Using Incoterms can save you export-related headaches
All sort of issues need to be resolved for international deliveries to go smoothly. Who pays for the shipping insurance or duties owing on the cargo? Will the cargo be unloaded at its destination? Will it need to be collected aboard ship by the receiver? Thousands of dollars and weeks of potential delays may depend on every party sharing a clear understanding of the answers to these questions.
Incoterms are three-letter acronyms that simplify and clarify responsibilities between buyers and sellers when adopted as part of a sales contract. Using them greatly reduces the potential for disputes over logistics while clarifying the transfer of risk.
Incoterms help sellers and buyers to easily understand the costs, risks and obligations for each party. And understanding them is crucial for Canadian exporters intent on diversifying their export markets as they deal with the shipping challenges that affect their supply chain.
Without Incoterms, having a contract is simply not enough, especially given the potential language barriers and different meanings around a particular term or phrase.
What do Incoterms cover?
Incoterms describe the obligations, risks and costs in a domestic or international trade transaction. Only one Incoterm is used between a seller and a buyer at a time, and a negotiated contract will help clarify and refine the specific term used.
- Under obligations, either the buyer or seller must organize transportation, insurance of the goods, or obtain shipping documents or permits, depending on the term used.
- Risks is the where and when the seller delivers the goods. This is where risk transfers from the seller to the buyer.
- For costs, including transportation, packaging, unloading and duties, charges will be made to either the seller’s or buyer’s account, depending on the term used.
Each of these obligations, risks and costs are described in the Incoterms 2020 rule book.
Remember: delivery of 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. Make sure that everyone involved in the transaction shares an understanding of all the delivery details to avoid trouble down the road.
What do Incoterms not cover?
Incoterms are generally incorporated in the international contract of sale. However, Incoterms don’t:
- address all the conditions of a sale;
- identify the goods being sold nor list the contract price;
- reference the method nor timing of payment negotiated between the seller or buyer;
- when title or ownership of the goods passes from the seller to the buyer;
- specify which documents must be provided by the seller to the buyer to facilitate the customers clearance process in the buyer’s country;
- address liability for the failure to provide the goods in conformity with the contract of sale, delayed delivery, nor dispute resolution mechanisms.
If these are areas where you need help, check out EDC’s resources here.
The most up-to-date Incoterms
The latest Incoterm rules are divided into two groups, based on modes of transportation. They were last revised in 2020, so all the 2020 Incoterms are fully up-to-date and ready for you to use.
There are 11 terms in total:
Rules for any mode or modes of transport
- EXW Ex Works
- FCA Free Carrier
- CPT Carriage Paid To
- CIP Carriage and Insurance Paid to
- DAP Delivered at Place
- DPU Delivered at Place Unloaded
- DDP Delivered Duty Paid
Rules for sea and inland waterway transport
- FAS Free Alongside Ship
- FOB Free On Board
- CFR Cost and Freight
- CIF Cost Insurance and Freight
How can you reduce your export risk even further?
As an exporter, there are potential financial risks that can be mitigated with EDC Credit Insurance. But depending on the Incoterm negotiated between the buyer and seller, an insurance responsibility might mean different levels of insurance coverage.
The Incoterms 2020 rules now provide specific levels of insurance coverage for CIF and CIP rules.
- Under the CIF rule (only to be used for sea freight trade), the Institute Cargo Clauses © remain the default level when it comes to coverage. The seller or buyer can agree to higher levels of insurance, but they must agree in writing, so that a proper policy can be underwritten.
- The CIP rule has been undated to a higher level of insurance coverage that should be compatible with the Institute Cargo Clauses (A).
A short history of Incoterms
Back in the early days of business, international trade was mostly based on conventions and informal practices. There were no globally recognized standards to create efficiencies in global trade. The International Chamber of Commerce, also known as the ICC, was founded post-First World War, and shortly afterward an industry standard would be created: The International Commercial Teams, known as Incoterms.
Incoterms have evolved in order to keep up with changes in trade regulations and business advancements. They’ll continue to evolve, and new revisions will incorporate new commerce trends and innovations. For example, in this latest revision, under general obligations (A1/B1) provision were made to include electronic documents and forms to be acceptable in lieu of paper documents “where there is no agreement, as is customary.”
Canadian exporters, importers and international trade practitioners should keep up to date with these changes and revisions and introduce them in their negotiations to ensure clarify in contracts when it comes to obligations, risks and costs.
Resources to help you use Incoterms
These resources will help you use Incoterms effectively. You’ll find official resources from the International Chamber of Commerce (ICC), as well as the Forum for International Trade Training (FITT).
The International Chamber of Commerce (ICC) has created the Incoterms® 2020 app, which gives easy access to a wealth of practical information on your mobile device.
- The Incoterms® 2020 online course, presented by FITT and the Canadian Chamber of Commerce (CCC), is designed to help international trade professionals gain an understanding of the latest Incoterms® rules.
This course provides background information, Incoterms® 2020 definitions/rules and obligations, and details about the main changes to the terms. This professional training is excellent for beginners and will also serve as an in-depth refresher with important updates for experienced professionals.
- The Incoterms® 2020 wall chart outlines the obligations, costs and risks of the buyer and seller under each of the 11 rules. The handy chart can be easily printed and kept as a reference guide.
Please note that the chart should always be used in conjunction with the Incoterms® 2020 rule book.
- ICC registered trainers of the Incoterms® rules are candidates who must undergo an intensive selection process. Candidates must be nominated by their local ICC national committee and then, they must pass the ICC Incoterms® 2020 registered trainer exam.
You can contact a registered Incoterms trainer here.
- EDC’s four-part blog series features of an EDC Export Help advisor taking a closer look at each of the Incoterms® 2020 rules, with explanations and examples to help you better understand the universal trade terms.