Incoterms®

Definition

Incoterms® are standardized contractual terms used in international and domestic sales agreements. They specify the duties, costs, and risks associated with the delivery of goods from the seller to the buyer. By clearly defining these responsibilities, Incoterms® reduce misunderstandings and potential disputes in global trade.

Core Function

The core function of Incoterms® is to establish a clear framework for the cost and risk transfer during the shipping process. It is an agreement between the buyer and the seller, decided before the shipment begins, ensuring clarity on:

• Who pays for carriage and insurance.

• Where the goods are delivered (point of risk transfer).

• Who handles customs clearance and export documentation.

Incoterms® Updates: 2020 Edition

The latest edition, Incoterms® 2020, was published by the ICC in September 2019 and became effective on 1 January 2020. This edition brought material changes and updated the Incoterms® 2010 rules.

It is crucial to note that the adoption of Incoterms® 2020 is NOT mandatory. Parties writing contracts must explicitly state which version they intend to use (e.g., "FOB Shanghai Incoterms® 2010" or "DAP New York Incoterms® 2020"). It is possible, therefore, that clients may still utilize the 2010 rules if mutually agreed upon.

Expert Advice

When structuring contracts of sale, logistics professionals must ensure absolute clarity regarding the Incoterm chosen and the specific edition referenced. Ambiguity in contracts can lead to significant financial liabilities, insurance coverage gaps, and major shipment delays.

Key Takeaways:

• Incoterms® define cost and risk responsibility between the buyer and seller.

• They are established by the International Chamber of Commerce (ICC).

• The current active standard is Incoterms® 2020, though Incoterms® 2010 remains valid if specified in the contract.

• Always specify the location and the year of the rule (e.g., CIF Port X Incoterms® 2020).