Incoterms, short for International Commercial Terms, are a set of rules published by the International Chamber of Commerce (ICC) that define the responsibilities of sellers and buyers for the delivery of goods under sales contracts. They are widely used in international commercial transactions and procurement processes. A series of three-letter trade terms related to common contractual sales practices, the Incoterms rules are intended primarily to clearly communicate the tasks, costs, and risks associated with the transportation and delivery of goods.
The Incoterms rules are accepted by governments, legal authorities, and practitioners worldwide for the interpretation of most commonly used terms in international trade. They are intended to reduce or remove altogether uncertainties arising from different interpretation of the rules in different countries. As such they are regularly incorporated into sales contracts worldwide.
History of Incoterms
The first set of Incoterms rules was published by the ICC in 1936. Since then, they have been periodically updated, with the eighth and current version—Incoterms 2020—being published on September 10, 2019. The amendments brought by each new version are intended to reflect changes in the international trade system.
Over the years, the Incoterms rules have been amended to accommodate changes in global trade practices. For instance, the Incoterms 2020 takes into consideration the increasing attention to security in the movement of goods, the need for flexibility in insurance coverage depending on the nature of goods and transport, and the growing importance of digitalization in today's business environment.
Incoterms 1936
The first version of Incoterms, published in 1936, was created to establish a set of international rules for the interpretation of trade terms. This was in response to discrepancies in the interpretation of trade terms in different countries, which were causing misunderstandings and disputes among traders.
Incoterms 1936 consisted of a set of international rules for the interpretation of eight trade terms: EXW, FCA, FAS, FOB, C&F, CIF, CPT, and DDP. These terms were chosen because they were commonly used in international trade contracts and had different interpretations in different countries.
Incoterms 2020
The most recent version of Incoterms, Incoterms 2020, was released in September 2019 and came into effect on January 1, 2020. It includes updates to reflect changes in the global trade environment.
Incoterms 2020 includes a total of 11 terms, down from the 13 terms included in Incoterms 2010. The two terms that were removed are DAF (Delivered At Frontier) and DES (Delivered Ex Ship). The terms that were added are DPU (Delivered at Place Unloaded) and DAP (Delivered at Place).
Understanding Incoterms
Incoterms are divided into four groups, categorized by the first letter in the term: E-terms (departure), F-terms (main carriage not paid by seller), C-terms (main carriage paid by seller), and D-terms (arrival). Each term represents a specific set of responsibilities and risks taken on by the buyer and seller in a shipping agreement.
It's important to note that Incoterms do not constitute a complete contract of sale, but rather become a part of it. They do not define the point at which ownership of goods transfers from seller to buyer. Instead, they outline who is responsible for the cost and risk at each stage of the goods' journey from seller to buyer.
E-terms (Departure)
E-terms, or departure terms, are used when the seller only makes the goods available to the buyer at their own premises. The buyer is responsible for loading the goods onto a vehicle (which they also arrange) and for all the costs and risks involved in the goods' transportation.
The only E-term in Incoterms 2020 is EXW (Ex Works), which means that the seller only needs to make the goods available at their premises, or at another named place. The buyer bears all costs and risks involved in taking the goods from the seller's premises to the desired destination.
F-terms (Main Carriage Not Paid by Seller)
F-terms are used when the seller is required to deliver the goods to a carrier appointed by the buyer. The seller is not responsible for the main carriage, but they do have to load the goods onto the transport (unless the term is FCA, where the buyer is responsible for loading).
There are three F-terms in Incoterms 2020: FCA (Free Carrier), FAS (Free Alongside Ship), and FOB (Free on Board). Each of these terms requires the seller to deliver the goods to a carrier appointed by the buyer, but the point at which the goods are considered delivered, and the risk transfers from seller to buyer, varies depending on the specific term.
Application of Incoterms
Incoterms are used in contracts to clearly define the responsibilities and risks of both the buyer and seller. They are used in international trade to ensure that trading terms are understood and agreed upon by both parties, regardless of language barriers or other potential misunderstandings.
It's important to note that while Incoterms are widely used and recognized, they are not legally required. Parties to a contract of sale can choose to use different terms or to not use Incoterms at all. However, using Incoterms can help to prevent misunderstandings and disputes.
Choosing the Right Incoterm
Choosing the right Incoterm depends on a variety of factors, including the nature of the goods, the countries of the buyer and seller, the mode of transport, and the specific details of the contract of sale. It's important for both parties to understand the implications of each Incoterm and to choose the one that best suits their needs.
For example, if the seller has limited access to reliable transportation or is shipping goods to a country with complex customs regulations, they may prefer to use an Incoterm that places more responsibility on the buyer. Conversely, a buyer who wants more control over the shipping process may prefer an Incoterm that gives them more responsibility.
Incoterms and Insurance
Some Incoterms require the seller to provide insurance for the goods during transportation. For example, under the CIF (Cost, Insurance, and Freight) Incoterm, the seller is required to obtain insurance against the buyer's risk of loss or damage to the goods during transport.
However, it's important to note that the level of insurance required by Incoterms is minimal and may not fully cover the value of the goods. Buyers and sellers may wish to arrange for additional insurance coverage, depending on the nature of the goods and the risks involved in their transportation.
Incoterms and Customs
Incoterms also have implications for customs procedures. For example, under some Incoterms, the seller is responsible for clearing the goods for export, while under others, this responsibility falls on the buyer.
Understanding the customs implications of each Incoterm can help parties to a contract avoid unexpected costs and delays. For example, if a seller is shipping goods to a country with complex customs regulations, they may wish to use an Incoterm that places the responsibility for customs clearance on the buyer.
Customs Duties and Taxes
Under some Incoterms, the buyer is responsible for paying any customs duties and taxes that apply to the goods. For example, under the DDP (Delivered Duty Paid) Incoterm, the seller is responsible for delivering the goods to the buyer's specified location, but the buyer is responsible for paying any import duties and taxes.
It's important for both parties to understand who is responsible for customs duties and taxes under the chosen Incoterm, as these costs can be significant. Misunderstandings about who is responsible for these costs can lead to disputes and delays.
Customs Documentation
Under some Incoterms, the seller is responsible for providing the buyer with the documentation needed to clear the goods through customs. This can include commercial invoices, packing lists, and certificates of origin.
It's important for the seller to understand what documentation is required and to provide it to the buyer in a timely manner. Failure to provide the correct documentation can result in delays and additional costs for the buyer.
Conclusion
Incoterms are an essential part of international trade, providing a common set of rules for the interpretation of trade terms. They help to reduce misunderstandings and disputes by clearly defining the responsibilities and risks of buyers and sellers.
While Incoterms are widely used and recognized, they are not legally required and parties to a contract of sale can choose to use different terms. However, using Incoterms can help to ensure that trading terms are understood and agreed upon by both parties, regardless of language barriers or other potential misunderstandings.
