Incoterms: A beginner’s guide

What is incoterms?

Incoterms are a standardized set of international trade terms designed to clarify the responsibilities of buyers and sellers in international transactions. They do this by outlining key areas of responsibility in a clear and consistent way, minimizing the risk of misunderstandings and disputes.

Here are some key aspects of Incoterms:

They define:
**Delivery point**: When and where the seller’s responsibility ends, and the buyer’s responsibility begins.
**Costs**: Who is responsible for paying for various aspects of the transaction, such as transportation, insurance, and customs clearance.
**Risks**: When the risk of loss or damage to the goods transfers from the seller to the buyer.
**Tasks**: Who is responsible for completing specific tasks, such as obtaining export or import licenses and arranging for customs clearance.

**They are not contracts**: Incoterms are a **reference point** for international trade, and they need to be **incorporated into the sales contract** between the buyer and seller.
**They are regularly updated**: The International Chamber of Commerce (ICC) publishes a new edition of Incoterms every few years, reflecting changes in international trade practices.

The Incoterms 2020 rules

The Incoterms 2020 rules are updated and grouped into two categories reflecting modes of transport. Of the 11 rules, there are seven for ANY mode(s) of transport and four for SEA or LAND or INLAND WATERWAY transport.

Each Incoterm contains a set of rules of interpretation for the obligations of both the seller (A1-A10) and the buyer (B1-B10) covering the following issues:

A1/B1 – General Obligations, A2/B2 – Delivery, A3/B3 – Transfer of risks, A4/B4 – Carriage, A5/B5 – Insurance, A6/B6 – Delivery/transport document, A7/B7 – Export/import clearance, A8/B8 – Checking/packaging/marking, A9/B9 – Allocation of costs, and A10/B10 – Notices.

What Do Incoterms Not Cover?

There are specific instances that Incoterms will not cover. Incoterms do not:

• address all the conditions of a sale;
• identify the goods being sold nor list the contract price;
• reference the method nor timing of payment negotiated between the seller or buyer;
• when title, or ownership of the goods, passes from the seller to the buyer;
• specify which documents must be provided by the seller to the buyer to facilitate the customs clearance process at the buyer’s country; and
•  address liability for the failure to provide the goods in conformity with the contract of sale, delayed delivery, nor dispute resolution mechanisms

Conclusion

The use of Incoterms in international trade is a widespread phenomenon, and disputes frequently arise due to confusion concerning them. Prior to inserting an Incoterm into a contract, it is essential for the parties to make sure that the Incoterm meets all their expectations and needs regarding the following issues:

• Is transport to be made by sea/inland waterway means or not?
• Who should bear the majority of the risk of loss/damage to the goods – the seller or the buyer? At what point in time in the delivery to the place of destination should risk be shifted from the seller onto the buyer?
• Is there a need to use the services of a carrier? If so, who should have an obligation to conclude a contract of carriage – the seller or the buyer?
• Should the seller be responsible for the unloading of the goods?
• Is there a need to subscribe an insurance contract?

In future articles, we will examine and compare Incoterms methods in detail.

References: investopedia, acerislaw, trade