Every company trading internationally is familiar with - and relies on - Incoterms, which set out the respective obligations of seller and buyer in a commercial transaction. As a contracting party, you can freely negotiate the conditions of purchase or sale with companies from all over the world, but practices and interpretations can vary from one country to another. Thanks to Incoterms, everyone's obligations are clear and trade is made easier. Let's decipher the ins and outs of these trade rules that apply throughout the world.
What are Incoterms?
Incoterms, or International Commercial Terms, are rules drawn up by the International Chamber of Commerce (ICC) in 1936 to govern international trade, particularly with regard to the delivery of goods. They specify the division of responsibilities between buyer and seller, particularly with regard to transport, insurance, customs formalities, duties and taxes, and the transfer of risks.
These standardised trade terms are crucial for any company involved in the international exchange of goods, as they provide a universal language for international trade, with rules that are recognised and accepted worldwide. Please note that they only apply to physical goods, thus excluding services and intangible goods, and will be the reference in the event of a dispute.
Incoterms are mainly used to answer the following questions:
- Who is liable for shipping costs?
- Who insures and who pays the insurance costs?
- Who is responsible for import costs?
- Who should handle customs clearance?
- Who contracts which obligations and on what transport?
- Who needs to obtain the supporting documents for the goods?
- Who informs the other, when and how?
- Who determines the packaging method?
- When does the transfer of risk take place?
It should be noted that it is normally the seller who sets his Incoterms and specifies them on his commercial invoice alongside the HS code, which is used by customs to classify products in order to determine customs duties, among other things.
Why use Incoterms?
The benefits seem obvious, but it is still worth clarifying the extent of them. Companies use Incoterms for several essential reasons:
Clarifying responsibilities
Incoterms allow buyers and sellers to clearly define the roles and responsibilities of each party at each stage of the transfer of goods, reducing the risk of misunderstandings and disputes.
Reduce the risk of litigation
By using standardised, internationally-recognised terms, companies can avoid disputes that might arise due to cultural or linguistic differences, which can be costly and time-consuming.
Optimising costs
By specifying who is responsible for each part of the logistics process, companies can better control their costs and plan their budgets.
Guaranteeing legal compliance
Incoterms comply with international trade practices and are often required in international sales contracts, ensuring that transactions comply with applicable legal standards.
Facilitating negotiations
By providing a framework with clear, pre-established bases, Incoterms make it possible to conduct trade negotiations with an equal level of information that can be understood by everyone.
11 Incoterms, grouped into two families
There are 11 Incoterms, coded by three letters and grouped into two main families, depending on the mode of transport used: those applicable to all modes of transport, and those specific to sea and river transport
Incoterms applicable to all modes of transport
- EXW (Ex Works): the seller makes the goods available at its premises on a fixed date. The buyer is responsible for the entire process, in terms of both costs and risk. The buyer must organise and pay for transport, take care of export and import formalities, and bear all related costs and taxes.
- FCA (Free Carrier): the seller delivers the goods to a carrier designated by the buyer. Export formalities and costs are borne by the seller, with the buyer assuming the costs and risks from the time the goods are taken over by the carrier.
- CPT (Carriage Paid To): the seller pays for carriage to an agreed point, but the risk passes to the buyer when the goods are handed over to the first carrier.
- CIP (Carriage and Insurance Paid To): the principle is the same as for CPT, except that the seller is obliged to provide insurance covering the risk of loss or damage.
- DAP (Delivered At Place or "Rendu au lieu de destination "): the seller assumes the transport costs and risks to the agreed place of delivery, but not the customs formalities.
- DPU (Delivered at Place Unloaded): the seller remains responsible for transporting and unloading the goods at the agreed place - note that this is the only Incoterm that requires the seller to handle unloading. The seller is also responsible for clearing customs, but the buyer manages customs clearance and the associated costs.
- DDP (Delivered Duty Paid): The seller is responsible for all costs and formalities up to final delivery, including customs clearance.
Incoterms specific to sea and river transport
- FAS (Free Alongside Ship): the seller bears the transport costs to the port of shipment and handles the export formalities. The buyer assumes the costs and risks as soon as the goods are positioned on the quay, ready to be loaded.
- FOB (Free On Board): in this case, the seller is responsible for loading, after which costs and risks are transferred.
- CFR (Cost and Freight): the seller pays the cost of transport to the port of destination (not including unloading) and must pay the related duties and taxes, but the risk is transferred as soon as the goods are on board the ship
- CIF (Cost, Insurance and Freight): same principle as CFR, but with the addition of insurance paid by the seller, which must cover at least the price of the goods plus 10%.
EXW: the most advantageous Incoterm for the seller!
If you're preparing to export goods abroad and your negotiations allow you to do so, don't hesitate to indicate EXW on your invoice: all you have to do is prepare the parcels on your premises.
Incoterms are changing!
Of course, the rules governing international trade need to adapt to a changing world. After Incoterms 2010, a new version was published in 2020, which will remain the reference until a new version is published. The 2020 version is still the one in use today. It should be noted that it is still possible to use the 2010 version, provided that this is explicitly specified during the negotiations to avoid any misunderstandings between the parties to the contract.
Major changes in 2020 include the introduction of the DPU term to replace the former DAT (Delivered at Terminal), reflecting the growing importance of deliveries to locations other than terminals, such as warehouses or factories. The FCA term has also been amended to allow the use of a letter of credit option to facilitate transactions for sellers.
Generally speaking, Incoterms 2020 places greater emphasis on the security of goods and the flexibility of terms to meet the different needs of companies, particularly in terms of insurance and customs formalities.
The departure / arrival distinction
Outward sales involve eight Incoterms (on main carriage, the goods travel at the buyer's risk):
- Multimodal Incoterms: EXW / FCA / CPT / CIP
- Maritime Incoterms: FAS / FOB / CFR / CIF
As far as sales on arrival are concerned, three Incoterms are involved (on main carriage, the goods travel at the seller's risk): DAP / DPU / DDP
To optimise logistics and avoid the many potential misunderstandings when goods are transferred from one country to another, Incoterms have become indispensable, especially given the scale and speed of today's trade flows. Incoterms don't just simplify transactions: they also help to build trust between trading partners, fostering long-lasting and prosperous commercial relationships.
In addition to using them, and in order to protect your interests (and in particular your margins), don't forget to secure payment of your invoices, because legal action against a foreign company is complex and the chances of success are highly uncertain. To ensure your peace of mind, you can take out credit insurance and, at the same time, ask for an investigation into the financial health of the co-contractor, even before entering into a commercial partnership. The incoterm used should also be indicated in the general terms and conditions of sale.
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