What are INCOTERMS?
Incoterms are a set of rules for the interpretation of the most commonly used trade terms in international trade - International Commercial Terms.
They were first published by the International Chamber of Commerce (ICC) in 1936 and since then have been updated in 1953, 1967, 1976, 1980, 1990 and the current revision 2000.
Parties to a contract are often
unaware that there are different trading practices in their respective countries, for example FOB for an American company may have a different meaning to FOB for a UK trader. This can lead to misunderstanding and,
in the worst scenario, costly litigation. Incoterms set out to avoid this problem by giving a set of standard rules that are recognised throughout the world.
The basic purpose of each Incoterm is to clarify
how functions, costs and risks are split between the buyer and seller in connection with the delivery of the goods as required by the sales contract. Delivery, risks and costs are known as the critical points. Each
term clearly specifies the responsibilities of the seller and the buyer. The terms range from a situation in which everything is fundamentally the responsibility of the buyer to the other extreme where everything is
fundamentally the responsibility of the seller.
The Obligations of the Seller and Buyer
The main purpose of Incoterms is to clearly set out the obligations of the seller and the buyer in
relation to the delivery of the goods and the division of functions, costs and risks related to the delivery. The way this is presented in each Incoterm is under ten clauses each for the seller and the buyer, where
each clause on the seller's side "mirrors" the position of the buyer with respect to the same subject matter. For example, clause A3 deals with the seller's obligations to contract for carriage and
insurance and clause B3 deals with the buyer's obligations to contract for carriage and insurance.
It is important to ensure that where the protection of
Incoterms is intended to be incorporated into a contract of sale that an express reference to the current edition of Incoterms is always made. For example it is not enough to quote just "FOB
Southampton" but instead "FOB Southampton Incoterms 2000" should be used.
Alternatively, suitable wording can be included in the contract stating that the contract is subject to Incoterms 2000.
However, if this is the case, you should be careful to ensure that standard contracts, and any other standard paperwork mentioning Incoterms, are updated to quote "Incoterms 2000" rather than Incoterms
Failure to incorporate the correct version of Incoterms could result in dispute as to which version is intended or indeed if Incoterms were intended to be incorporated at all.
The thirteen Incoterms are split into four distinct groups:
Group E - where the goods are made available to the buyer at the seller's premises;
- where the seller must deliver the goods to a carrier appointed by the buyer;
- where the seller must contract for the carriage of the goods without assuming risk of loss of, or damage to the goods or additional costs due to events occurring after shipment;
- where the seller has to bear all costs and risks required to bring the goods to the place of destination.