Incoterms is a widely recognized document in the field of international trade. Compiling this document was necessary due to the significant differences in the legal systems of various countries. The main aim of Incoterms is to eliminate confusion in foreign trade contracts by outlining the responsibilities of both buyers and sellers. Domestic and international traders often use Incoterms as a shorthand to help them comprehend each other’s trade agreements and the specific terms governing them.
This document plays a crucial role in facilitating international trade and unifying concepts for international business people. It is one of the most frequently used sources in the field of international transportation. Choosing and using Incoterms in commercial contracts is an important issue. To select the right Incoterm, it is essential to have a comprehensive understanding of each term. The best way to achieve this is by consulting with specialists in contractual and commercial matters. Karimi & Associates Law Firm is a reliable provider of specialized legal services in this field. We have a team of experts who specialize in commercial and international business affairs, as well as contract writing.
Definition
The International Chamber of Commerce (ICC) developed Incoterms to regulate the terms of international trade contracts. Although not mandatory, it is widely used in international trade to simplify the regulation of responsibilities between the buyer and seller in the sale of goods across borders.
Purpose and Scope
One of the most notable aspects of Incoterms is its clear and predictable nature, which contributes to the simplicity and transparency of many business matters. Incoterms outline the division of responsibilities, obligations, costs, and risks involved in transporting and delivering goods between the buyer and the seller.
Incoterms is responsible for overseeing transportation issues such as costs, insurance, and the duration of goods delivery and determining the methods and conditions of transportation. It’s important to note that Incoterms is not responsible for contractual rights and obligations outside of the delivery category between the buyer and the seller. Additionally, it does not offer any solutions other than the ones mentioned.
Incoterms have a significant advantage and usage as they are monolingual terms with a pre-defined meaning. This means that even when the contract is not written in English or the seller, and buyer do not share a common language, the terms that define the obligations and responsibilities are accepted and understood universally. This makes it easier for parties from different countries to understand the terms of the agreement and avoid any misunderstandings.
Structure
The Incoterms regulations can be divided into four main categories. These categories can be summarized as follows:
- Group “E” covers cases where the seller delivers goods to the buyer within their scope of activity but does not arrange transportation.
- Group “F” is used when the seller can arrange some of the transportation steps within the country or place of business; in other words, the seller delivers the goods to the place designated by the buyer or carrier.
- The next group is group “C,” which is used when the seller can arrange and pay most of the shipping costs abroad.
- The fourth group, known as the “D” group, is used for places where the seller will cover most of the shipping costs to the destination.
After analyzing the groups, we can determine that the seller’s obligations and responsibilities regarding transportation are the least in Group E and the most in Group D. Additionally, the most frequently used incoterms among the groups are DDP, EXW, FAS, and CIF.
Choosing Incoterms for Export and Import
Before using Incoterms, buyers and sellers should define their needs and prepare for an agreement. Several factors influence the selection of suitable Incoterms, including:
1) Type of Goods
When choosing Incoterms for export and import, it is important to consider the type of goods being transported, as this will affect how they are transported, loaded, and unloaded.
2) Customs Experience
The choice of Incoterms is crucial in international trade. Buyers and sellers with a good understanding of the export processes in the countries involved are more likely to choose the right Incoterm. However, one should not overlook each party’s bargaining power when making this decision.
3) Budget
Budget is an important consideration when using Incoterms in international trade. Buyers can request that the seller handle all the necessary paperwork and cover the costs of transportation and clearance of the goods or only a portion of them. Alternatively, buyers can choose to take full responsibility for all transportation costs. It is important for buyers to carefully review and select the appropriate group and subgroup based on their specific needs and budget constraints.
Steps to Use Incoterms in a Commercial Contract
- Use of a Single Version by the Parties
The initial step is to ensure that both parties agree on the version of Incoterms they want to use. The most recent version was updated in 2020, and the International Chamber of Commerce (ICC) suggests using it. However, if both parties agree, they can also use older versions, such as the one from 2010.
- To write Incoterms accurately before signing
Including Incoterms in the contract is crucial, as well as specifying the version utilized and furnishing any necessary information. Certain laws mandate buyers and sellers to specify the delivery location and destination. Both parties must comprehend their responsibilities and the circumstances in which each party is accountable for transporting the cargo. It is essential to mention these responsibilities in the contract and sign it after agreeing to the terms.
- Ensuring Accurate Location Determinations
When incorporating Incoterms into a contract, it is important to specify key details such as the delivery point, destination point, and final recipient’s address.
Two Important Questions About Incoterms
1) Can Incoterms be used for domestic transportation?
The answer to this question is positive. The use of Incoterms is widely prevalent among traders and companies engaged in international and domestic business. These terms are pre-established standards recognized by most exporters and freight forwarders. Moreover, internal standard terms are also available in many countries.
2) Is it mandatory to use Incoterms?
No, using Incoterms is not mandatory, but it is highly recommended. Incoterms are internationally accepted and clearly define the responsibilities of both parties involved in an international trade and shipping agreement, which helps prevent mistakes and miscommunications.
Although there are well-defined concepts, benefits, and advantages associated with Incoterms and their use, international traders and merchants encounter numerous challenges in various fields, including the transportation of their goods. Seeking advice from legal experts is crucial to achieving better outcomes.
Crucial points must be considered when drafting Incoterms and contracts. However, experts in this field should also have a broader perspective and anticipate potential future circumstances. Karimi and Associates Law Firm is equipped to provide specialized legal services in this area, with a team specializing in business affairs, commerce, and contract drafting. Please contact us if you require advice or legal services in this field.