In this Quick Guide, we look at the Who, What, When, Where, Why using Incoterms for international transactions.
Incoterms (International Commerce Terms) are standard terms of trade that indicates the respective responsibilities of the buyer and the seller in an international shipment.
What are Incoterms?
Incoterms provide a division of costs, risks, obligations between the buyer and the seller, including customs clearance responsibility.
Each term specifies the responsibilities of each party to the transaction. For instance, each terms will indicate who of the buyer or the seller is responsible for the export declaration, for the transport, for the insurance of the shipment, for the import declaration….. It allows both parties to be very clear on who is doing what from collection in one country to delivery in the other.
The Incoterms are maintained by the International Chamber of Commerce (ICC) since 1936. The ICC regularly revises the rules and issues updated versions. The latest version is the Incoterms 2020; however, previous versions are still in use. Traders can choose whatever version they prefer, as long as both the buyer and the seller are clear about the provisions and their obligations. The ICC publishes the rules in an Incoterms book (and ebook) available from the ICC shop, in multiple languages for about €45.
Why use Incoterms?
- An Incoterms clarifies the transaction by defining the responsibility of each party of an international shipment.
- Incoterms help to control costs of import formalities, import duty and taxes.
- It is mandatory on commercial invoice for customs clearance in most countries and is part of Customs compliance.
- The Incoterms will determine the Customs treatment of the transaction during Customs clearance.
- Incoterms will guide international transportation intermediaries on how to deal with shipping.
When to use Incoterms?
Incoterms should be considered as soon as possible in the transaction, ideally at the time of sourcing/proposal. Incoterms should be used whenever a shipment crosses international border such as:
- Hire equipments and rentals on both the outbound and return journey.
- Return of faulty material and shipment of repaired products.
- Return of product.
- Shipment of spare part and components.
- Shipment of engineers’ tools.
- Demonstration and samples.
- Exhibition, trade show stands, material and equipment.
Who can use Incoterms?
Anyone trading across international borders.
Where should the Incoterms be shown?
Incoterms are also necessary on all documentations of an international transaction. The agreed terms should be mentioned for instance on:
- Standard Terms and Conditions.
- Proposal and Quotations: prices should always be shown with the Incoterms.
- Contracts (critical: if the Incoterms is not in the contract, it does not have legal value).
- PO (As above) If the Incoterms is not shown on the PO, an email should be sent to the buyer asking them to confirm the Incoterms.
- Acknowledgement of order.
- Commercial invoice (Incoterms are mandatory on invoice for customs clearance).
- Despatch notes, shipping notes.
How to use the Incoterms?
Incoterms must be part of the contract. Incoterms are not a law, they are a contract provision. They are therefore the result of the commercial negotiations.
To have legal value, Incoterms must be incorporated into a contract of sale with an express reference to the chosen edition of Incoterms, e.g. Incoterms 2020.
If you want to use the Incoterms 2010 or if you prefer the 2020 version of the rules to apply to your contract, you should make this clear in the contract.
A quick guide to Incoterms – A bit more…
Incoterms are a complex contract provision so we could add many more information. But then, it will no longer be a quick guide! Still, there are a few elements that are often overlooked and that might be of interest.
Other Terms of Trade
Incoterms are not the only terms around. There are several sets of terms of trade: Intraterms, Incoterms, US Uniform Commerce Code. Make sure you specify that your preferred terms are Incoterms.
If a term is adopted without reference to any of the published standard sets of terms, should a dispute arise, it will be left to the courts to apply the meaning of the terms. This could differ from the meaning set out in Incoterms.
Also specify the of the version (the year) you want to use.
Deviation from Incoterms
Deviation from Incoterms is permissible however it creates legal uncertainty. Incoterms are standards and the benefit they provide derives from the standard clauses and definitions they provide. Because Incoterms are standards, a deviation modifies the terms, and its interpretation is open to discussions. Some deviations have run their courses through courts, so we have a definition for them such as “Ex Work Loaded”. They then become part of the interpretation body of reference. However, even then, they remain a source of uncertainty and risk. For instance, a product damaged during transport might or might not be due to incorrect loading.
We strongly advise against the deviation from Incoterms whenever possible, because, in case of dispute, there is no dispute resolution reference.
If a deviation is necessary, the obligations of both parties must be clearly stated in the contract so there is no doubt as to the split of responsibilities.
Variation of Incoterms
To conclude this quick guide to Incoterms, we need to mention that there can be variation of the terms. This is rare. However, although used internationally, terms may be interpreted differently in different countries and their meaning can be modified by:
- Agreement of the parties.
- Business tradition of a particular industry.
- Usage in a particular port.
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