What are Incoterms

Incoterms' meaning revolves around international trade. They are an international term that defines a transaction between importers and exporters so that both parties understand their tasks, risks, responsibilities, etc. It is a way of distributing obligations and responsibilities between both parties.

The Incoterms rules, universally accepted by legal authorities and governments around the world. These terms are crucial for daily international and domestic trade and are an integral part of many sales contracts.

Functions of Incoterms

• The main function of the terms is to outline the obligation of the buyer and seller in a trade transaction.

• Another crucial function of Incoterms is to clearly define when the risk shifts from seller to buyer under the specified rules, providing a sense of security in the transaction.

• It also helps in understanding how costs are allocated between the seller and buyer.

Incoterms rules are internationally accepted definitions and interpretations of trade terms created by the International Chamber of Commerce (ICC).

They specify the duties of buyers and sellers in international and domestic trade, focusing on the delivery of goods. The rules help in understanding the following:**

-Cost: It will help in understanding who will pay the freight, insurance and other transportation-related costs.

-Delivery: It also specifies the points at which the seller has fulfilled his obligation to deliver the goods.

-Risk: It also helps to know when and where the risk of loss or damage to goods has been passed on from seller to buyer.

-Incoterms Rules for Any Mode of Transport

Below, we are discussing the seven common Incoterms for any mode of transport:**

-CIP - Carriage and Insurance Paid

The CIP terms stand for carriage and insurance paid, which is widely used in international trade. Under the Incoterms, the seller is responsible for delivering goods to a designated location and pays for transportation and insurance.

-CPT - Carriage Paid To

CPT refers to the carriage paid to refer to the seller who is responsible for delivering goods to a specified destination and paying for transportation, but not insurance.

-DAP - Delivered At Place

DAP stands for delivered at place, which refers to the seller responsible for delivering goods to a specified location, excluding import duties or taxes. The buyer handles customs clearance and pays import duties.

-DPU - Delivered At Place Unloaded

DPU is another Incoterm that stands for delivered at a place unloaded. In this case, the seller is responsible for delivering and unloading goods at a specified location, while the buyer is responsible for customs clearance and import duties.

-DDP - Delivered Duty Paid

DDP stands for delivered duty paid. It specifies that the seller is responsible for delivering the goods to the buyer's specified location and assumes all risks and costs involved in the transportation process, including duties and taxes, customs clearance and shipping costs.

In a DDP agreement, the buyer has minimal responsibility, as the seller handles almost all aspects of the shipping process up to the point of delivery.

-EXW - Ex Works

EXW stands for Ex works, in which the seller makes the goods available at their premises, such as a factory or warehouse, and the buyer is responsible for all costs and risks involved in transporting the goods from there to the final destination, including loading the goods, import duties and taxes, transportation costs and more.

-FCA - Free Carriers

FCA is another Incoterm that stands for free carriers and defines the seller's and buyer's responsibilities in the delivery of goods. The seller delivers the goods to a carrier or a location specified by the buyer.

The seller is responsible for clearing the goods for export and bears all risks until the goods are handed over to the carrier.

The buyer assumes all risks and costs from the point where the goods are handed over to the carrier, including transportation, insurance, import customs clearance and duties.

-Incoterms Rules for Sea and Inland Waterway Transport

There are specific Incoterm rules set by the International Chamber of Commerce for inland and sea transport. The common Incoterms for sea and inland waterways transport are:**

-CFR - Cost and Freight

CFR is a common Incoterms that stands for cost and freight. This is the term used in the shipping industry where the seller needs to deliver the goods to a specified destination or port and load them on a specified vessel.

The seller will pay for the necessary payments and freight to bring the goods to the named port of destination. Under this, the seller is obliged to provide necessary transport documents, such as proof of delivery, bill of lading, etc, to the buyer.

-CIF - Cost Insurance and Freight

Another common Incoterm is CIF, which stands for cost, insurance, and freight. The term specifies that the seller should deliver the goods to a specified port and load them on a specified vessel.

The risk of damage or loss to the products passes when it is on the ship or vessel. The seller is responsible for paying the necessary payment and freight to bring the goods to the specified destination.

They are also responsible for insurance to cover the buyer's loss or damage to the goods during the carriage.

-FAS - Free Alongside Ship

FAS is another Incoterm that stands for free alongside ship, which refers to the seller delivering when the goods or products are placed alongside the ship or vessel. The buyer at the named port of shipment nominates the goods.

The risk of loss or damage to the products passes when it is alongside the vessel or ship, and in that case, the buyer will bear all the expenses from that point. The seller is responsible for all the activities till the cargo is delivered alongside the ship.

However, the FAS term is more suitable for non-containerised cargo since it can be delivered alongside the ship.

-FOB - Free On Board

FOB stands for free on board, which specifies that the seller will deliver the goods on board the vessel nominated by the buyer at the specified port of shipment.

The risk of loss or damage to goods is passed when the products are on board the vessel, and the buyer will bear all the expenses from that point onwards. In FOB, the seller should deliver the goods on board the ship.

There are some circumstances which are not covered under Incoterms, such as:

• Incoterms do not identify the goods being sold nor list the contract prize.

• The Incoterms do not determine when the ownership of the goods or title passes from the seller to the buyer.

• It does not determine which documents the seller must provide to the buyer for the customs clearance process in the buyer's country.

• It does not address the condition of a sale.

• It does not determine the methodology or timing of payment discussed between the buyer and seller.

Lastly, Incoterms do not specify or address the liability for the failure to provide goods in conformity with the delayed delivery, dispute resolution mechanisms and contract of sale.

When it comes to Incoterms, you need to consider their advantages and disadvantages. Let us examine the pros and cons of Incoterms.

-Advantages of Incoterms

• One of the advantages of Incoterm is standardising and specifying the complicated aspects of international trade.

• These terms make trading much simpler and save time and money that has been spent on lawyers to draft terms.

• The Incoterms have been updated and clarified by the International Chamber of Commerce.

-Disadvantages of Incoterms

• The disadvantage of using Incoterms is that buyers and sellers have preferences when using them. For example, sellers prefer CIF because they understand shipments better than buyers, while buyers choose FOB because they understand it better than sellers.

• Another disadvantage is that some specified terms can expose one party to inflated costs.

If you want to facilitate international trade, knowing all about Incoterms is essential. These terms are separated by the modes of transport. They help categorise the responsibility between the buyer and seller. These terms basically help clarify the agreements, but they are not the entirety of the agreements.

Additionally, business owners should consider investing in SME insurance, such as transit insurance, to protect their goods while in transit.

This insurance covers potential risks like damage, loss or theft during transportation, providing financial security for goods being shipped domestically or internationally.

TATA AIG offers various SME insurance policies, such as marine insurance policies, that ensure assets and goods are protected against various risks.

-Why is it called Incoterms?

Incoterms, short for "International Commercial Terms," are standardised trade terms published by the International Chamber of Commerce (ICC).

-What are the Incoterms in shipping?

Incoterms in shipping are a set of internationally recognised trade terms that define the responsibilities of buyers and sellers during the shipping process.