WHAT INCOTERMS DO AND WHAT THEY DON’T DO

What are incoterms?

In international sale of goods the terms you use to arrive at agreements are important. Whether you are filing a purchase order, packaging and labeling shipment for freight transport or preparing a certificate of origin at a port, this is where incoterms® come in.

Incoterms is an acronym standing for international commercial terms published by the international chamber of commerce (ICC) relating to international commercial law. The idea behind these terms is to show the seller and the buyer the task, cost and risks associated with the transport and delivery of goods.

It is important to know to know what incoterms do and what they don’t do. In simpler terms incoterms inform sale contracts, defining respective obligations, costs and risks that are to be borne by the buyer or the seller in the process of delivering goods from the seller to the buyer.

These terms are only applicable in contracts where the parties have expressly accepted their use.

Incoterms are designed to reduce uncertainty that comes from the different rules that various countries have when conducting international shipping.

What do incoterms rules do?

Incoterms are presented in 3 letters, e.g. EXW, FOB, DPU. There are, as at current (the year 2020), 11 of these terms which are designed to reflect business to business practice in contract of sale goods. Here is a summary of what these terms do:

1. They show obligations of the parties

With these terms it is easy to know who does what between the seller and the buyer, for instance who arranges carriage or insurance. A term like CIF –Carriage Insurance and Freight tells the seller to obtain insurance (minimum) cover complying with institute cargo clause. Incoterms also handles issues like who obtains shipping documents.

2. They indicate a point where risk is transferred from the seller to the buyer.

The idea is that the moment the goods are considered “delivered” the risk in those goods has been transferred.

3. Costs

Which party is responsible for which cost, for example, cost relating to transport, packaging, loading or unloading etc

What incoterms do NOT do.

The one thing you have to understand when dealing with incoterms is that they are not a substitute of a contract of sale. These rules are not designed to deal with a particular type of goods of trade.

Incoterms rules will therefore NOT:

1. Specify whether or not a contract of sale exist
2. Specify the type of goods you are dealing with
3. Tell you the time, place, method or currency of payment
4. Suggest remedies in the event of a breach of contract
5. Tell you how to deal with issues regarding force majeure

You should also remember, and this is important, that incoterms rules do not deal with transfer of property, title, ownership of goods sold.

As a party getting into these import export or international sale of goods contract, you truly have to be good with your sale of goods contracts especially the provisions you wish the agreement to deal with and remember, incoterms 2020 rules are not in themselves a contract of sale.