Motivations and rationale for variation of Incoterms® rules (2024)

FAQs

What is the basic reason for revisions of Incoterms? ›

International commercial terms—Incoterms for short—clarify the rules and terms that buyers and sellers use in international and domestic trade contracts. The International Chamber of Commerce (ICC) developed Incoterms in 1936 and updates them periodically to conform to changing trade practices.

Four factors which are “relations with forwarding agents, type of goods, complexity of transportation and distance” differ according to importers and exporters in their selections.

Of primary importance is that each Incoterms rule clarifies the tasks, costs, and risks to be borne by buyers and sellers in these transactions. Familiarizing yourself with Incoterms will help improve smoother transactions by clearly defining who is responsible for what and each step of the transaction.

The primary purpose of Incoterms, or International Commercial Terms, is to simplify and standardise trade terms in international transactions, fostering greater clarity and efficiency in global commerce and supply chain management.

Delivery – at which point the seller's responsibility ends and the risk of loss or damage passes to the buyer. Transportation – which party is responsible for transportation costs. Documentation and formalities – who is responsible for dealing with customs, shipping documentation, duty payments, and other formalities.

The International Chamber of Commerce (ICC) reviews and updates the Incoterms® rules every ten years – the previous edition was published in 2010. It responds to concerns raised by users of Incoterms and to changes in the market to ensure the terms are relevant and suitable to both domestic and global trade.

In this article, we will delve into the basics of Incoterms, focusing on six commonly used terms: Ex Works (EXW), Free On Board (FOB), Cost and Freight (CFR), Cost Insurance and Freight (CIF), Delivered At Place (DAP), and Delivered Duty Paid (DDP).

One of the primary benefits of using Incoterms is that they provide clarity and consistency in international trade transactions. They establish clear rules and responsibilities for buyers and sellers, which helps reduce confusion and misunderstandings.

What is the purpose and scope of Incoterms? ›

The purpose of Incoterms is to provide a set of international rules for the interpretation of the most commonly used trade terms in foreign trade. Thus, the uncertainties of different interpretations of such terms in different countries can be avoided or at least reduced to a considerable degree.

Choosing rules that do not suit the requirement of the business will result in both buyers and sellers misunderstanding their respective obligations and costs thus not knowing the exact extent of their responsibilities. This will result in extra costs, delays and risks in the delivery and transport of the goods.

Complexity: Some users may find Incoterms complex and challenging to understand, especially those who are new to international trade. Not Comprehensive: While Incoterms cover many aspects of the trade process, they may not address every detail of a specific transaction.

In addition, Incoterms® rules do not deal with such issues as transfer of ownership, breach of contract, or product liability – all of which need to be clarified in the contracts. Besides, Incoterms® rules cannot override applicable laws.

Incoterms play the strongest role in ensuring all international trade is performed in a standardized, thorough manner. Without Incoterms, buyers and sellers would suffer from constant changes in language and difficulties in shipping practices.

As we already know, the rules of the International Chamber of Commerce (ICC) in the field of Incoterms international trade clauses are revised every 10 years.

In conclusion, while #incoterms are not sales contracts, they are crucial supplementary clauses that strengthen sales contracts. Modifying any Incoterms rule is generally discouraged. If trade partners wish to modify an Incoterms® rule, the specifics should be clearly defined in the sales contract.

Incoterms 2020 now has provisions for shipping goods Free Carrier (FCA) with a Bill of Lading with an on-board notation. This is especially useful for containerized shipments. Under Incoterms 2010 many buyers were using FOB, because of the Bill of Lading that was required to be present under FCA.

The first work published by the ICC on international trade terms was issued in 1923, with the first edition known as Incoterms published in 1936. The Incoterms rules were amended in 1953, 1967, 1976, 1980, 1990, 2000, and 2010, with the ninth version — Incoterms 2020 — having been published on September 10, 2019.