What is the meaning of Incoterms and why do they play a crucial role in international trade when buying or selling products?
Incoterms = International Commercial Terms
The purpose of allocating Costs, Risks and Responsibilities between the Seller and Buyer.
Incoterms are identifiable as a series of three-letter trade terms related to common contractual sales practices, consisting of 4 Groups and 11 Terms.
Incoterms cover all modes of transport; Air, Sea, Rail, Road and Inland waterways.
They serve to:
1. Clearly communicate the Tasks, Costs and Risks associated with the transportation and delivery of goods
2. Simplify sales contracts by defining respective obligations, costs, and risks involved in the delivery of goods.
Incoterms exists due to discrepancies in interpretation of commercial trade. A need therefore arose for common protocol for importers and exporters globally. The use of Incoterms dates back to 1923 when the ICC (International Chamber of Commerce) conducted a study of the most commonly used trade terms and highlighting disparities of their interpretation. Over the years there have been various revisions of the Incoterms. The last of which was in 2010 1 January 2020 sees the implementation of yet another revision with the following being the major changes from 2010 to 2020:
1. A new order –giving more prominence to the delivery of goods and the transfer of risk as between seller and buyer. The place of delivery is the central factor that differentiates between the four families of rules.
2. Determining the cost -all the costs allocated by each particular Incoterms rule are now listed, for the seller in A9 and for the buyer in B9.
3. DAT to DPU -emphasising the reality that the place of destination could be any place and not only a “terminal” –a place where it is able to unload goods. If the named place is at a place where the seller will find difficulty in unloading, DAP should rather be considered.
4. FCA–a need was expressed for a maritime document in a sale where delivery had occurred inland (especially using letters of credit) The buyer will instruct its carrier to issue an on-board bill of lading to the seller after the loading of the goods (in event of sea transport) FCA stipulates two ways of delivery –
• (a) Seller’s premises, loaded
• (b) Named place, ready for unloading.
5. CIF and CIP –different levels of Insurance cover increasing the cover for benefit of the buyer.
• CIF (maritime trade) -Institute Cargo Clauses (C)
• CIP (multimodal) -Institute Cargo Clauses (A)
6. E and D Rules -point of delivery at extreme poles. EXW –buyer collects goods when ready, D-rules seller delivering goods at agreed destination point.
7. F and C Rules -Delivery occurs, for example:
• when the goods are placed on board the vessel at the port of loading in CFR, CIF and FOB; or
• by handing the goods over to the carrier in CPT and CIP; or
• by loading them on the means of transport provided by the buyer or placing them at the disposal of the buyer’s carrier in FCA.
Applying Incoterms Rules to Contracts:
• Default point is the specific point where risk & cost transfers from the seller to the Buyer.
• Default/Delivery point defines place /port of ‘delivery’:
• DDP, Johannesburg
• CIF, Shanghai
• DDP, 15 Excel Road, Waverley, Warehouse 2, XYZ Traders, Johannesburg Incoterms 2020
• CIF Shanghai Port Incoterms 2020
Attached is a summarised document on Incoterms 2020
INCOTERMS 2020 Document