Incoterms are international rules for the interpretation of trade terms. If your business is engaging in international trade, it’s important to be familiar with incoterms as they help different countries understand each other’s terms and how they want their agreements to work.
In other words, incoterms are rules that apply to international contracts. They set out the responsibilities of sellers and buyers, and are recognised across borders.
In this article, we’ll go through the benefits of incoterms and whether you should use them for your international business activities – read on to learn more.
What Is The Meaning Of Incoterms?
Incoterms are standard rules that apply to international contracts for the supply or sale of goods between countries. They make it easier for businesses across the globe to engage with each other and interpret the terms of trade.
Each ‘incoterm’ is a set of 3 letters, and there are 11 incoterms in total (we’ll cover this in more detail later).
Incoterms were created by the International Chamber of Commerce (ICC). In 1936, the ICC first defined the International Commerce Terminology (Incoterms) and were created to prevent disputes between sellers and buyers trading between countries.
Every ten years, the ICC publishes a new update of these three-letter terms. The ICC identifies who are liable for arranging and paying for the shipping, insurance, customs clearance, and other requirements of transporting the goods.
Who Should Use Incoterms?
Incoterms are basically an international language for shipping rules, commonly used for:
- Nyc company that imports or exports goods; and
- Anyone who appreciates reliable regulations in the sale contract and wants to avoid disputes; and
- Freight forwarders and customs agents who have to carry out customs clearance and determine the customs value
If this sounds like your business, you may want to incorporate incoterms into your international agreements. Our lawyers may be able to answer any questions you have about how it all works.
Why Are Incoterms Important?
If you’re managing a supply chain company where you are importing and exporting goods out of a country (or domestically), you will likely need to discuss Incoterms with a legal professional.
In this case, it is highly recommended that you have a contract in place to clearly identify both parties’ obligations. This type of contract is called a “Shipping Contract” which will specifically call out the import and export security requirements and identify whether the buyer or seller is responsible for meeting those requirements.
What Are The Benefits Of Using Incoterms?
Incoterms clearly identifies the points at which liability for transportation, risk, and cost transfers from the seller to the buyer. This term is important for mitigating risks and clarifying responsibilities between parties in an international arrangement.
The incoterms mainly cover these three points:
- Carriage and insurance – obligations of parties to organise carriage, insurance, shipping documents, export or import licences;
- Delivery and risk – where goods are to be delivered or collected, and where risk passes from the vendor to the purchaser; and
- Costs – which party bears costs such as transport, packaging, loading, unloading, checking and security.
Familiarising yourself with incoterms will help with clearly defining who is responsible for what and each step of the transaction.
Sarah is an Australian business purchasing products or equipment from a company in Europe. She has only agreed on the purchase price and payment terms so far but has not yet discussed other terms.
Here are the following questions that Sarah and her lawyer will need to consider.
Who is responsible for:
1. Arranging the transportation of the products from Europe to Australia
2. Submitting documents for export clearance and paying the associate fees
3. Loading the goods onto the cargo ship
3. Arranging and paying for cargo insurance on your shipment
4. Customs clearance for the import of the products into Australia
5. Delivery of your products to your warehouse or project site
Are Incoterms Compulsory?
Incoterms are not a law and therefore their use is not compulsory.
However, if they are used, they are legally binding in the context of a commercial contract signed between two parties. Incoterms also do not apply to the contract of carriage with the carrier.
Incoterms are generally incorporated in the contract of sale, however, they do not:
- Address all the conditions of a sale;
- Identify the goods being sold nor list the contract price;
- Reference the method nor timing of payment negotiated between the seller or buyer;
- When title, or ownership of the goods, passes from the seller to the buyer;
- Specify which documents must be provided by the seller to the buyer to facilitate the customs clearance process at the buyer’s country; and
- Address liability for the failure to provide the good since conformity with the contract of sale, delayed delivery, nor dispute resolution mechanisms.
What Are The Incoterms Rules?
There are 11 incoterms rules, and they are divided into two classes.
Rules for Any Mode of Transport / Multimodal
- Ex Works (EXW)
- Free Carrier (FCA)
- Carriage Paid To (CPT)
- Carriage and Insurance Paid To (CIP)
- Delivered at Place (DAP)
- Delivered at Place Unloaded (DPU)
- Delivered Duty Paid (DDP)
Rules for Sea and Inland Waterway Transport
- Free Alongside Ship (FAS)
- Free on Board (FOB)
- Cost and Freight (CFR)
- Cost, Insurance and Freight (CIF)
What Should I Consider Before Incorporating Incoterms Into My Contract Of Sale?
To incorporate Incoterms into your contract of sale, you may want to consider the following things:
- Understanding your industry;
- Understanding your buyers’ needs
- Choosing the appropriate Incoterm Rules;
- Specifying your place or port of delivery as specific as possible
- Adding a clause re taxes and duty fees (value-added tax, tariff, etc.); and
- Checking if both parties will hold insurances
It can be a bit daunting when incorporating incoterms into your international agreements, as there are specific rules to comply with. It’s best to speak to a legal professional who can draft or review your existing agreements to ensure you are well protected and have used incoterms correctly.
If you would like some help with your international agreements or have any questions about incoterms as an Australian business, you can reach us at 1800 730 617 or email@example.com for a free, no-obligations chat.
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