Incoterms or the International Commerce Terms are defined as the set of terms which are standardized and used in case of international trade. Companies engaged in the shipment of goods or enterprises that receive goods from the international markets via ships must be aware of these terms. They help in deciding the terms of delivery between the seller and the buyer. It also specifies which party is liable for the insurance of the goods and which party is supposed to bear the unloading and loading charges of the products. When these terms get clarified between the parties, there is hardly any confusion to deal with. Thus, for the ease of international transactions, the Incoterms first came into existence in the year 1936.
ICC is the organization which laid down these rules which govern the cross-border trades even today. There have been many changes incorporated in the terms to suit the changes of the global business environment. Using the incoterms correctly and wisely helps businesses in enjoying several benefits. The shipping rules mentioned in the incoterms must be adhered to by the parties for more clarity in transactions. The latest amendments to the shipping rules are available in the Incoterms 2010 which have brought about many useful modifications in the system.
Reduction Of Risks:
The most important benefit of the shipping rules mentioned in the Incoterms help in minimizing business risks. It is known that international transactions take place between different countries that follow different languages and business cultures. Thus, it is always wise to have everything in writing to avoid any type of misunderstandings. The use of correct incoterms makes the contract much valid and simplified. Thus, there is no risk involved in transacting with a foreign company.
The contract of sale must have all the obligations of the seller and the buyer engaged in export and import of the products. This removes any type of confusion related to the rules of transporting the goods from one point to the other. Thus, the transacting parties know when the risks and costs involved in the goods would be transferred in the process of the shipment.
Understanding Of The Rules:
- The E Rules: As per this rule, the agreement specifies that the goods are to be delivered EXW meaning “ex-works”. This indicates that the goods would reach either the factory of the seller or at his warehouse. Thus, the seller is not liable for any expenses relating to transportation, loading charges, and customs tariffs
- The F Rules: This rule involved three terms- FOB, FCA, FAS. Here, the seller sends the consignment to the carrier whom the buyer appoints. In this case, the seller is responsible to bear the expenses of delivery and thereafter all other costs are borne by the buyer.
- The C Rules: In this type, the seller contracts for carriage but does not take into account any risk or damage of the goods after the shipping of the products. The related terms here are- CIF, CFR, CIP, CPT.
- The D Rules: The seller takes up any risk that is involved in delivering the goods at the doorstep of the buyer. The terms used are- DAP, DDP, DAT.
So, you see each risk factor has been defined so well in the rules that both the parties can clearly understand what their obligations are. There is no room for confusion if one understands the terms well. It facilities not just smooth transactions but is also helpful in strategic logistics management.
Most of the small businesses prefer transacting under the C-terms. This ensures that the buyer is having more grasp when the shipment is in huge quantity. Till the time the cargo reaches the origin port, all the costs are borne by the seller. Thereafter, the buyer takes on the responsibility of the costs up to the discharge port. So, more or less the burden of risks and costs get divided equally among the parties. The latest version of the Incoterms which came out in 2010 has also well defined the FOB Incoterms. This has made the segregations quite understandable and comprehensible.