In order to facilitate relations between countries in international trade at the beginning of the 20th century, in view of the difficulties that arose in the jurisdictions and to reduce the risk of legal complications and simplify commercial disputes, the International Chamber of Commerce (ICC) in 1936, the world exporters and the rest of the commercial sectors approved a first regulation that has subsequently been subject to various revisions which they called Incoterms, acronym of the English terms International Comerse Terms (International Trade Terms).
As is well known, international marketing methods have varied and developed as technology evolves, so constant modifications have been included to adapt them to current commercial practices and adapt them to the development of international trade.
Within the historical evolution of Incoterms we find that in 1812 this term appears for the first time in the British courts. Subsequently, the use of these terms is added or consolidated to the Insurance and Freight Cost, also in 1919 in Paris was founded the International Chamber of Commerce, in parallel, but in the United States are created the Revised Definitions of Foreign Trade of America, for the year 1936 the International Chamber of Commerce creates the first version of what we now know as Incoterms.
Incoterms establish international rules that are intended to facilitate the conduct of global trade and thus avoid uncertainties arising from different interpretations in different countries, they assist in identifying the obligations between the parties (Buyer/Seller) and reduce the risk of legal complications.
They also determine the exact point of transfer, the risk of damage and the responsibility for delivery of the goods between the parties involved. These are not considered as Law, they are Recommendations recognized as Uniform International Trade Practice.
The development of Incoterms has brought a series of important changes to the way of doing business at the international level. In certain aspects they have managed to simplify these commercial processes, however, there are some negative results of the application of these commercial terms, which have been overcome due to the periodic revisions to which these recommendations are subjected, thanks to the observations made by the jurisdictions.
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WHAT ARE THESE TERMS USED FOR?
Incoterms are used to establish a standardized language that can be used by buyers and sellers involved in international business. They are used to divide transaction costs and responsibilities between buyer and seller.
The purpose of this representation is to provide a set of international rules for the interpretation of the terms most commonly used in international trade. Incoterms are not the contract itself, but it is up to them to be interpreted correctly.
THREE-LETTER ABBREVIATIONS
These terms are made known through a simple and clear presentation of 13 acronyms or three-letter abbreviations. Each of these abbreviations encapsulates the set of obligations assumed by each party involved in the international sale and purchase. Its purpose is to determine precisely the terms of the contract such as:
o The sharing of costs between exporter and importer
o Place of delivery of the goods
o Documents that the exporter must provide to the importer
o Transfer of risks between exporter and importer in the transportation of the goods
o Who contracts and pays for the transportation
o Who contracts and pays for the insurance What documents each party processes and their cost.
IMPORTANCE OF INCOTERMS
In summary, we can point out that the Incoterms specify particulars of utmost importance for the costs and responsibilities for the parties regarding the logistics of the contract, such as the time and point of delivery of the goods, the means of transport, the responsibility for the insurance of the cargo and the customs clearance.
The Incoterm chosen influences the costs of the contract since, although all expenses are paid by the importer, the latter must know at all times which are directly disbursed and which are included in the price of the goods.
Their importance is crucial in the sales contract since they specify the transfer of ownership, internal clauses, payment instruments, non-performance and its consequences, exemptions from liability due to various causes or the condition of the goods.
It is not the responsibility of Incoterms to determine the ownership of a good, they should not be seen as an all-inclusive service, they should not be used as a law, they are recommendations recognized as uniform international practice.
STANDARDIZED RULES AND USAGES OF INTERNATIONAL TRADE
We already know that the fundamental objective of Incoterms is to establish defined criteria for the distribution of costs and the transfer of risks between the buyer and the seller in an international sales contract.
o Incoterms apply only to the international sale of goods, not to the sale of services, as these are intangibles that do not involve logistics.
o Incoterms regulate four basic aspects of the international sales contract: the delivery of goods, the transfer of risks, the distribution of costs and the processing of customs documents.
In order for Incoterms to fulfill 100% of their functionality, there are 4 different types of Incoterms so that they can be used according to what is being negotiated between the seller and the buyer.
These are the following: outbound, without payment of the main carriage, with payment of the main carriage and arrival group where delivery is included.
E: Single term whereby the seller makes the goods available to the buyer at the seller's premises.
F: The seller is responsible for delivering the goods to a means of transport chosen by the buyer.
C: The seller contracts for carriage without assuming risk of loss or damage to the goods or additional costs after loading and clearance.
D: The seller bears all costs and risks necessary to bring the goods to the country of destination.
o Delivery of the goods: this is the first of the seller's obligations. Delivery can be direct, when the Incoterm defines that the goods are delivered to the buyer, these are the "E" terms and the "D" terms; or indirect, when the goods are delivered to an intermediary of the buyer, a carrier or a freight forwarder, these are the "F" terms and the "C" terms.
o Transfer of risk: this is an essential aspect of Incoterms and should not be confused with the transfer of ownership, which is regulated by the law governing the contract. The fundamental concept is based on the fact that risks, and in most cases also costs, are transferred.
