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Incoterms: Speaking the Language of Trade

An important part of daily trade language, Incoterms® rules help exporters, importers, insurers, and others “speak” to one another through a series of short, 3-letter acronyms. Updated in 2010, Incoterms were first published by the International Chamber of Commerce (ICC) in 1936. At the time, the global business organization had set out to understand the commercial trade terms used by merchants. Based on the findings of the studies, the first version of the Incoterms® rules was published and included the terms FAS, FOB, C&F, CIF, Ex Ship, and Ex Quay.

Three Little (But Very Important) Letters

Today, Incoterms are the internationally-recognized standard for both international and domestic contracts for the sale of goods. Developed and maintained by experts and practitioners brought together by ICC, Incoterms became the standard in international business rules setting. Launched in mid-September 2010, Incoterms 2010 went into effect in January 2011. The trade terms help traders avoid costly misunderstandings by clarifying the tasks, costs, and risks involved in the delivery of goods from sellers to buyers.

Incoterms rules are recognized by UNCITRAL as the global standard for the interpretation of the most common terms in foreign trade. UNCITRAL has been recognized as the core legal body of the United Nations system in the field of international trade law. According to the ICC, their latest iteration consolidated the D-family of rules, removing DAF (Delivered at Frontier), DES (Delivered Ex Ship), DEQ (Delivered Ex Quay) and DDU (Delivered Duty Unpaid) and adding DAT (Delivered at Terminal) and DAP (Delivered at Place). Other modifications included an increased obligation for buyer and seller to cooperate on information sharing and changes to accommodate string sales. String sales are multiple sale of goods during transit.

When used properly, the goal of Incoterms 2010 is to provide the descriptive tasks, the costs, and the risks that’s involved with the delivery of a commodity (or commodities) from the seller to the buyer,” explains Ivelisse James, DB Schenker’s, of Trade Advisory Solutions. “When moving from Incoterms 2000 to Incoterms 2010, the trade terms were reduced in number from 13 to 11.”

Of those 11 terms or rules, seven apply to all modes of transportation and four are specific to sea and inland waterway transport. “In my experience,” says James, “there have been instances where the rules have been misused and applied to the wrong mode of transport.”

Tips for Successful Use

  • Incoterms 2010 indicates:
  • Which party in the sales contract has the obligations to make the carriage
  • Which party in the sales contract has the obligation to make the insurance arrangements
  • When the seller delivers the goods to the buyer
  • The cost responsibilities (buyer’s vs. seller’s)
  • The buyer/seller obligations as related to the physical contract of carriage

“What Incoterms 2010 doesn’t deal with,” James says, “are the ownership transfers nor the method of payment that’s involved in the transaction.”
James says “One of the challenges that may be encountered when using Incoterms is not including the necessary details after the 3-letter acronyms. Put simply, the trade term must be followed by a named place (e.g., FOB Port of New York) and the phrase [Incoterms 2010].  If it’s not stated in that manner, there could be misunderstandings or increases in disputes,” says James, “Another challenge may be the selection of an improper trade term.  Depending on the specific Incoterm—the named place is where actual delivery takes place, and where the risk associated with the shipment passes from seller to buyer.  Yet, in another specific incoterm—the named place differs from the place of delivery, and is the place of destination to which carriage is paid.”
For this and other reasons, James says,“It’s extremely important that shippers understand the meanings behind the Incoterms and properly identify that “place” in relation to each used acronym.”
A useful tool for you to reference the latest edition – which you can find here.

Up Next: Incoterms 2020
To keep pace with the ever-evolving global trade landscape, the latest update to the trade terms is currently in progress and is set to be unveiled in 2020. The Incoterms 2020 Drafting Group includes lawyers, traders, and company representatives from around the world. The overall process will take two years as practical input on what works and what could possibly be improved will be collected from a range of Incoterms® rules users worldwide and studied.
“They’re already working on the evaluation and revision of the current Incoterms,” says James, adding “In most cases the new rules go into effect one year after they are officially published.”
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