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An Introduction to Incoterms
An Introduction to Incoterms
Why do we need the Incoterms Rules?
In the days of horses, carts, and sailing ships, if a merchant wanted to export goods, they only had control over two things:
- Getting the goods to a port
- Handing them over to the master of a ship bound for their intended destination
Once the goods were on board the ship, it was impossible for the seller to have any further control over what happened to them.
Essentially, the goods became the buyer’s problem, and by custom of trade, the risk of loss or damage transferred to the buyer at that point.
Today, things are more complex. However, the fundamental principle of defining the point at which risk transfers from the seller to the buyer remains a key element of the Incoterms Rules. Specific consideration should be given to ensuring that the risk transfer point aligns with the method of carriage — particularly for containerized goods.
The Incoterms Rules comprise 11 terms of sale, which are split into two groups. Seven of them are designed for almost every type of goods, transported by any mode or modes of carriage. Four of them are designed specifically for the port-to-port shipment of certain types of goods — typically bulk and break-bulk cargo — by sea or inland waterway only.
How goods are transported and which Incoterms Rules are appropriate
For the majority of goods:
- International trade is not just by sea. It also can be by road, rail, or air. A single movement of goods often uses more than one of these methods of carriage.
- About 60% of all world trade is transported in containers.
- Contracts of carriage are mainly arranged on a warehouse-to-warehouse basis rather than port-to-port only.
- The method or methods of carriage may not even involve a ship.
If FAS, FOB, CFR, or CIF are used for containerized goods, and then those goods are damaged in the country of origin, there may be a dispute about whether the seller or the buyer bears that loss.
Choosing the right Incoterms Rule and using it in the right way is essential
Using terms that are designed for modern, multimodal carriage means that sellers and buyers can be confident that they both have the same understanding about exactly where the risk of loss or damage passes from the seller to the buyer.
The risk transfer point, which is called the “delivery” point in the Incoterms Rules, is important in relation to marine cargo insurance underwriting and claims because it is a factor in establishing insurable interest. (Another factor is title, but the Incoterms Rules do not deal with payment or the passing of title.)
Because banks will only release funds to sellers when documents are presented that match the applicable terms of sales — where sales are made against letters of credit — care should be taken to ensure that the incorporated terms are appropriate for the method of carriage.
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