Incoterms are a set of trade rules established by the International Chamber of Commerce (“ICC”) that are used in international sales contracts. The purpose of Incoterms is simple: to establish a standardized logistics terminology to prevent confusion and disagreements between international buyers and sellers. Incoterms are not mandatory rules, but in order for them to have legal effect, they must be explicitly incorporated by the parties into their contract.
In the following article, we will describe their basic features and how to use them for all modes of transport.
What are the Incoterms 2020 and their characteristics?
To date, there are 11 Incoterms divided into 4 groups:
There are two concepts to keep in mind regarding the reimbursement of transportation costs :
- A freight term that is “Freight Collect” indicates that the importer is responsible for the payment of the carrier’s ocean freight.
- In a Freight Prepaid Arrangement, instead of the importer, the exporter is responsible for carrying out the contract of carriage and making the ocean freight payment.
Thus, each Incoterm represents a more or less important assumption of responsibility for each party of the contract.
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How to choose the best sales conditions?
The selection of the Incoterm is first and foremost a component of the commercial negotiation. Globally speaking, you must define it in relation to your company’s organizational capabilities, the modes of transportation you employ, the caliber of service you wish to provide to your customers or obtain from your suppliers, the tactics used by the competition, or the nature of the transported goods.
Sale at the beginning
The buyer bears the cost and risk of conveying the goods under Incoterms for outbound sales (to a greater or lesser extent).
An outbound sale means that the goods travel at the buyer’s risk, i.e. :
- From the moment of its availability at the seller’s premises (EXW)
- From the time it was delivered to the carrier for shipment (FCA, FAS, FOB, CFR, CIF, CPT and CIP).
To read more about it: FOB (free on board) Vs CFR (cost and freight): Incoterms explained
Sale at the destination
When products are sold “on arrival”, they are transported at the seller’s expense to the designated site or port. Three Incoterms exist:
- Throughout the duration of the sea transport and landing
- Up till the final destination (DPU, DDP).
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How to use the Incoterms ?
Using the correct Incoterms in an international transaction allows the parties to establish the risks for which they are responsible.
Companies must comprehend their responsibilities and the dangers associated with all phases of transactions, whether they are importing or exporting, in today’s increasingly complicated business world.
The sales contract must expressly state whether Incoterms will be used by stating the chosen Incoterms rule, the port, the designated place or location, and “Incoterms 2020.”
How can Incoterms reduce your risk?
They can assist you in avoiding disputes regarding the weight of risk at various phases of the logistics process. It assists you in selecting the appropriate insurance for the time frame for which you are accountable.
They lessen the likelihood of a dispute over purportedly delayed delivery or late charges.
They do this by making the sales contract absolute, which stabilizes the risk environment. Thus, you safeguard yourself against defaulting on a shipment by applying the pertinent Incoterms regulations.
What are the possible consequences of misusing Incoterms?
Incorrect Incoterms usage can result in a lack of understanding of the costs, obligations, and liabilities agreed upon by the buyer and seller, which can leave a company with very expensive and unexpected liabilities.
The following factors are the most common causes of incorrect Incoterms usage:
- Rules that are inappropriate for the mode of transportation
- Lack of knowledge of how costs and risks are divided between the buyer and the seller
- Incorrect application of the Incoterms rules
- The absence of regional restrictions in the rules
- Not being aware of what the Incoterms regulations do and do not include
- Selecting regulations that don’t meet the needs of the business
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FAQ | Shipping: How to Choose and Negotiate the right Incoterms?
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