Incoterms is short for International Commercial Terms, these are rules created by the International Chamber of Commerce in order to provide a worldwide import/export tool for shipments/delivery of goods.
During the 19th century international trade increased rapidly. Exporters noticed that trade customs was interpreted very differently in different national courts, which led to misunderstandings between the parties. As a result, the first set of Incoterms rules were created in 1936.
The purpose of Incoterms is to clarify buyers and sellers obligations towards each other. By choosing an incoterm rule the exporter and importer agree on:
• Who bears the risk of loss or damage to goods at any point of transportation • Who is responsible for customs formalities and duties • Who is responsible for insuring the goods • A definition of when goods “are delivered”
These are all key points for having a successful trade. The benefit with using standardized terms is that there will be no misunderstandings, no cultural barriers or language problems. Even small variations in wording can have a major impact on aspects of a business agreement. For example, a word such as “delivery” can be perceived in many different ways. For a trade to be optimal and efficient one has to be sure words and expressions mean the same for all parties.
Putting incoterms in the sales contract provides clarity for both buyer and seller, gives certainty over costs and reduces the risk of disputes and disagreements during the trade. As Incoterms have no legal status they need to be included in the sales contract to ensure validity. Using incoterms without understanding what they mean can cause unexpected results, ie unexpected costs, problems with delivery schedule, or causing disagreements that may ruin relationships with clients.
Note that incoterms are to be put in Contract of Sale, this is a contract between buyer and seller. Not to be confused with Contract of Carriage which is a contract between the shipper and the carrier. Shipper is either buyer or seller depending on the incoterms in the sales contract.
There is no right or wrong to when using a certain Incoterm. It depends on the parties and the situation. As an example, let’s say the importer is a smaller, newly started company and the exporter is a large enterprise that has been in the business for a while and already have a relationship with transport companies. Then the exporter might have the opportunity to negotiate a better deal with the carrier than the importer will be able to do. Total cost will in this case be lower than if the importer shall be responsible for transport, and vice versa. If the importer is established and has a favourable agreement with the carrier the best solution might be that they are responsible for the freight.
What is “included” in the invoice amount is a negotiation between buyer and seller.
There are many considerations to be made when deciding how to implement a trade.
Checking out our PDF with Incoterms in the link below is a good start.