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.
|Incoterms||Rules for any mode of transport (AIR or SEA)||Rules only for SEA transport|
|Ex Works||Free Carrier||Carriage Paid To||Carriage & Insurance Paid To||Delivered at Place||Delivered Duty Paid||Free on Board||Cost & Freight||Cos, Insurance & Freight|
|Services||Who Pays||Who Pays||Who Pays||Who Pays||Who Pays||Who Pays||Who Pays||Who Pays||Who Pays|
|Export Packing, Marking & Labeling||Seller||Seller||Seller||Seller||Seller||Seller||Seller||Seller||Seller|
|Export Customs Clearance / Licence||Buyer||Seller||Seller||Seller||Seller||Seller||Seller||Seller||Seller|
|Pick Up from the Seller||Buyer||Seller||Seller||Seller||Seller||Seller||Seller||Seller||Seller|
|Export Warehousing / Port / Terminal||Buyer||Buyer||Seller||Seller||Seller||Seller||Seller||Seller||Seller|
|Forwarder / Carrier Documentation||Buyer||Buyer||Seller||Seller||Seller||Seller||Seller||Seller||Seller|
|Ocean Freight / Air Freight||Buyer||Buyer||Seller||Seller||Seller||Seller||Buyer||Seller||Seller|
|Cargo Insurance||to confirm||to confirm||to confirm||Seller||to confirm||to confirm||to confirm||to confirm||Seller|
|Destination Warehousing / Port / Terminal||Buyer||Buyer||Buyer||Buyer||Seller||Seller||Buyer||Buyer||Buyer|
|Destination Customs Clearance / Licence||Buyer||Buyer||Buyer||Buyer||Buyer||Seller||Buyer||Buyer||Buyer|
|Destination Duty, Taxes, Biosecurity Fees||Buyer||Buyer||Buyer||Buyer||Buyer||Seller||Buyer||Buyer||Buyer|
|Delivery to the Buyer||Buyer||Buyer||Buyer||Buyer||Buyer||Seller||Buyer||Buyer||Buyer|
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.
If you want the Incoterms rules to apply to your contract, you should make this clear in the contract, through such words as, “[the chosen Incoterms rule including the named place, followed by] Incoterms”.
The chosen Incoterms rule needs to be appropriate to the goods, to the means of their transport, and above all to whether the parties intend to put additional obligations, for example such as the obligation to organize carriage or insurance, on the seller or on the buyer. Whichever Incoterms rule is chosen, the parties should be aware that the interpretation of their contract may well be influenced by customs particular to the port or place being used.
The chosen Incoterms rule can work only if the parties name a place or port, and will work best if the parties specify the place or port as precisely as possible. A good example of such precision would be:“FCA 38 Cours Albert 1er, Paris, France Incoterms”.
Incoterms rules do say which party to the sale contract has the obligation to make carriage or insurance arrangements, when the seller delivers the goods to the buyer, and which costs each party is responsible for.
Incoterms rules, however, say nothing about the price to be paid or the method of its payment. Neither do they deal with the transfer of ownership of the goods, or the consequences of a breach of contract. These matters are normally dealt with through express terms in the contract of sale or in the law governing that contract. The parties should be aware that mandatory local law may override any aspect of the sale contract, including the chosen Incoterms rule.
Contact us today to find out how we can help you to select the correct Incoterms.