What is an Incoterm? INCOTERMS, as their name suggests, are international commercial terms, recognised and used throughout the world for international contracts.
INCOTERMS, as their name suggests: “International Commercial Terms”, are international commercial terms, recognised and used throughout the world for international contracts. They define the obligations (transfer of costs and risks) of the buyer and seller in international sales contracts.
Incoterms therefore aim to establish uniform international rules by inserting contractual provisions that are mainly used in foreign trade contracts. Uncertainties arising from differing interpretations of the various clauses in different countries are thus avoided or at least considerably limited.
These rules were drawn up by the International Chamber of Commerce (ICC) in 1936 and are regularly revised in line with current practice. Although they are not mandatory, they are very useful to international trade operators. The Incoterms essentially specify the obligations, the distribution of costs and the risks associated with the delivery of goods by the seller to the buyer.
Exporting or importing involves, among other things, the physical movement of goods, which entails costs and risks. It is therefore necessary to determine very precisely who bears these risks and costs, to know exactly when the risks are incurred by each of the parties, and when the transport and other costs are borne by one or other of the parties.
The Incoterms rules specify the meaning of a series of commercial terms, each of which is designated by a trigram (three capital letters) followed by an agreed place, port, etc.
The main purpose of the Incoterms rules is to determine the extent to which the seller has fulfilled his obligations, and therefore to be able to say that he has delivered the goods to the buyer in the legal sense.
Once the place of transfer of costs is known, the seller can include in his selling price, and therefore in his invoice, all the costs of transport and other customs, consular and tax formalities, etc. up to the point previously agreed. The buyer is therefore aware of the costs incurred from this point, which are not included in the amount of the commercial invoice issued by the seller.
The place of transfer of risk or delivery is extremely important. It determines the extent to which the transport risk is borne by the seller and the extent to which the risk is borne by the buyer. This is where delivery comes in.
However, INCOTERMS do not define the transfer of ownership, as it is only when the invoice is paid in full that ownership of the goods is acquired.
The place of risk transfer or delivery is extremely important. It determines the extent to which the transport risk is borne by the seller and the extent to which the risk is borne by the buyer.
Incoterms are defined and updated every 10 years by the International Chamber of Commerce. They are now referred to as INCOTERMS 2022, as the latest update applies from 01 January 2020 to 31 December 2029.
In international trade, several players in the logistics chain are involved between a seller and a buyer.
The seller provides the goods, which are then loaded onto a lorry that delivers them to a logistics platform or freight forwarder (this is the pre-carriage stage), before going through customs and being loaded onto the main means of transport (which may be land, sea, rail or air).
The main mode of transport is the one that will cover most of the journey.
The goods must then be unloaded from the main means of transport (which may be a lorry, plane, ship or train), cleared through customs and then post-route (i.e. the last few kilometres that will take the goods to the buyer, where they will be unloaded at their final destination).
The diagram below shows all the players in the logistics chain.
At each of these stages, costs are added, but who pays for them? The buyer or the seller? The first bar shows who pays for transport and up to which stage.
If something were to go wrong in the supply chain, who would be responsible? The buyer or the seller? Here again, Incoterms answer this question with the second bar in the diagram illustrating the transfer of risk.
In most cases, the seller’s insurance covers only the seller’s risk. This is illustrated by the third bar in the diagram, but we will see that for certain specific Incoterms, the seller’s insurance may also cover part of the buyer’s risk.
To make things clearer, for each of the incoterms, we will distinguish between the seller’s share and the buyer’s share, with 2 distinct colours.
Ideally, for every commercial transaction involving delivery from the seller to the buyer, choose an appropriate Incoterm.
The choice of Incoterm is made on the seller’s offer or at the time of negotiation of the transaction, after agreement has been reached on the price or content of the delivery.
The same principle applies to four incoterms specific to maritime transport:
Finally, the last 3 Incoterms can be used regardless of the main mode of transport.
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