What are Incoterms®?

The Incoterms® rules are an internationally recognized standard and are used worldwide in international and domestic contracts for the sale of goods.

Developed by the International Chamber of Commerce (ICC), Incoterms® help businesses operating internationally avoid costly misunderstandings by defining the costs, risk and obligations in each international trade transaction to importers, exporters, customs brokers, lawyers and students. Whether you are filing a purchase order, packaging and labelling a shipment for freight transport or preparing a certificate of origin at a port, the Incoterms® rules are there to guide you.

Incoterms are changing with the times

Which Incoterms® rule an organization chooses for a trade transaction will depend on a number of factors.

For example, if a buyer has facilities in the destination country and can arrange cost-effective transportation, then a good choice might be EXW or one of the F terms (in which the buyer takes responsibility for the goods after they are delivered to a carrier, alongside a ship or on board a ship).

If a seller is dealing with a buyer that is new to international trade and unsure about how to arrange transportation, then one of the C or D terms would be appropriate because the buyer would not be able to arrange efficient export clearance and transportation.

Negotiating Incoterms® rules

When negotiating contract terms, organizations should consider whether the buyer or the seller would be able to obtain a cost advantage for transportation and warehousing, e.g. because they ship large quantities annually.

Sellers may also add a surcharge to freight costs for the “value-added service”. When a buyer takes control of the supply chain, they are in control of carriers used and can access shipment details for tracking and tracing purposes without having to rely on a third party.

Sellers should consider the risk of goods sold for export remaining in the seller’s country. Under an EXW term, the buyer takes possession in the seller’s country and could actually resell the goods to the original seller’s clients. However, provisions in contracts could be included to avoid such cases.

It is important to note that with Incoterms® rules, there is an understanding that sellers and buyers will assist and exchange information for clearing export and/or import customs and for obtaining cargo insurance.

As well, sellers and buyers notify each other of delivery and collection arrival and departure times, in advance to ensure proper preparations can be made and to avoid issues and extra costs.

Selecting Incoterms® rules

Organizations must ensure their selection of an Incoterms® rule is appropriate for the type of goods, the means of transport, and that it is suitable for the intended payment transaction.

For example, FOB is appropriate to transport everyday items, but not to transport urgently required medical supplies.

Despite the long-standing use of Incoterms® rules, organizations still use them incorrectly.

It’s recommended that sellers and buyers consult with international trade experts and legal counsel for an explanation or a professional opinion on international sales contracts.

Using the wrong Incoterms® rule means that the contract between the buyer and seller might not be adhered to, which could result in delivery and payment problems, and unanticipated costs and disputes.

It might also mean that customs declarations are incorrect, which can have some serious legal ramifications. It is important to ensure that the Incoterms® rule selected will provide the documentation required to complete the transaction, for example, to claim the goods from the carrier, to take delivery or pick up goods, to obtain cargo insurance, and most importantly, to get paid.

Variations to any of the rules must be clearly stipulated in the contract of sale and must consider the effects, i.e. if there will also be a variation in the transfer of risk and assumption of costs.

This is very important for those terms where the buyer may wish to obtain additional insurance coverage (CIF and CIP) or where the carrier for the transfer of risk may not be the seller’s first carrier, or where the loading or unloading of the goods varies. If there are too many variations, sellers and buyers may need to select a different Incoterms® rule that better meets their needs.

Incorporating Incoterms® rules

When used properly, Incoterms® rules impose certainty on a sale contract. Incoterms® rules influence the documentary requirements for a shipment.

Using the correct Incoterms® rule is often essential for collecting payment, especially if documentary credit is the form of payment being used.

The ICC recommends that the Incoterms® 2020 rules be referred to specifically whenever the terms are used together with detail on location. For example, if the Incoterms® rule is Carriage Paid To (CPT), a reference to an exact airport or seaport should always accompany the destination; if a company had negotiated CPT to the Frankfurt Airport, the C term should state “CPT airport Frankfurt, Germany, Incoterms® 2020”.

It is important to further specify the actual point of delivery at the terminal, port or place of destination, to avoid doubt, confusion and extra costs (e.g. FCA Eckenheimer Landstr. 60b, 60318 Frankfurt, GERMANY).

