Understanding Incoterms

The idea behind Incoterms is simple: To provide standardized logistics terminology to help prevent confusion and disagreement between international sellers and buyers. As Mark Agnew, senior director, international policy for the Canadian Chamber of Commerce (CCC) observes, “Having and using this common language is vital for Canadian companies as we diversify our trade and confront the logistical challenges of moving goods to and from unfamiliar markets.”

What are Incoterms?

Incoterms are formal terms used in most international sales contracts to reduce the logistical risks of doing business internationally. These three-letter acronyms mean the same thing in any contract anywhere. As a result, both sellers and buyers can clearly understand their contractual rights and responsibilities when delivering or receiving goods internationally. 

More specifically, according to the Forum for International Trade Training (FITT), Incoterms “are used in negotiations to resolve who is responsible for the expenses associated with a shipment at a specific point in the shipment’s journey, such as export packing costs, the main transport costs and custom duties.” 

To get businesses up to speed on the new Incoterms 2020 rules and help them succeed internationally, FITT has partnered with the CCC to offer the only Incoterms 2020 in-class training across Canada officially recognized by the International Chamber of Commerce. This training is also offered in partnership with the Canadian Trade Commissioner Service (TCS) and Export Development Canada.

There are 11 Incoterms in all. A familiar example is Free on Board (FOB), which means that you deliver the goods to your buyer on board the vessel chosen by the buyer at the named port of shipment. 

Why are Incoterms so important to international logistics?

Global trade moves goods among many different markets with many different languages and business cultures. Because Incoterms provide a common logistics vocabulary, using them significantly reduces the potential for disputes over logistics.

“Having a contract is simply not enough,” says Agnew, “especially given the potential language barriers and different meanings around a particular term or phrase. Incoterms greatly reduce the challenges by ensuring that the parties involved in a transaction know their responsibilities at every step along the way.”

What do Incoterms cover?

Incoterms rules describe obligations, risks and costs in a series of 10 articles that accompany each Incoterm. The “A” articles, which represent the seller’s obligations, and the “B” articles, which represent the buyer’s obligations, are as follows:

A1/B1 General obligations
A2/B2 Delivery/taking delivery
A3/B3 Transfer of risks
A4/B4 Carriage
A5/B5 Insurance
A6/B6 Delivery/transport document
A7/B7 Export/import clearance
A8/B8 Checking/packaging/marking
A9/B9 Allocation of costs
A10/B10 Notices


Note that delivery of the cargo isn’t rigidly defined (for example, by reaching the buyer’s warehouse). Instead, it refers to the seller fulfilling the obligation of the terms of sale, or to the seller completing a contractual obligation. This means that “delivery” can take place at any point in the physical movement of the cargo. 

Having a contract is simply not enough, epecially given the potential language barriers and different meanings around a particular term or phrase.

Mark Agnew  —  Senior Director, International Policy Canadian Chamber of Commerce

FITT’s Global Value Chain also emphasizes that the use of Incoterms doesn’t replace the need for a contract. The terms “are a standardized means of setting out obligations with respect to carriage and insurance. They do not contain provisions for delivery times and do not regulate the issue of title.” This means that your contract should always specify a delivery time and state when title transfer (transfer of ownership) takes place. 

Incoterms and risk management

“In an increasingly complex global trade environment, companies need to understand their obligations and risks at all stages of their transactions, regardless of whether they are an importer or exporter,” says Agnew.

How can Incoterms reduce your risks?

  •       They can help you avoid disagreements over who carries the risk at various points in the logistics process. This helps you get the right insurance for the period during which you carry the risk.
  •       They can help you avoid disputes over alleged late delivery and lower your risk of late-delivery penalties.
  •       They provide a stable risk environment by imposing certainty on a sales contract. For example, using the appropriate Incoterms rules can help ensure that you get paid for a shipment. 

“Using the correct Incoterms in an international transaction helps the parties involved identify the risks for which they’re responsible,” says Philip Turi, EDC’s director of strategy and innovation. “ At the same time, they can take pre-emptive steps to mitigate those risks and not wait until something goes wrong.”

What can happen if you don’t use Incoterms properly?

“Using the wrong Incoterm,” says CCC’s Agnew, “can lead a company to misunderstand and/or misrepresent the costs, obligations and division of responsibilities that are being negotiated between the buyer and the seller. This can lead to significant unanticipated liabilities for a company, which can be very costly.”

More generally, adds Turi, “Companies often don’t ensure that the Incoterms in their sales agreements match across all the contracts involved in the transaction. When something goes wrong, the disagreements tend to focus on risks and responsibilities that could have been managed through the accurate use of an Incoterm. I have seen this happen and it can cost companies inordinate amounts of time and money to resolve.”

Learn more about Incoterms 2020

To get businesses up to speed on these new terms, FITT and the CCC are offering Incoterms 2020 training across Canada.

Incoterms 2020 Training FITT

 

  •       For training details, visit the FITT Incoterms page. This in-class training is the official ICC Canada training, providing participants with both a refresher on Incoterms and what the Incoterms 2020 changes mean for businesses.
  •       For more information about the updated Incoterms and what they can mean for your operations abroad, visit the ICC Incoterms 2020 pages. You can sign up for email alerts, ask questions online and purchase a range of resources, including the new Incoterms 2020 guide.
  •       You can also find other international trade-related courses, certification and resources at fittfortrade.com.