Why Are Incoterms Important?
Incoterms themselves are a set of rules that define responsibilities for the delivery of goods under sales contracts. These rules are commonly used in international transportation.
Shippers use incoterms to spell out who is responsible for the arrangement and payment of shipping, insurance and Customs duties. The main goal of incoterms is to reduce confrontation and misunderstandings between traders and in turn this minimises trade disputes and litigation.
When Did Incoterms Begin?
Incoterms is an acronym for International Commercial Terms. These terms have been developed by the International Chamber of Commerce (ICC) and are recognised worldwide in international contracts for the sale of goods.
Since its founding in 1919, the ICC has been committed to facilitating international trade and reducing conflict between traders. As an answer to this, the ICC published a set of incoterms, its first, in 1936. Incoterms are a vital part of the transport industry and have been developing and improving since their origin in the 30s.
What are the different types of Incoterms?
There are 11 official incoterms at present which are recognised across the world.
“Ex Works” means the seller delivers when it makes the cargo available for the purchaser at the seller’s premises or another agreed location. The seller is not responsible for loading goods on to a vehicle or completing an export customs entry.
“Free Carrier” means that the goods are delivered by the seller to a nominated person or carrier. Risk passes on to the buyer from the seller on handover.
“Carriage Paid To” means that the seller delivers the goods themselves to the end destination. Either this, or another person nominated by the seller completes the delivery. The named place needs to be fully accurate with a complete address, not just the town or city. Costs are also all paid for by the seller to bring the goods to its destination.
“Carriage and Insurance Paid To” means that the seller delivers the goods to the carrier or once again nominates another person to do so. The seller must contract for and pay all costs of the carriage related to bring the goods to the named location.
With CIP, the seller also must contract for insurance cover against the buyer’s risk of disappearance or damages of cargo during the transportation. Buyers should note that it is a requirement of the seller to obtain insurance, but, only on minimum cover. Should the buyer then feel the need for extra insurance and peace of mind, they will have to either agree so with the seller or make their own separate arrangements.
“Delivered at Terminal” means that once the seller has unloaded the goods at their destination (e.g. a terminal or port) and they are placed at the hands of the buyer, the transportation risk then passes to the buyer. Export Customs clearance is completed by the seller whereas the import Customs clearance and tariffs are paid by the buyer.
“Delivered Duty Paid” means that the seller delivers the goods ready for unloading at the destination country. The destination tends to be the buyer’s “base” and with the goods being in the hands of the seller until the final location, all costs and risks, including custom clearance of export and import are that of the seller.
“Free Alongside Ship” means that the seller delivers the goods alongside the vessel to the point of shipment. Once delivered and alongside the ship, all costs and risks are that of the buyer. Export customs clearance is always completed by the seller.
“Free on Board” means that the seller delivers the goods right up to and including the boarding of the ship however, the buyer chooses both the ship and pays the freight. Costs and risks pass from seller to buyer once the goods have been placed on board the ship. In this situation, the seller pays the Terminal Handling Charge (THC).
“Cost and Freight” means that the seller again delivers the goods onto the vessel, however, the seller this time assumes transport costs to the port of destination. The risk of loss and damage on the other hand, is once more transferred from seller to buyer when safely on board the ship.
“Cost, Insurance and Freight” is very similar to CFR above. The only addition is that CIF requires insurance to be included.
Where Do I State the Incoterms?
The incoterms should be included on your commercial invoice.
As aforementioned, incoterms were established in 1936 and do get updated in stages over time, with the latest set of rules being published in 2010. This of course means the rulings haven’t changed for nearly a decade, so you need not worry about where the incoterms 2018/19 are and so on.
Incoterms 2010 do remain in full affect for those using them. With that said, as ICC is in its celebratory Centenary year in 2019, they have announced preparation and publication of incoterms 2020. The ICC have said ‘this newest edition of incoterms rules will help prepare business for the next century of global trade’.
Knowing about incoterms can be invaluable when working within the trading industry, so familiarise yourself and familiarise those you are trading with. Not only will gaining a good understanding help you but it will enable you to provide excellent customer service when you are able to clearly define who is responsible for what. Knowledge is key and having the know how could save you from many a difficult situation.
Tudor International Freight Brexit Recommendation
Incoterms should always be agreed between the buyer and seller in advance of goods being transported from one country to another. If the UK leaves the EU as planned there will be even more emphasis on using the correct terms as taxes and duties may also be payable.
If a UK company buys goods from a company in the EU under Ex Works (EXW), the UK company may wish to consider changing this to Free Carrier (FCA) so that the company in the EU completes the customs declaration in their own country.
If you would like to learn more about incoterms or have any general queries regarding overseas trading, don’t hesitate to get in touch with us here at Tudor International Freight.
Telephone: +44 (0) 113 250 1155