The fundamental concept is based on the fact that the risks, and in most cases also the costs, are transferred at the geographical point and at the chronological moment defined by the contract and the established Incoterms rule.
The geographical point can be the factory, the dock, the interior of the ship, etc.; while the chronological moment is defined by the delivery time of the goods.
The overlapping of both requirements automatically produces the transfer of risks and costs.
o The distribution of costs: usually, the seller bears the costs strictly necessary to get the goods ready for delivery and the buyer bears the other costs.
o Customs document formalities: in general, export is the responsibility of the seller; there is only one Incoterm without export customs clearance: EXW (Ex Works, ex works), where the buyer is responsible for the export and usually hires the services of a freight forwarder or customs broker in the country of dispatch of the goods, who manages the export.
The remaining Incoterms are with clearance, i.e. the export is the responsibility of the seller, who sometimes also handles the import in the country of destination, e.g. DDP (Delivered Duty Paid).
CATEGORIZATION OF INCOTERMS YEAR 2020
Incoterms are divided into four categories: E, F, C, D.
o Term in E: EXW. The seller makes the goods available to the buyer at the seller's own premises, i.e. direct delivery on departure.
o Terms in F: FCA, FAS and FOB. The seller is instructed to deliver the goods to a means of transport chosen and paid for by the buyer; i.e. an indirect delivery without payment of the main carriage by the seller.
o C terms: CFR, CIF, CPT and CIP. The seller contracts for carriage, but without assuming the risk of loss of or damage to the goods or additional costs for events occurring after loading and clearance; i.e., an indirect delivery with payment of the principal carriage by the Seller.
o D-Terms: DPU, DAP and DDP. The Seller bears all costs and risks necessary to bring the goods to the country of destination; this is a direct delivery on arrival. The costs and risks are passed on at the same point, like the terms in E and the terms in F. The terms in D are not proposed when the payment of the transaction is made through a documentary credit, basically because financial institutions do not accept it.
o DAP is a flexible multi-purpose Incoterms rule and can be used in any means of transport and in the combination of all of them.
INCOTERMS IN FORCE SINCE JANUARY 1, 2020:
o EXW.
o FCA.
o FAS.
o FOB.
o CFR.
o CIF.
o CPT.
o CIP.
o DPU.
o DAP.
o DDP.
CHANGES IN INCOTERMS 2020
The changes in Incoterms 2020 with respect to Incoterms 2010 are:
o Incoterm DAT (Delivered At Terminal) is replaced by DPU (Delivered at Place Unloaded). The most significant aspect of this modification is the change of name, since the responsibilities and obligations are the same, but the new name DPU allows the delivery to be established anywhere, without having to be especially in terminal, although it could also be agreed in the contract if the parties so wish.
o New conditions are set when contracting insurance for Incoterms CIF and CIP. In the Incoterm FCA that is made with maritime transport, now the buyer can ask the shipping company or its agent to admit the BL (Bill of Lading) with the annotation "on board" for the seller.
UPDATED ASPECTS IN THE APPLICATION OF INCOTERMS 2020
On the other hand, there are also some factors that have changed with respect to the application of Incoterms 2020:
o To consider valid the BL "house" it has to be indicated in the document that it is governed by UCP 600 (rules that regulate documentary credits, because it is the only one that admits the "house" modality).
o It is always necessary to indicate in the sales contract the Incoterms used, in this case Incoterms 2020, because if it is not specified the Incoterms of the year 2010 or even those of 2000 may be applied.
INCOTERMS MOST COMMONLY USED IN INTERNATIONAL TRANSPORT
o FAS (Free Alongside Ship). "Free alongside ship, named port". Here, it is the seller who is obliged to place the goods alongside the ship at the port, it is the selling party who must carry out all the export management. On the other hand, it is the buyer who bears all the risks related to the voyage, loading and freight charges.
o FOB (Free on Board). "Free on board, named port of loading". The selling party will load the goods on the vessel, while all risks and costs once the goods have been loaded are borne by the buyer.
o FCA (Free Carrier). "Free Carrier" the seller delivers the goods that have previously passed through the export clearance designated by the buyer at an agreed place, if the delivery takes place at the seller's premises, it is the seller who bears the cost of loading in the transfer, however, if it is carried out elsewhere, the seller is not responsible.
o CFR (Cost and Freight). "Cost and freight, named port of destination: The seller bears the costs and the cargo until it arrives at the named port. The risk is transferred to the buying party at the moment the goods have been loaded on the ship.
o CIF (Cost Insurance Freight). Cost, Insurance and Freight (named port) The seller pays insurance and freight to deliver the goods to the named place.
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