Incoterms are key elements that facilitate negotiation and communication in international trade, in addition to establishing the basic principles of any transaction. In 2020, the table of incoterms underwent several modifications, so it is essential to know what the incoterms are in 2023, their main characteristics, what aspects they cover and which they do not, and why it is vital to know in detail each one of them.
What are Incoterms?
Incoterms is short for “International Commercial Terms,” and they are a set of international rules created and managed by the International Chamber of Commerce (ICC). Since their publication in 1936, they have become an essential tool in international trade, as they establish clear and fair rules for the delivery of goods between buyers and sellers.
These rules help avoid misunderstandings and conflicts by establishing terms related to transactions, such as who is responsible for contracting and paying for transportation, the point of delivery, when the risks are transferred from the seller to the buyer, and who handles customs procedures and associated costs.
What are they used for?
The primary purpose of Incoterms is to facilitate international trade and simplify the associated procedures and contracts. In this way, by using only three letters and a place, someone from Madagascar, New York, or Hong Kong will perfectly understand what “DPU Barcelona” means, greatly facilitating transportation processes and avoiding mistakes.
Moreover, the use of Incoterm greatly simplifies contracts and their negotiations, as they are a key tool to facilitate understanding and allow the establishment of clear rules for the delivery of goods. And although Incoterms are of great help in negotiating commercial contracts, it is important to remember that they do not replace them, but complement and strengthen the terms and conditions agreed upon between the parties involved in each transaction.
What aspects do incoterms cover?
Incoterms regulate four fundamental aspects of international trade:
- Delivery of goods: they establish the moment and place where the goods are delivered from the seller to the buyer.
- Transmission of risks and responsibilities: these norms determine at which point the risks associated with the goods are transferred from the seller to the buyer.
- Distribution of expenses: they establish how the expenses related to transportation, insurance, customs, and other costs associated with the delivery of goods are distributed.
- Customs documentation procedures: Incoterms also regulate who is responsible for customs procedures, such as obtaining licenses, permits, and necessary documents for importing or exporting goods.
What aspects do incoterms NOT cover?
Incoterms do not regulate the following aspects:
- Payment method and price: Incoterms do not specify the price to be paid for the goods or establish the payment method. These aspects must be agreed upon by the seller and buyer in the purchase contract separately.
- Transfer of ownership of the merchandise: these rules do not determine when the ownership of the goods is transferred from the seller to the buyer.
- Consequences of breach of contract: Incoterms do not address the legal or commercial consequences in case of breach of contract, such as penalties, compensation, or contract termination.
As previously mentioned, Incoterms do not replace commercial ones, but simply complement them. This is why elements like the ones mentioned above are not covered by them.
Types of incoterms that exist
Incoterms are classified into different categories and typologies according to their scope and application in different modes of transport:
Firstly, there are two main typologies:
- Group 1: Incoterms for any type of international transport and logistics, including air, land, and sea transportation.
- Group 2: Incoterms that apply exclusively to maritime transport.
In addition, Incoterms are classified into four categories that determine the place of delivery of the goods and the responsibility of the parties involved:
- Group C: includes terms with payment for the main transport.
- Group D: encompasses direct delivery terms at the arrival point.
- Group E: contains direct delivery terms at the departure point.
- Group F: includes terms without payment for the main transport.
Incoterms for any international transport and logistics (Group 1)
- FCA (Free Carrier): now allows Bills of Lading to be issued after loading the goods.
- DPU (Delivered at Place Unloaded): the seller is responsible for taking the goods to a designated place, usually in the importing country, and unloading them there. From that point on, the buyer assumes responsibility and risks related to the goods.
- EXW (Ex Works): the buyer is responsible for the goods and the necessary procedures, without involving the manufacturer or seller.
- CPT (Carriage Paid To): the seller is responsible for delivering the goods to the agreed destination, using the indicated transport and bearing the freight payment.
- CIP (Carriage and Insurance Paid to): the seller is responsible for delivering the goods to the destination, covering international transport and necessary insurance.
- DAP (Delivery At Place): the goods are delivered at the buyer’s facilities, who is responsible for unloading and subsequent transport logistics.
- DDP (Delivered Duty Paid): similar to DAP, but the seller also handles the import of the goods into the buyer’s country and pays the corresponding tariffs and taxes.
Incoterms for sea transport only (Group 2)
- CFR (Cost and Freight): The seller covers all costs until the goods reach the designated port, including the main transport and unloading costs. The buyer assumes risks from the moment the goods are onboard, and also handles import procedures and transport.
- FAS (Free Alongside Ship): The seller covers customs expenses until the delivery of the goods on the loading dock of the port of origin, but it does not include boarding the goods onto the ship. The buyer manages stowage, freight, and costs until delivery at the agreed place, and also assumes insurance, risks, and import costs.
- FOB (Free On Board): The seller covers the expenses and issues until the goods are loaded onboard. The buyer is responsible for contracting transportation, carrying out import procedures, freight costs, unloading, and delivery at the designated destination. Risks are borne by the buyer once the goods are onboard.
- CIF (Cost, Insurance, and Freight): The seller is responsible for contracting sea transport to the agreed port. The buyer assumes risks during the journey, import expenses, and means of transportation.
The eternal question: What’s the difference between DPU and DAP incoterms?
The main difference between DPU (Delivered at Place Unloaded) and DAP (Delivered at Place) lies in the point of delivery and the seller’s responsibility regarding unloading.
With DPU, the seller is responsible for delivering the goods at the agreed place in the importing country and unloading them there. The seller bears all costs and risks associated with the delivery and unloading of the goods to that point. From then on, responsibility is transferred to the buyer, who must handle import procedures and any additional transportation needed to take the goods from the unloading place to their final destination. For DAP, the seller is responsible for delivering the goods at the agreed place in the importing country, but is not responsible for unloading. The seller bears all costs and risks associated with delivering the goods to that point but doesn’t have the responsibility of unloading it. From there on, the responsibility is transferred to the buyer, who must handle both the unloading of the goods and the import procedures and any additional transportation needed to get the goods to their final destination.
As we can see, the key difference between DPU and DAP is that with DPU, the seller is also responsible for unloading the goods, while with DAP, this responsibility falls on the buyer. Both incoterms are used to agree on the responsibilities and risks between the seller and buyer in an international business transaction, but the scope of the seller’s responsibility regarding unloading is what distinguishes them.
Which is the best incoterm?
The truth is that there isn’t an Incoterm that’s better than another, as its choice depends on various factors that must be considered in each operation. That’s why it’s vital for departments and individuals who must choose them to be knowledgeable about all terms and be coordinated.
Choosing one Incoterm over another will depend on variables such as the type of goods, mode of transport, risks involved, destination country, and many more factors that will determine the optimal choice for each operation.
Why is it so important to know the Incoterms?
Firstly, because it avoids misunderstandings and conflicts. These rules clearly set out the responsibilities, obligations, and risks of both the seller and the buyer in international trade.
But, fundamentally, it’s important to know them because it greatly facilitates negotiation and contract drafting. Incoterms provide a common framework for negotiations and the drafting of international sales contracts. By having solid knowledge of the terms and their application, those in charge can select the most suitable Incoterm for each operation and agree on terms and conditions efficiently for both parties.