Other sales terms

Incoterms® rules have traditionally been used in international sale contracts when goods pass across national borders. In various areas of the world, however, trade blocs like the European Union have made border formalities between different countries less significant.

Consequently, the subtitle of the Incoterms® 2020 rules formally recognizes they are available for application to both international and domestic sale contracts. As a result, the Incoterms® 2020 rules clearly state that the obligation to comply with export/import formalities exists only where applicable.

Two developments have persuaded the ICC that a movement in this direction is timely. First, traders commonly use Incoterms® rules for purely domestic contracts. The second reason is the greater willingness in the U.S. to use Incoterms® rules in domestic trade rather than the former Uniform Commercial Code (UCC) shipment and delivery terms. UCC terms should not be used for international sales. This can cause confusion, because the UCC terms are written the same way as Incoterms® rules, but do not have the same meaning.

It must be remembered that Incoterms® rules do not constitute a contract. They are a standardized means of setting out obligations with respect to carriage and insurance.

They do not contain provisions for delivery times and do not regulate the issue of title. Other terms of sales contracts must be negotiated and agreed upon. However, it is very important to include Incoterms® rules in contracts between sellers and buyers.

In the past, disputes surrounding these issues were dealt with by applying the sales law of the relevant country specified in the commercial contract. However, the UN Convention for the International Sale of Goods (CISG), which was ratified in 1980, has come to replace national sales laws in more and more countries.

Currently, when a sales contract does not make clear which national sales law applies, the CISG provides uniform, internationally applicable rules to govern legal questions surrounding transactions. From the perspective of the CISG, Incoterms® rules have to take the CISG into consideration because they supplement its provisions.

The post Choosing the wrong Incoterms® can mess up your contract – here’s how to get it right appeared first on Trade Ready.

International trade transactions involve considerable negotiation between sellers and buyers to determine which party will pay for transportation, cargo insurance and other costs associated with shipping goods, as well as who is responsible for the goods at any given time during shipping. Given differences in culture, language and government regulations, negotiations have the potential for confusion and misunderstandings, which could result in irresolvable disputes.

In 1936, as part of their work towards rules-based trade, the International Chamber of Commerce (ICC) created a system of standardized international trade terms, known as the Incoterms® system, that represents different methods of transportation and assumption of risk and cost between sellers and buyers.

The use of the Incoterms® system is for domestic and international trade and refers to the parties as gender-neutral buyers and sellers.

New Incoterms® 2020 rules come into effect soon

Since their inception, Incoterms® rules have undergone seven revisions in order to reflect the development of international trade. At the time of this publication, Incoterms® rules 2010 are in use, but new Incoterms® 2020 rules have been introduced and will come into effect on January 1, 2020.

Contracts made under Incoterms® 2010 rules remain valid even after 2019. It is recommended that you use Incoterms® 2020 rules after 2019, however, parties to a contract for the sale of goods can agree to choose any version of the Incoterms® rules. It is important however, to clearly specify the chosen version of Incoterms® rules, either 2020 or 2010. If using Incoterms® 2010 in the contract of sale, be sure to understand what the older terms mean.

What are Incoterms® rules?

Incoterms® rules are used in negotiations to resolve specific terms and conditions of sales contracts by addressing the following:

• Costs: Who is responsible for the expenses associated with a shipment at a specific point in the shipment’s journey, such as export packing costs, the main transport costs and custom duties?
• Risks: Who bears the risk of loss or damage to the shipment, i.e. who is responsible for the goods during transit?

Incoterms® 2020 rules clearly define the obligations and responsibilities related to the transport of goods for both the seller and buyer. Incoterms® 2020 rules should not be considered a contract of sales. They do not:

• Provide specific details of transfer points, transport, and delivery (must be defined in sales contract)
• Determine ownership or title transfer of the goods
• Determine payment terms
• Apply to intangible services
• Define contract rights or dispute processes
• Relate to goods before or after delivery
• Specify the types of document to be issued or what their content should be
• Provide default Incoterms® rule

It is worth noting that Incoterms® rules include the use of electronic data information systems for customs purposes and other documentation and information exchange. The terms also include customs requirements for security for specific types of goods including chain of custody documentation.

