International Sales of Goods. Incoterms are known and implemented by all major trading nations.
Incoterms are only part of the whole export contract. They don’t say anything about the price to be paid or the method of payment that is used in the transaction. Furthermore, Incoterms don’t deal with the transfer of ownership of the goods, breach of contract, or product liability; all of these issues need to be considered in the contract of sale. Also, Incoterms can’t override any mandatory laws.
The Origin Of Incoterms
Differences in trading practices and legal interpretations between traders of different countries necessitated a need for a common set of rules. These rules needed to be easy to understand by all of the participants in order to prevent misunderstandings, disputes and litigation. Incoterms were first created in 1936 and were designated Incoterms 1936. Since then, Incoterms have evolved into a codified worldwide contractual standard. They are periodically updated as events in international trade occur and require attention. Amendments and additions were made in 1953, 1967, 1976, 1980, 2000, and 2010.
The most current revision of the terms, Incoterms 2010, came into effect on January 1, 2011, and consists of 11 Incoterms. The latest revision categorizes the terms by modes of transport, and according to the export.gov website, reflect “a need for improved cargo security, changes to the Uniform Commercial Code in 2004 that resulted in a deletion of U.S. shipment and delivery terms, and new trends in global transportation.” You'll find an excellent discussion of the Incoterms 2010 and how to use them in this three-part series of articles by Dr. Roberto Bergami.
While you can still use previous versions of Incoterms, like Incoterms 2000, it’s not preferred, and it’s going to be more of a hassle; if you’re not using Incoterms 2010, you must clearly state which version you’re using and make sure your documentation is correct throughout the transaction. If you’re looking to streamline that tedious process, our software can help.
Incoterms that apply to any mode of transport are:
EXW (Ex Works): the seller fulfills his obligations by having the goods available for the buyer to pick up at his premises or another named place (i.e. factory, warehouse, etc.). Buyer bears all risk and costs starting when he picks up the products at the seller’s location until the products are delivered to his location. Seller has no obligation to load the goods or clear them for export.
FCA (Free Carrier): the seller delivers the goods export cleared to the carrier stipulated by the buyer or another party authorized to pick up goods at the seller’s premises or another named place. Buyer assumes all risks and costs associated with delivery of goods to final destination including transportation after delivery to carrier and any customs fees to import the product into a foreign country.
CPT (Carriage Paid To): seller clears the goods for export and delivers them to the carrier or another person stipulated by the seller at a named place of shipment. Seller is responsible for the transportation costs associated with delivering goods to the named place of destination but is not responsible for procuring insurance.
CIP (Carriage and Insurance Paid To): seller clears the goods for export and delivers them to the carrier or another person stipulated by the seller at a named place of shipment. Seller is responsible for the transportation costs associated with delivering goods and procuring minimum insurance coverage to the named place of destination.
DAT (Delivered at Terminal): seller clears the goods for export and bears all risks and costs associated with delivering the goods and unloading them at the terminal at the named port or place of destination. Buyer is responsible for all costs and risks from this point forward including clearing the goods for import at the named country of destination.
DAP (Delivered at Place): seller clears the goods for export and bears all risks and costs associated with delivering the goods to the named place of destination not unloaded. Buyer is responsible for all costs and risks associated with unloading the goods and clearing customs to import the goods into the named country of destination.
DDP (Delivered Duty Paid): seller bears all risks and costs associated with delivering the goods to the named place of destination ready for unloading and cleared for import.
Incoterms that apply to sea and inland waterway transport only:
FAS (Free Alongside Ship): seller clears the goods for export and delivers them when they are placed alongside the vessel at the named port of shipment. Buyer assumes all risks/costs for goods from this point forward.
FOB (Free on Board): seller clears the goods for export and delivers them when they are onboard the vessel at the named port of shipment. Buyer assumes all risks/cost for goods from this moment forward.
CFR (Cost and Freight): seller clears the goods for export and delivers them when they are onboard the vessel at the port of shipment. Seller bears the cost of freight to the named port of destination. Buyer assumes all risks for goods from the time goods have been delivered on board the vessel at the port of shipment.
CIF (Cost, Insurance, and Freight): seller clears the goods for export and delivers them when they are onboard the vessel at the port of shipment. Seller bears the cost of freight and insurance to the named port of destination. Seller’s insurance requirement is only for minimum cover. Buyer is responsible for all costs associated with unloading the goods at the named port of destination and clearing goods for import. Risk passes from seller to buyer once the goods are onboard the vessel at the port of shipment.
As you can see, each Incoterm provides exporters clear, succinct rules that help us understand our responsibilities, clarify any gray areas in contracts, and can save us a lot of headaches when used correctly.
Incoterms reduce the risk of legal complications by giving exporters a single home base from which to reference trade practices.
Incoterms help establish and execute an international transaction by defining distinct obligations and responsibilities between buyers and sellers. When a seller and a buyer agree to employ a particular Incoterm, each accepts the corresponding obligations and responsibilities as clearly set forth and defined under that particular Incoterm.
By correctly using Incoterms, you’ll be able to partner more harmoniously, transport and deliver your goods more easily, and get paid more quickly. And who doesn’t want that?
J.D. Brokers & Forwarding, Co - Marketing Dept.