Are Incoterms relevant in today’s commercial setting?
An analysis of the benefits and issues related to the practice
Trade between countries has increased manifold with the advent of globalization. This boost in global trade has also increased the complexity in dealing with international laws and customs. Harmonization of these vast arrays of legal terms and complexities led to the incorporation of “Incoterms” (International commercial terms) into modern contracts. Incoterms are trade terms used in a contract for sale. They specify in exact terms the cost and risk borne by the seller and the buyer, and more importantly draw the line where the risks and costs are passed in the transaction. Once incoterms have been correctly incorporated into a sales contract, parties to that contract can clearly ascertain their respective obligations despite their different languages and professional backgrounds. Nevertheless, in the recent past, we have also seen that as a consequence of trying to standardize mercantile processes all over the world, the use of incoterms has been mainly as a tool for guidance, with parties incorporating their own variations to the terms. There have also been legal issues concerning the incorrect usage of incoterms, sending a clear signal that knowledge and understanding of these important terms is not yet universal. With the latest revision (Incoterms 2010), there are now 11 terms namely EXW, FCA ,FAS, FOB, CIF, CFR, CIP, CPT, DAT, DAP and DDP, with EXW(ex-works) representing the minimum obligation of the seller to DDP(Delivery duty paid) representing the maximum obligation of the seller. 2. Uses and Benefits
a. Contract of Sale
Incoterms may be incorporated into a contract of sale, to clearly define the passing of risk and costs between the two parties. It's important to understand that incoterms only cover the contract of sale between the seller and the buyer - setting out responsibilities and obligations of both parties over the delivery of the goods. Incoterms do not apply to the contract of carriage - a common assumption which can cause confusion. These terms also define the mode of transport to be used. For e.g. the FOB term is to be exclusively applied to ocean/sea transport. b. Reduce Costs
Incoterms also help to reduce litigation and erroneous costs. In most cases while using the term EXW, the seller would assist the buyer in loading the goods onto the transport vehicle at the named place; however he is under no obligation to do so, and would not be held liable for any damages in loading the goods as the risk passes when he makes the goods ready at the named place. These terms also follow a general logic that in cross-border transactions, the seller would be better poised to deal with the exporting countries custom regulations and the same for the buyer. Thus, with the exception of EXW and DDP, all incoterms require each party to deal with their own authorities. With regards to customs, the words “where applicable” are added to clauses A2, B2, A6 and B6 in order for these terms to be used without any ambiguity where customs procedures are not required in place such as the European Union or where cross-border customs are more relaxed(USA-Canada). (Jan Ramberg, 2000) c. Periodic updates
The ICC is making an increasing effort to make sure these terms keep up with the pace of modern technology, by revising the terms and their scope every 10 years. The current terms have been reduced from 13 to 11 removing redundant terms. Due to free trade areas and customs unions as well as increased acceptance of Incoterms in the USA, incoterms not only regulate international transport of goods but have also been expanded by guidelines to include “domestic transports”. The term “ship’s rail” as “place of delivery” was deleted and instead the goods are considered to be delivered, when they are loaded “on board the vessel”. This important...
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