Although many reference tables suggest that buyers must buy cargo insurance, the Incoterms® rules do not specify insurance as a requirement, except for two Incoterms® rules: CIF and CIP require the seller to purchase cargo insurance for the benefit of the buyer, i.e. the buyer can make a claim for loss or damage directly to the insurance company. The rest of the terms do not require the seller to obtain cargo insurance, nor do the terms require the buyer to obtain insurance.

The decision to purchase cargo insurance is the responsibility of buyers. However, given the cost of replacement and the loss of profit should cargo be lost or damaged, it is generally in buyers’ interest to obtain cargo insurance. Organizations should consider the cost of insurance in a per-transaction basis versus the utilization of an umbrella insurance that can cover all of their shipments.

Each of the Incoterms® rules represents a different situation involving the domestic or international movement of goods. Incoterms® rules also deal with the documentation that is required for international trade because they specify which parties are responsible for producing each document. Because documentary requirements vary so much between countries, this specification is very helpful in facilitating trade transactions.

What are the different categories of Incoterms® rules?

There are two categories of Incoterms® rules:

• Rules for any mode or modes of transportation
• Rules for sea and inland waterway transportation

Each Incoterms® rule is referred to by three letter abbreviations, and are usually listed by category of transport. It is important to note that there are several charts with images for Incoterms® rules online, and they tend to have significant differences. The key to learning Incoterms® rules is not to memorize, but to interpret each of the rules. Depending on the shipment’s point of departure and point of arrival, and the modes of transportations used, rules might or might not apply.

The first letter of the abbreviation provides information on the focus of that group of terms:

• Terms beginning with the letter E indicate that the seller’s responsibilities are fulfilled when the goods are made available for shipping by the buyer’s chosen carrier. There is only one rule under the E term: EXW.
• Terms beginning with the letter F refer to shipments where the primary cost of shipping, or main carriage, is not paid for by the seller.
• Terms beginning with the letter C refer to shipments where the seller pays for a portion of the shipping, usually the pre-carriage and main carriage, but the seller’s responsibility ends when the goods are delivered to the carrier somewhere on the seller’s side.
• Terms beginning with the letter D are destination contract terms because the seller delivers somewhere on the buyer’s side. The shipper or seller’s responsibility ends when the goods arrive at a predefined point. Delivery on the buyer’s side means that recognition of payment is deferred. With these terms, the seller pays the pre-carriage, main carriage and onward carriage.

The post Read this Incoterms® overview to start preparing for the new Incoterms® 2020 updates appeared first on Trade Ready.

August 29, 2019 – The Canadian Chamber of Commerce and the Forum for International Trade Training (FITT) are proud to announce their partnership to deliver Incoterms® 2020 in-person training to Canadian businesses in advance of the new standards coming into effect January 2020.

Revised by the International Chamber of Commerce every 10 years, the latest version of Incoterms® will be released in early September before going live in 2020. Incoterms® are an essential part of the language used by buyers and sellers in international trade. These trade terms have been incorporated in contracts for the sale of goods worldwide and define the costs, risks and obligations in international trade transactions to importers, exporters, transporters, customs brokers, lawyers and students of international trade. An improper use of Incoterms® can be costly to businesses.

To help Canadian businesses get up to speed on the Incoterms® 2020 changes and what they mean for their involvement in international trade, the Canadian Chamber and FITT are working with local chambers of commerce, World Trade Centres, economic development agencies and other associations to deliver face-to-face training across Canada.

The Incoterms® 2020 course offered by the Canadian Chamber and FITT will be the only in-class training in Canada that is officially recognized by the International Chamber of Commerce.

Stay tuned for further information from FITT in September 2019 on where you’ll be able to access this training.

If you are interested in working with us to host training sessions in your region, please contact Mark Agnew at magnew@chamber.ca or 613.238.4000 (2230).

About Us:

The Canadian Chamber of Commerce is Canada’s largest business association representing over 200,000 businesses across the country. The Canadian Chamber is also Canada’s national committee for the International Chamber of Commerce.

The Forum for International Trade Training (FITT) is Canada’s national standards, certification and training body for international trade practitioners.

The post The Canadian Chamber of Commerce and the Forum for International Trade Training establish partnership to train Canadian businesses on Incoterms® 2020 appeared first on Trade Ready.