WHAT INCOTERMS DO AND WHAT THEY DON’T DO (2024)

FAQs

WHAT INCOTERMS DO AND WHAT THEY DON’T DO? ›

In simpler terms incoterms inform sale contracts, defining respective obligations, costs and risks that are to be borne by the buyer or the seller in the process of delivering goods from the seller to the buyer. These terms are only applicable in contracts where the parties have expressly accepted their use.

There are specific instances that Incoterms will not cover. Incoterms do not: Address all the conditions of a sale. Identify the goods being sold nor list the contract price.

Incoterms, widely-used terms of sale, are a set of 11 internationally recognized rules which define the responsibilities of sellers and buyers. Incoterms specify who is responsible for paying for and managing the shipment, insurance, documentation, customs clearance, and other logistical activities.

Delivery – at which point the seller's responsibility ends and the risk of loss or damage passes to the buyer. Transportation – which party is responsible for transportation costs. Documentation and formalities – who is responsible for dealing with customs, shipping documentation, duty payments, and other formalities.

One of the most common mistakes is misinterpreting what Incoterms cover. Incoterms define the responsibilities for transportation, risk, and costs, but they do not cover other aspects such as payment terms, ownership, or the conditions of the sale contract.

The primary purpose of Incoterms, or International Commercial Terms, is to simplify and standardise trade terms in international transactions, fostering greater clarity and efficiency in global commerce and supply chain management.

Under DDP – all import duty, taxes & customs clearance requirements are the responsibility of the seller. Under DAP – all import duty, taxes & customs clearance are the responsibility of the buyer.

Incoterms are not law nor are they all inclusive. Therefore formal sales contracts and agreements are still necessary. They also do not remedy breach of contracts or agreements. They are not implied so be sure to specify them during the purchase process and contract / agreement negotiations.

Which is the most commonly used Incoterm rule? ›

What Is the Most Popular Incoterm? While it varies, we often see EXW (Ex Works) used in international contracts. It's one of the easiest for sellers, who only have to make the buyer's shipment available for pickup.

The Incoterms rules are not mandatory. They are not laws enacted by governments, but rather, guidelines agreed to by parties to a contract.

INCOTERMS are the language you'll need when you're trading abroad, defining the trade contract responsibilities and liabilities between a buyer and a seller. They cover who is responsible for paying freight costs, insuring goods in transit and covering any import/export duties, for example.

In addition, Incoterms® rules do not deal with such issues as transfer of ownership, breach of contract, or product liability – all of which need to be clarified in the contracts. Besides, Incoterms® rules cannot override applicable laws.

Allocation of Risks and Responsibilities: One of the primary functions of Incoterms is to clearly define the point at which risk and responsibility for goods transfer from the seller to the buyer. This delineation is crucial for both parties to understand their obligations, including costs, insurance, and logistics.

If an Incoterm is agreed upon when selling a good, it defines the rights and obligations of the parties with regard to the cost and risk of shipping. For example, under the Incoterm EXW (Ex Works), the seller is not allowed to increase the price to cover shipping costs.

While extensively used in purchase and sales contracts, Incoterms have their own limitations in application. The terms apply to the delivery of the goods only and do not govern other contractual rights and obligations between buyer and seller.

Incoterms do not cover ownership of title; it is defined separately within the sales contract. They do not cover the payment; delivery payment is also negotiated separately. They do not assign responsibility for arranging insurance; it is separate expense for the buyer.

They cover crucial aspects such as the point of delivery, transfer of risk, transportation costs, and the division of responsibilities between the parties involved. Incoterms themselves are not legally-binding, but rather a set of rules that parties can choose to incorporate into their sales contracts.