Incoterms are a set of specific rules and restrictions that are necessary for processing international commercial transactions. The name itself stands for International Commercial Terms. Moreover, they determine the basic rights and obligations of counterparties, and determine how the costs and risks are allocated between the parties.
Before closing an agreement on an international level, it is essential to agree of what Incoterms type will be used. They are required in the following cases:
- transportation of goods from the seller to the buyer.
- compliance with customs formalities for the export or import of goods or raw materials
Why do I need to use Incoterms?
Incoterms are recognized by governmental and commercial structures around the world. They help buyers and sellers from different countries to have an agreement without unnecessary complicates and to speak the same language, rather than reinvent the wheel in each new commercial agreement.
What version of Incoterms should I use?
Incoterms are reviewed every 10 years; the latest edition was in 2010 with the next revision scheduled for 2020. Note that the 2010 rewrite reduces the 2000 version from 13 terms to 11. There are 2 new items: Delivered at Terminal (DAT) and Delivered at Place (DAP) which replace the terms Delivered At Frontier (DAF); Delivered Ex Ship (DES) and Delivered Ex Quay (DEQ) and Delivered Duty Unpaid (DDU) which commercially had minimal application.
What are the types of Incoterms?
The 11 types of Incoterms 2010 are presented in 2 groups:
The Incoterm 2010 Rules that apply to any Mode of Transport
- EXW - Ex Works
- FCA - Free Carrier
- CPT - Carriage Paid To
- CIP - Carriage and Insurance Paid To
- DAT - Delivered at Terminal (New Term)
- DAP - Delivered at Place (New Term)
- DDP - Delivered Duty Paid
The Incoterm 2010 Rules that apply to Sea and Inland Waterway Transport
- FAS - Free Alongside Ship
- FOB - Free On Board
- CFR - Cost and Freight
- CIF - Cost Insurance and Freight
In what cases Incoterms don't work for me?
Transferring of title of the goods. The commercial agreement must clearly state the procedures of transferring the title of the goods from the seller to the buyer and the documents used in this procedure.
Unseen circumstances. Even if the obligations are not governed by the rules and cannot be performed due to insuperable circumstances, they are anyhow subject to regulation by the applicable law or the commercial agreement.
Violations. Incoterms do not regulate the responsibility of the counterparties in the event of non-fulfillment of their obligations or partial fulfillment.
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Remember Incoterms are not law but international commercial rules that divide costs, risk and responsibilities between sellers and buyers. They do not address the transferring of title. Incoterms are also only recognized if they are incorporated in the sales or purchase agreement between the seller and the buyer. Companies are also reminded that if they intend to adopt Incoterms 2010 they must remember to specify the 2010 revision in their contracts or agreements that applies to avoid any confusion.