The Little Guide On How To Use Incoterms

If you happened to find this article, it is probably because you are interested in learning how to use Incoterms. You have just found an importer or exporter abroad, depending on whether you sell or buy, maybe you have already got familiar with Incoterms, you have even chosen the contract that better suits your situation, yet you are still unsure about how to use Incoterms in the right way.

For example, you are discussing with your business partner of a USD 1,000,000 shipment FCA Free Carrier; ok, but, FCA what?

In this article we are going to deal exactly with this issue: how do you I incorporate an Incoterm effectively into my contract so that it suits my position in the deal?

To answer this question, here are the principles, you might even call them the commandments, of dealing with Incoterms.

Principle number 1: Incoterms must be explicitly incorporated in the contract

Let’s say that you have closed a deal whereby you are selling under CIF Cost, Insurance, Freight.

Is it an Incoterm? No, because the Incoterm would be CIF Cost, Insurance and Freight Incoterm 2020. It might sound irrelevant or redundant, but you know as they say: they devil is in the details. If you just write CIF, you will be using a trade term, not an Incoterm.

Why is it different? Because, when you write a contract, you do it under a certain body of law: it could be US law, UK law, French law, etc. Under different domestic laws, the term CIF might have a dissimilar meaning than its corresponding Incoterm. If you sign a contract selling under CIF in English law, the terms of the contract would be interpreted as per English law (judged by English courts).

In order to benefit from the internationally accepted interpretation of the provision, you have to specify that you are using CIF Cost, Insurance and Freight Incoterms 2020.

For more on this topic, you can have a look at our article: What are trade terms and Incoterms?

Principle number 2: Incoterms deal with the level of responsibility from the seller’s perspective

There are 11 official Incoterms: they start from a situation where the responsibility for the seller is the least (EXW, i.e. Ex Works), to a situation where the responsibility for the seller is the most (DDP, i.e. Delivered Duty Paid). Even if you are not that familiar with Incoterms, you will note that the name Ex Works would imply something like just out of the factory, whereas Delivered Duty Paid has more to do with an at-home, Amazon-like delivery.

Why is this relevant? Because if you are the seller, you are the one setting the price; being aware of the responsibilities that you are going to meet, would make a big difference in your asking price.

If you are selling USD 1,000,000 EXW, it cannot be the same as USD 1,000,000 DDP.

You are free to do that, as long as you understand that there are going to be bills eroding your original price. Knowing that you, as the seller, are the one dealing with more or less responsibilities, allows you to play with the price. If you are selling DDP instead of EXW, all things being equal, you can ask for much more.

Principle number 3: Incoterms do not deal with the transfer of property, but with the transfer of risk

This is perhaps the most important principle regarding Incoterms: it tells you that Incoterms are not a contract regarding transfer of property, but they deal with risk management and financial and transport obligations.

Incoterms will tell you at what physical point in the supply chain (see below principle number 5 regarding the concept of delivery) the risk of loss or damage to the goods shifts from the seller to the buyer.

What does it mean? Take the EXW Incoterm for example: anything that happens to the goods after they have been picked up by the buyer at the seller’s premises is the buyer’s responsibility. The risk that the goods are lost, stolen, damaged, etc, is transferred to the buyer as soon as this latter collects the goods.

Another important point is that Incoterms will state at what physical point in a supply chain the responsibility for all transportation, customs clearance, duties, and related charges shift from the seller to the buyer.

If we go back to the EXW example, the burden to carry on all the above-mentioned obligations shifts to the buyer at the point of collection.

Principle number 4: delivery as per Incoterms is not necessarily physical delivery

If you just ordered something on Amazon and received email from them saying, «Your order has been delivered», you would expect your order be delivered to your house. In fact, it works just like that.

But in Incoterms, it does not. Delivery may not mean physical delivery, i.e. delivery up to the final destination point (actually it could, but not necessarily so). What delivery under Incoterms means, is risk transfer.

Delivery under Incoterms means the point where risk of loss or damage shifts from the seller to the buyer.

Depending upon the Incoterm that the parties choose, delivery under Incoterms could be the place of origin, the door of a factory, or the final destination at a customer’ site.

Principle number 5: Incoterms need the place of delivery to be clearly specified in the clause

Let’s say that you are buying FOB Free On Board Incoterms 2020 from China. Fine, but, FOB where? Is it FOB Shanghai, FOB Shenzhen, FOB Guangzhou, FOB Qingdao, FOB Tianjin?

When you use Incoterms, you need to specify the place of delivey, i.e. a parenthetic reference to the place of delivery as is it written in the Incoterm you are going to use:

EXW Ex Works (named place of delivery)

FCA Free Carrier (named place of delivery)

FAS Free Alongside Ship (named port of shipment)

FOB Free On Board (named port of shipment)

CFR Cost & Freight (named port of destination)

CIF Cost, Insurance & Freight (named port of destination)

CPT Carriage Paid To (named place of destination)

CIP Carriage & Insurance Paid To (named place of destination)

DAP Deliverred At Place (named place of destination)

DPU Delivered At Place Unloaded (named place of destination)

DDP Delivered Duty Paid (named place of destination)

As you can see, the Incoterm itself will help you to answer the question «where?», i.e. the place of delivery (as defined under Incoterms), which must be included for the Incoterm to be valid.

Globartis Research

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