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Incoterms, short for “international commercial terms”, are a set of pre-defined international rules published by the International Chamber of Commerce which determine the contractual clauses to be used in international commercial sales contracts.
In layman terms, they represent specific conditions by which the importer and exporter are legally obliged to abide and prevents misinterpretation and confusion over costs, risks, management, and responsibilities. Before an agreed transaction can go through, it is very important for both buyer and seller to agree on an Incoterm.
Who is responsible for costs (who pays each part of the international transport)
When risk is exchanged between the seller and the buyer during the transportation of the goods (who is responsible at any given time)
The delivery location (provided to the seller)
Who hires and pays for the transportation required
Who hires and pays for the insurance used
Handling and cost of each necessary document
Incoterms were first introduced by the International Chamber of Commerce in 1939. Since then, they’ve been accepted and adopted by traders all over the world when dealing with international trade. Incoterms are updated every few years to adapt to the evolving trade conditions and practices. As such, there may be various versions of an incoterm, which makes it extremely important to specify the version of the Incoterm you’re using.
The 8th and current version of Incoterms, Incoterms 2010, was published on January 1st 2011 and defines 11 different Incoterms, two less than the 13 used in the previous Incoterms 2000.
In the current version, Incoterms are divided into four groups (E, F, C and D), depending on the delivery location of the goods and the responsibility for payment at different stages of the international transport.
Furthermore, within groups F and C, incoterms are divided between those which are specific to maritime transport:
and those that can be used with any kind of transport:
Different Incoterms have different conditions under which the importer and exporter are obliged to fulfil. As a shipper, the Incoterm you choose will depend on a few factors, including your relationship with your buyer, the country to which you’re exporting to, the country from which you’re exporting from, and your knowledge of the know-hows of these countries.
Choosing the right Incoterm may in itself be a challenge if you’re new to logistics. We recommend giving our article on how to choose a safe and competitive Incoterm a read to find out which Incoterm is right for you.