INCOTERMS, or International Commercial Terms, are a set of pre-defined commercial terms published by the International Chamber of Commerce (ICC). These terms are widely used in international commercial transactions and procurement processes to provide clear communication of the tasks, costs, and risks associated with the transportation and delivery of goods. First introduced in 1936, INCOTERMS have been regularly updated to reflect changes in the global trading environment.
Types of INCOTERMS
INCOTERMS are divided into two main categories based on the mode of transportation:
Rules for Any Mode(s) of Transport
- EXW (Ex Works): The seller makes the goods available at their premises, and the buyer is responsible for all transportation costs and risks.
- FCA (Free Carrier): The seller delivers the goods to a carrier or another party at the seller’s premises or another designated place.
- CPT (Carriage Paid To): The seller pays for the carriage of the goods to the named destination, but the risk transfers to the buyer once the goods are handed over to the carrier.
- CIP (Carriage and Insurance Paid To): Similar to CPT, but the seller also pays for insurance to cover the buyer’s risk.
- DAP (Delivered At Place): The seller bears all costs and risks of delivering the goods to the named place of destination.
- DPU (Delivered at Place Unloaded): The seller delivers and unloads the goods at the named place of destination.
- DDP (Delivered Duty Paid): The seller is responsible for delivering the goods to the destination, including payment of all import duties and taxes.
Rules for Sea and Inland Waterway Transport
- FAS (Free Alongside Ship): The seller delivers the goods alongside the vessel at the named port of shipment.
- FOB (Free On Board): The seller loads the goods onto the vessel. The risk transfers to the buyer once the goods are on board.
- CFR (Cost and Freight): The seller pays for the transportation costs to the named port of destination, but the risk transfers to the buyer when the goods are on board.
- CIF (Cost, Insurance and Freight): The seller covers the cost, insurance, and freight to the named port, but risk transfers once the goods are on board.
Special Considerations
Changes and Updates
INCOTERMS are periodically revised to accommodate shifts in international trade practices and to address new logistical challenges. The latest update, INCOTERMS 2020, introduced refinements to existing rules and added greater clarity to facilitate their practical application.
Applicability in Contracts
INCOTERMS can be included in international sales contracts to define obligations clearly between buyers and sellers. Correct usage requires stating the chosen term, followed by a named place or port (e.g., FOB Rotterdam).
Examples of INCOTERMS in Use
- FOB Shanghai: A seller in China (Shanghai) agrees to deliver goods on board a vessel. Risk and cost transfer to the buyer once goods are on board.
- DAP New York: The seller is responsible for delivering goods to the specified address in New York, with all costs and risks borne by the seller until delivery.
Historical Context
Since their inception in 1936, INCOTERMS have revolutionized international trade by providing a standardized set of rules. This standardization reduces misunderstandings and legal disputes, fostering smoother global commerce.
Comparison with Related Terms
- Shipping Terms: While INCOTERMS focus on international trade, domestic trade often uses similar shipping terms, which may not cover the wide scope of risks and responsibilities.
- UCC Terms: The Uniform Commercial Code (UCC) in the United States provides similar terms for domestic commerce, which share similarities but are tailored for the U.S. legal framework.
Frequently Asked Questions (FAQs)
Q: Can INCOTERMS replace a sales contract? A: No, INCOTERMS are used to clarify terms within a sales contract but do not replace the contract itself.
Q: Are INCOTERMS legally binding? A: INCOTERMS are not laws but are widely recognized standards. They become binding when referenced in a contract.
Q: How often are INCOTERMS updated? A: INCOTERMS are typically updated every decade to keep pace with changes in global trade practices.
References
- International Chamber of Commerce. (2020). INCOTERMS 2020.
- Export.gov. (n.d.). INCOTERMS.
Summary
INCOTERMS facilitate international trade by providing clear and standardized terms that define the responsibilities, costs, and risks for buyers and sellers. Their periodic updates ensure they remain relevant in the dynamic landscape of global commerce. Proper use of INCOTERMS in contracts helps avoid misunderstandings and legal disputes, making them indispensable tools for international trade negotiations.
