Incoterms

In our global economy, it is essential for sellers and buyers of goods to understand ownership and responsibilities.

To provide standards, the international chamber of commerce (icc) developed an international set of trade terms called Incoterms or international commercial terms for determining how costs and risks are allocated to the parties.

These rules are an internationally recognized standard and are used in international contracts for the sale of goods. They help traders avoid costly misunderstandings by clarifying the tasks, costs and risks involved in the delivery of goods from sellers to buyers.

Incoterms consist of series of three-letter trade terms (e.g. FOB) related to common contractual sales practices.

The Incoterms acronyms themselves are less important than are the implications to your business as a buyer or seller. If your company has strong transportation contracts and is selling goods, you may be inclined to sell under Cost & Freight (CFR), which gives greater control of shipping costs moving out of the country. But if you are buying, and want more control over your freight cost, you may purchase Free on Board (FOB), which gives greater control on goods being imported to your country.

Can stating the wrong Incoterms violate any laws? Luckily, no. But properly cited in a sales contract, the Incoterm is then given legal standing. In the event of loss, damage, or dispute over cost, the Incoterms may then eliminate any confusion over responsibilities between the parties.

I’ll give you an example. It may come as a surprise that FOB is a term for ocean transport only. Use of FOB in an air shipment can lead to an argument between buyer and seller in the event of loss because the term makes the seller responsible until goods have been “loaded on the vessel.” But most air cargo shipments are delivered to a freight forwarder’s warehouse. If something were to happen to the cargo at that warehouse, there is now ambiguity in the parties’ obligations. Had a more appropriate term been used, such as FCA, that ambiguity disappears and both parties clearly understand their responsibilities in the transaction.

How to use incoterms rules