The International Commercial Terms, store more commonly known as Incoterms, stuff are standard trading terms that can be used in international contracts for the sale of goods, store which determine the rights and obligations of the parties related to the place and time of delivering goods, the transfer of the risks for the goods, the distribution of the transport and insurance costs and the formalities for customs documents.
Incoterms were drawn up for the first time in 1936 by the International Chamber of Commerce, which since then has also been responsible for amending and updating them according to the changes taking place in international trade. Incoterms 2000 are the ones currently in force, but on 1 January 2011 the Incoterms 2010 will come into force.
The main change in Incoterms 2010 is that four of the former Incoterms (DDU, DAF, DES and DEQ) have been deleted and two new ones created (DAT and DAP); there will therefore be a total of eleven Incoterms.
Another important change is the modification of the classification system, which is intended to improve application of Incoterms. The Incoterms were previously grouped in four categories, each of them defining the time when the delivery of goods takes place and the transport conditions and risk for the goods. On the other hand, the new classification only contains two categories, based on whether the transport is by sea or another means of transport is used.
The four Incoterms included in the category of transport by sea-going vessels are FAS, FOB, CFR and CIF. It must be taken into account that when the International Chamber of Commerce refers to maritime transport, it only implies they are applicable when it involves transporting goods in bulk (for example, a vessel shipping coal) or transporting cargo normally directly in the hold (for example, pallets loaded directly in the vessel’s hold). Therefore, even though a vessel is used for the main transport, if the goods are in containers it would not be correct to use a maritime Incoterm.
The other Incoterms that can be used for any means of transport or a combination of all of them are as follows: EXW, FCA, CPT, CIP, DAT, DAP and DDP.
Without going into too much detail about the definition and meaning of each of the Incoterms, we would just like to mention some of the most common mistakes made when using the different Incoterms, which has also been stressed by the International Chamber of Commerce in the new Incoterms 2010.
In this respect, for example, EXW is the acronym for Ex-works. This Incoterm means that the seller only undertakes to deliver the goods in the agreed place, normally at its factory, perfectly packaged and labelled. From this point on all the expenses and risks are undertaken by the buyer: loading the transport vehicle, customs clearance, the main transport, insurance, etc.
The International Chamber of Commerce does not recommend using this Incoterm for international sales because, although the Incoterm states that the loading is the buyer’s responsibility, in most cases the seller does this, which indirectly accepts the risks that it is not responsible for. Another problem that could arise is related to obtaining the exportation SAD (Single Administrative Document) because, if the buyer does not carry out the customs clearance, the seller cannot obtain the justification of exportation.
For these reasons, the Chamber of Commerce recommends using the Incoterm FCA (Free Carrier). This Incoterm is very similar to EXW but the seller undertakes the loading work and customs clearance for exportation.
Another very common mistake that the Chamber of Commerce attempts to avoid with the classification of the new Incoterms is that maritime Incoterms are used for transport that is not actually of this kind. For example, the Incoterm FOB is the most commonly used in international trade and, despite the fact it is only designed for maritime transport, it is very common to find it used for air transport and container cargo.
As can be seen, each Incoterm clearly defines the obligations of each party and each one has its own purpose; however it is clear they are very often misused by companies, intermediaries, haulage companies and customs agents.
Due to the foregoing, it is important for companies to be very-well informed about this tool that they have available, a tool that is very useful in relations between international sellers and buyers and they must know how to choose which Incoterm is the most suitable and convenient for their purpose, depending on the kind of goods, transport and obligations they are willing to undertake. The recent update of the Incoterms provides us with a good excuse to bring ourselves up to date.
Laia Coderch Oliva