What are the Incoterms clauses of international trade?
Patrick Gordinne Perez2024-12-24T21:21:32+00:00Incoterms (International Commercial Terms) are a set of rules created by the International Chamber of Commerce (ICC) to facilitate international trade by establishing clear and common terms between buyers and sellers. These clauses regulate aspects such as the delivery of goods, transit, risks and costs associated with transport.
What are Incoterms?
Incoterms, whose name comes from the term “International Commercial Terms”, were created in 1936 and have been updated several times, the most recent version being the 2020 version. Their main objective is to define responsibilities and obligations between exporters and importers to avoid misunderstandings in international trade.
Each Incoterm is composed of a set of three letters that specify the conditions under which the seller and buyer handle transport, insurance and other logistical aspects.
Incoterms clauses are grouped into two main categories: those that apply to any type of means of transport and those that apply exclusively to maritime transport.
Categories of Incoterms
Incoterms 2020 are divided into two main groups: Incoterms that apply to any mode of transport (such as EXW, FCA, CPT, CIP, DAP, DPU and DDP) and those that apply specifically to sea transport (such as FAS, FOB, CFR and CIF). Each of these terms has specific implications for the parties involved.
Incoterms for all modes of transport
- EXW (Ex Works): The seller fulfils his obligation when he makes the goods available to the buyer at his premises. The buyer bears all costs and risks from the point of origin.
- FCA (Free Carrier): The seller delivers the goods to the carrier or another person designated by the buyer, at the seller’s premises or at another agreed point. The risk is transferred once the goods are in the hands of the carrier.
- CPT (Carriage Paid To): The seller pays for carriage to the agreed destination, but the risk is transferred to the buyer once the goods are in the hands of the carrier.
- DAP (Delivered at Place): The seller bears all costs and risks up to the agreed point, not including the cost of unloading. The buyer must bear the costs associated with unloading.
Maritime Incoterms
- FAS (Free Alongside Ship): The seller delivers the goods alongside the ship at the agreed port of shipment. From that moment on, the buyer bears the risks and costs.
- FOB (Free On Board): The seller assumes the costs and risks until the goods are loaded on board the ship. This Incoterm is commonly used for the transport of large volumes of maritime cargo.
- CIF (Cost, Insurance and Freight): In this case, the seller not only assumes the costs and risks until the goods arrive at the port of destination, but is also obliged to take out insurance during transport.
Key differences between Incoterms
Each term has different implications in terms of costs, risks and responsibilities. For example, Incoterms such as EXW impose maximum responsibility on the buyer, as the buyer is responsible for all logistics from origin. In contrast, terms such as DDP (Delivered Duty Paid) benefit the buyer, as the seller is responsible for all costs and formalities, including taxes and customs duties.
Another crucial difference is in the insurance coverage. In Incoterms such as CIF, the seller must insure the goods up to the port of destination, whereas in FOB the buyer is responsible for the insurance once the goods are on board the ship.
Advantages and disadvantages of Incoterms
The use of Incoterms provides clarity and avoids disputes by defining which party is responsible for which aspect of the shipping process. Some of the main advantages include the standardisation of terms, which facilitates communication, and the ability to accurately allocate the associated costs and risks.
However, some Incoterms also have disadvantages. For example, terms such as DDP can be difficult for the seller to manage if the seller does not have a structure in place to handle customs formalities in the destination country. Similarly, CIF can be costly if the seller does not obtain favourable insurance coverage.
How to use Incoterms in international contracts
It is essential to include the appropriate Incoterm in international sales contracts to ensure that both parties clearly understand their responsibilities. When specifying the term in the contract, it is also advisable to add the exact place where the risk will be transferred.
It is also important to understand that Incoterms do not cover all aspects of a sales contract, such as breach of obligations or force majeure. It is necessary to supplement these terms with other specific clauses to protect both parties in case of eventualities.
How can an international trade consultancy help?
Navigating the complexities of Incoterms can be complex, especially for companies that are starting to expand internationally. At Asesoría Orihuela Costa we are committed to exporting companies who wish to understand and apply Incoterms effectively. We have a team of experienced professionals who can guide you in the selection of the appropriate Incoterm, advise you in the preparation of contracts and help you to optimise your export operations, minimising risks and maximising opportunities.