Incoterms are essential to facilitate international trade. The reference to an Incoterms 2020 rule in a contract for the sale of goods clearly defines the respective obligations of the parties in matters such as risk, costs and the organisation of transport and customs clearance, thus reducing the possibility of legal complications.
Below are some recommendations for the appropriate use of Incoterms.
Choosing the Right Incoterm
Selecting the right Incoterm is essential to ensure an efficient and conflict-free transaction. Therefore, we recommend carefully assessing the specific needs of each transaction and considering factors such as the type of goods, the destination and the logistical capabilities of both parties.
Risk Management
It is crucial not to confuse the transfer of risks with the transfer of ownership. Risks are transferred at the place and time specified in the contract and in the Incoterm. It is very important to emphasise the importance of this concept and to understand that this aspect protects the interests of both parties during the transport of the goods. The point of delivery is fundamental to define when the risk of the goods is transferred from the seller to the buyer. This point may vary according to the Incoterm used, such as FCA (Free Carrier), DPU (Delivered at Place, unloaded), or FOB (Free On Board). Clarity on this point is essential to avoid disputes and ensure efficient delivery.
Cost sharing
Incoterms help to define how logistics costs are shared between the seller and the buyer, avoiding duplication. We therefore encourage parties to review the terms in detail to ensure that costs are clearly defined and agreed. Each Incoterm clearly defines the obligations of both parties. For example, under the DAP Incoterm, the seller bears all costs and risks up to the agreed delivery point, while the buyer is responsible for unloading and import customs clearance. This division of costs and responsibilities helps to simplify the logistics process and to ensure that each party knows exactly what to do.
Clarity in Documentation
It is vital that documentation related to Incoterms is clear and precise. This includes specifying the point of delivery, responsibilities for customs clearance and the passing of risk. Well-prepared documentation certainly helps to avoid misunderstandings and facilitates the fulfilment of contractual obligations.
Incoterm terms precisely delimit
- Obligations: who is responsible for what in the relationship between seller and buyer.
- Responsibility for customs documentation and management: It establishes who is responsible for the necessary export and import formalities.
- Risk & Delivery: where and when the seller ‘delivers’ the goods. We insist on the idea of not confusing the transfer of risks with the transfer of ownership. The risks are transferred at the place and time of delivery specified in the contract and the Incoterm. In all Incoterms rules, except for the C rules, the named place indicates where the goods are ‘delivered’, i.e. where the risk is transferred from seller to buyer.
- Distribution of logistics costs: Determines how costs are distributed between the seller and the buyer, avoiding duplication.
Incoterms do not detail the method of payment
Although Incoterms specify the logistics of the contract, such as the point of delivery and cost sharing, they do not detail the method of payment. This is at the discretion of the parties involved and may include methods such as payment in advance, letter of credit, or open account. The choice of payment method depends on the relationship of trust between buyer and seller and their respective priorities
Formula to incorporate the incoterm rules
[chosen incoterm rule][port, place or designated point] incoterms 2020
Disregarding the year of issue could lead to problems that may be difficult to solve. The parties, a judge or an arbitrator must be able to determine which version of the incoterms rules applies to the contract.
In essence, the Incoterms 2020 rules are not themselves a contract of sale: they only form part of such a contract when they are incorporated into an existing contract. Nor do the Incoterms rules provide for the law applicable to the contract. There may be legal regimes that apply to the contract, either international ones, such as the Convention on Contracts for the International Sale of Goods (CISG), or mandatory national laws relating, for example, to health, safety or the environment.
For more information about Incoterms and how they affect logistics operations, you can visit the resources section on the BestWay Cargo Resources and download detailed information in the following file:
BestWay-Incoterms®-2020-v2024.pdf
If you have any further questions, the BestWay team will be pleased to help you.
*This article has been automatically translated from its Spanish version.
