What are Incoterms?
The Incoterms rules are a set of standard packages of terms and conditions relating to the sale of physical goods that need to be transported. First published by the ICC in 1936, the Incoterms rules are revised from time to time. The latest revision, Incoterms 2010 came into force on 1 January 2011, replacing the previous version Incoterms 2000.
The Incoterms rules focus on these two key aspects of the transaction:
- Which party – buyer or seller – is responsible for arranging and paying for transport (and associated activities such as loading or unloading), import and export procedures, insuring the goods etc.?
- At what point in the journey does responsibility for the consignment transfer from seller to buyer? This becomes important if the goods are lost or damaged in transit
By agreeing to use an Incoterms rule, the buyer and seller achieve precision and clarity in defining their obligations and responsibilities.
Note that the Incoterms rules do not attempt to cover all aspects of the commercial agreement – there are important matters such as transfer of title and how the goods are to be paid for, on which the Incoterms rules are silent.
When the parties have agreed on an Incoterms rule to govern the transaction, it is incorporated into the commercial agreement by way of a reference such as the following:
CIP Hong Kong Terminal 4 Incoterms 2010
Note these three elements:
- A three-letter abbreviation – CIP stands for “Carriage and Insurance Paid to“
- A precisely-defined place. For the CIP Incoterms rule, this is a place of destination, to which the seller has contracted to transport the goods. For other Incoterms rules, the place may have a different meaning – see the summaries for more on this.
- The applicable edition of the Incoterms rules – here, Incoterms 2010. (Parties who wish to use earlier editions of the rules such as Incoterms 2000 are free to do so, provided they specify this)
The logic of the Incoterms rules
The Incoterms 2010 revision divides the rules into two groups – there are four Incoterms rules whose use is reserved for transport of goods by sea or inland waterway, and seven rules that can be used for any transport mode or more than one means of transport.
One of the aims of the Incoterms 2010 edition is to encourage use of the correct Incoterms for containerised goods, which nowadays represent the vast majority of cross-border movements.
Use of the “traditional” Incoterms rules such as CIF and CFR for containerised goods exposes the exporter to unnecessary risks. This was dramatically illustrated by the Japanese tsunami in March 2011. Many exporters suffered avoidable losses when their containers were washed away whilst in the container terminal
Although the Incoterms 2010 edition no longer emphasise this, the rules can also be usefully arranged in these four groups:
- Buyer responsible for all carriage – EXW
- Buyer arranges main carriage – FAS; FOB; FCA
- Seller arranges main carriage, risk passes after main carriage – DAT; DAP; DDP
- Seller arranges main carriage, but risk passes before main carriage – CFR; CIF; CPT; CIP
The Incoterms rules in this last group have an important feature that the newcomer should take careful note of. The place mentioned in a rule such as CIP Hong Kong Terminal 4 Incoterms 2010 is not the point of delivery, where risk transfers. The seller is responsible for arranging and paying for transport to Hong Kong, but risk will transfer from seller to buyer at the point where the goods are taken in charge by the carrier, i.e. before the main carriage.
Taken from Incoterms Explained, for a comprehensible guide on each Incoterm rule visit www.incotermsexplained.com