Incoterms: what they are and what they mean
Have you ever heard of Incoterms? In international trade, it is essential to establish agreements between the parties to clearly identify the time and place of delivery and to agree on the costs of transporting the goods. For this reason, the International Chamber of Commerce has officially recognized Incoterms: contractual clauses that precisely identify the division of responsibilities between seller and buyer as well as costs related to transport. Let’s see what Incoterms are in detail and what they are used for.
Incoterms: Unambiguous Rules for International Trade
Incoterms, short for International Commercial Terms, were defined in 1936 by the International Chamber of Commerce with the aim of facilitating international trade after the First World War. The multitude of contractual terms required harmonization and identification of shared rules to make trade between countries easier.
Over the years, the diversification of modes of transport and the increase in the number of countries involved in trade have made it necessary to continuously update Incoterms. Although the previous editions are still valid and applicable – as long as they are made explicit in the contract – today reference is made to the latest revision that came into effect on January 1st, 2020.
What are Incoterms rules?
Incoterms are a set of contractual rules used in the field of importing/exporting, which unambiguously define the rights and obligations of the parties involved in the transaction. Specifically, these rules regulate who amongst the parties must:
- Stipulate the contract for the transportation of the goods and any required insurance up to the place of arrival;
- Take responsibility for the duties related to customs clearance.
Furthermore, Incoterms identify:
- The time and place in which the delivery takes place;
- The moment in which the risk of loss or damage is transferred from seller to buyer;
- The costs related to the delivery of the goods.
How many Incoterms are there and how are they classified?
The Incoterms 2020 include 11 terms, which are classified into 4 macro-groups based on the obligations that fall to the seller and the buyer:
- Group E: obligations fall predominantly on the buyer (EXW yield);
- Group F: main transportation is the buyer’s responsibility (FCA, FAS and FOB yields);
- Group C: transportation is the seller’s responsibility and the risks are the buyer’s responsibility (CPT, CIP, CFR and CIF yields);
- Group D: both transportation and risks are the seller’s responsibility (DAP, DPU and DDP).
Another classification of contract terms is also made according to the mode of transport:
- Incoterms applicable to all types of transport, i.e. EXW, FCA, CPT, CIP, DAP, DPU and DDP;
- Incoterms applicable only to maritime transport, i.e. FAS, FOB, CFR and CIF.
The importance of Incoterms in a sales contract
The use of Incoterms is optional, but they are now an essential element in commerce as they provide basic guidelines for importers, exporters, transporters, lawyers, and insurers involved in international trade.
If the parties choose to adopt these rules, it is good to remember that they must be referred to within the contract, stating the chosen term, the agreed location and the reference edition.