Incoterms are something a lot of business overlook or misunderstand when trading internationally. It is essential that businesses understand Incoterms® as their use is vital for the successful movement of goods between customers and suppliers around the world. The misuse of these terms can lead to delays, penalties, problems with payment and more.
What are Incoterms®?
Incoterms are a set of internationally recognised, three letter acronyms, which define the risks and responsibilities of buyers and sellers in international trade contracts.
One of the main advantages of Incoterms is their clear and concise wording which is globally recognised. This is the result of the International Chambers of Commerce’s many years of experience of assisting with the many difficulties involved in the movement of goods.
Although Incoterms are set and form part of an International Contract, they are not a legal regulation. This means buyers and sellers can make changes to their agreed Incoterm but these changes must be specified in their official contract, else the original Incoterm specifications apply.
What are the risks and responsibilities covered by an Incoterm?
Incoterms state the place of delivery and fulfilment of the exchange of goods within a sales contract. The main purpose of the Incoterms is the stipulation of which time or at which place on the transport route the risk is transferred from the seller to the buyer. Incoterms also make it clear who is responsible for the costs for transport and customs clearance.
Incoterms do not, however, specify the terms of payment and when in the transport period the goods become the property of the buyer, product liability, defects in the goods or the legal consequences of a breach of contract. All these aspects should be covered in your official contract.
What are the Incoterms
There are currently eleven Incoterms. Seven of these can be applied to all trade routes, with four relating only to maritime and inland waterways.
Incoterms for all trade routes
1. EXW (Ex Works)
2. FCA (Free Carrier)
3. CPT (Carriage paid to – Free Carrier)
4. CIP (Carriage & insurance paid to)
5. DAP (Delivered at place)
6. DPU (Delivered at place unloaded)
7. DDP (Delivered duty paid)
Incoterms for sea freight and inland shipping
8. FAS (Free alongside ship)
9. FOB (Free on board)
10. CFR (Cost and freight)
11. CIF (Cost, insurance, freight)
The 2020 edition of Incoterms is the current version, but the buyer/seller may also refer to an older version of Incoterms. If this is agreed, they must reference the version they are using in the contract including the year of publication. If the version isn’t specified, it will be assumed the Incoterm used is from the current version.
Which Incoterm is best for your business?
Incoterms vary greatly and some are more seller-friendly, while others favour the buyer. So, negotiating about which Incoterm to choose is very important.
You need to be mindful of which Incoterm makes the most sense for which freight and as to whether the freight forwarder uses more than one carrier on the transport route.
Something else to consider when agreeing on your Incoterm is can you legally deliver on the term agreed?
For example, if the Delivered Duty Paid (DDP) Incoterm rule is agreed on, the seller is responsible for all costs associated with the delivery of goods to the named destination. It is the seller's responsibility to pay both export and import duties/taxes in the buyer's country, and the exporter also carries the risk if the goods are lost or damaged at any time before they reach their destination.
Every country has different rules and procedures regarding importing and many require the exporter to have a registered business in the destination country which is approved to import goods. So if you agree to a term where you have take care of the import customs formalities, are you able to comply?
Who in your business needs to understand Incoterms?
Some businesses overlook the need to train the correct staff in understanding the importance of Incoterms. Any staff involved in the buying or selling of goods or setting price structures, need to be aware of the specific Incoterms they are agreeing to and associated costs involved.
An example of the importance of this from a business that saw a huge increase in international sales but couldn’t work out why this wasn’t reflected in their profit. After investigation, it was discovered that their sales team were agreeing to Incoterms that benefited the buyer, without understanding additional costs involved in complying with the terms as the seller. After training, the business had a clear understanding of the terms and priced their goods accordingly, see the rise in profit initially expected.
Staff involved in the shipping of the goods must also be aware of Incoterms and the responsibilities that must be adhered to. They must be aware of the risks and responsibilities involved in order to ensure the correct transportation costs, insurance and customs formalities are taken care of.
How we can help
Incoterms with their 200 pages of rules can be difficult to understand. Our virtual half day workshop explains each Incoterm® and gives you the understanding needed to confidently choose the right terms for your business.
Date: Wednesday 26th June 2024 9.30am to 12.30pm
Virtual: Zoom Platform
Cost to attend: Members £250.00 + VAT and Non-Members £330.00 + VAT
In partnership with Essex County Council, we are offering all Essex Chambers Members Match Funding for two places on our Trade Expert courses. This will include our selected British Chambers of Commerce Accredited Training and extends to the individual courses that form part of our Academy Training, saving you 50% on course costs. Contact us to apply.