Incoterms (international commercial terms) are internationally accepted definitions and rules of interpretation for most common commercial terms. Essentially, they are the shorthand form of agreeing on who is responsible for the costs and risks associated with the international sale of goods. With one simple three-worded acronym, you can confirm when risk in goods passes from the supplier to the recipient and who is responsible for transporting, insuring and paying duties on goods. So if you’re in the business of selling goods online and you have a growing base of international customers, you should familiarise yourself with them.
Examples of Incoterms
DDP (delivered duty paid). The seller is responsible for all costs relating to transporting the goods to the named place in the country of purchase (including import duties and taxes). The seller is not responsible for unloading.
EXW (ex-works). The seller has to make the goods available to the buyer at a specified place, usually the seller’s factory or depot. EXW is the only Incoterm that makes export clearance the responsibility of the buyer.
FOB (free on board). The seller clears the goods for export and delivers them when they are on board the vessel at the named port of shipment. This Incoterm is only suitable for sea and inland waterway transport methods.
How Do They Apply to Me?
Incoterms are important if you buy or sell products internationally. Suppose you are a bespoke Canadian maple syrup importer in Australia. Your business caters to Australians who are not happy to accept cheap substitutes. You source the best syrup from one supplier in Canada and need monthly shipments to maintain your stock and meet demand.
Accordingly, you should buy your maple syrup DDP (delivered duty paid). This means that the Canadian supplier has to pay all costs and cover all risks involved in delivering the maple syrup to your door in Australia. The supplier must unload and clear the goods for import and pay all duties, taxes and charges in the country of import (Australia). If a shipment is lost in transit, the supplier is responsible for ensuring a new shipment reaches you. A supplier agreement may also apply to you.
Continue reading this article below the formTips on Using Incoterms
Name a Specific Delivery Point
All Incoterms require you to specify a point of delivery. However, simply noting ‘Australia’ could mean your precious goods could end up in Darwin. Thus, it is your responsibility to ensure you correctly note a specific delivery point.
Understand Where the Risk Lies
For most Incoterms, the end destination you name is where the risk passes and delivery takes place. However, note that for CPT, CIP, CFR and CIF, where the risk passes and where delivery occurs are different. Accordingly, you should specify both.
Which Incoterms Should I Use?
Incoterms are updated sporadically, so you should define the edition you are using. For example, state ‘[Incoterm, delivery point] Incoterms® 2020’.
State Risk Passing
Incoterms do not specify title, this is your responsibility. Accordingly, you must note when and where risk passes.
Do Not Replace a Contract
Incoterms cannot be used in place of a contract. You still need to agree on a price, consequences of breach, what the goods are, termination rights and jurisdiction.
Before buying a business, it is important to undertake due diligence, to verify the information supplied by the seller. This guide will walk you through the due diligence process.
Key Takeaways
In summary, Incoterms are an important aspect of international commercial agreements. Incoterms will only apply to your transaction if the contracting parties agree to include it. Accordingly, ensure you choose the appropriate term for your situation and understand what it means. Note that you should not use these terms as a substitute for a written contract as they only deal with the delivery of goods and not payment or costs.
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Frequently Asked Questions
An Incoterm is a shorthand form of agreeing on who is responsible for the costs and risks associated with international goods.
Your contract should include a provision specifying that you will be using Incoterms and the edition you are using.
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