With international commercial transactions, all terms of the agreement must be clearly defined so that each agent involved (vendors, purchasers, transporters, etc.) can take economic and legal responsibility for their part of the agreement. It is complex to express this agreement in a document, and even more so if the transaction is carried out between different countries. Language is not the only barrier; there is also governing legislation for each one of the parties, which may be interpreted in different ways.
To unify criteria regarding commercial terms, the International Chamber of Commerce Trade Terms came about, better known by its abbreviation Incoterms, in 1936. The party responsible for these international trade terms is the International Chamber of Commerce, (ICC), a private organisation headquartered in Paris.
After the first list published, several updates have taken place (in 1945, 1953, 1967, 1976, 1980, 1990, 2000), until the 2010 list (applicable since 1 January, 2011 and still in force today) to adapt the terms to changes in commercial use.
What are Incoterms?
These are nomenclatures that make it easier to interpret the most commonly-used commercial terms that are applied internationally. They describe who hires and pays the transport service, insurance and customs taxes; who is liable if the freight is harmed, lost or if there is a delay in delivery, and where the merchandise is delivered.
They are not of mandatory compliance; rather they are standards that the purchasing party and the vendor party voluntarily accept regarding freight delivery conditions (they do not refer to services, because they are intangible and do not require logistics) and the accompanying transaction costs.
Although the list from 2010 is the last one to come into force, lists from previous years may still be used, so the commercial transaction documentation that goes with each Incoterm specifies the version year.
What are Incoterms like?
Each Incoterm is made up of three letters and contain 11 positions (different types of contracts) that may be partially modified later on by applying certain clauses.
The list below shows them classified into categories:
- Group E: Exit
- EXW – Ex Works
- Group F: No payment of main transport
- FCA – Free Carrier
- FAS – Free Alongside Ship
- FOB – Free On Board
- Group C: Payment of main transport
- CFR – Cost and Freight
- CIF – Cost, Insurance and Freight
- CPT – Carrier Paid To
- CIP – Carriage and Insurance Paid To
- Group D: Arrival
- DAT – Delivered At Terminal
- DAP – Delivered At Place
- DDP – Delivered Duty Paid
Some of these Incoterms are specific for sea transport or interior navigable waterways (FAS, FOB, CFR, CIF), and the rest can be used regardless of the transport method selected, and also when more than one transport method is used.