An introduction to Incoterms

• Location, location, location

  When using Incoterms® Rules by reference in a supply contract, it is common to include a statement or clause such as “The Goods shall be supplied in accordance with the terms of Incoterms 2020 CIP [location]”. Sometimes parties may insert a vague destination location, such as London or England, to give themselves flexibility. However this could lead to unfortunate consequences, for example a customer might agree to CIP England but the Supplier may then deliver the goods into any number of ports, leaving the customer to deal with further inland transportation than expected. Therefore in general, the location should be as specific as possible.

  

• Check your-(Incoterms®)-self!

  It may seem obvious, but always check the version of the Incoterms® Rules that is being referred to in the supply contract. The latest version published by the ICC is the Incoterms®2020 Rules, which was an update on the previous version from 2010, and there were some important changes. While not as common to see these days, some contracts do still reference the 2000 version (although the interpretation clause in the contract may automatically switch to the latest version once published).

• Ensure you are insured

  While Incoterms® Rules do contain some insurance obligations, these generally tend to be fairly basic or minimum marine cargo insurance requirements – if the goods to be transported are high value, additional insurance provisions should be inserted in the supply contract (if this is to be an obligation on the supplier) and consideration should also be given to the most appropriate point at which risk transfers (for example on making available for unloading or once fully unloaded).

• “Insert Title”

  It is sometimes assumed that because the Incoterms® Rules cover many aspects of delivery and transportation of goods, they also cover when title in the goods will transfer from the supplier to the customer. However they do not, so make sure your supply contract contains an express provision to be clear when title will pass, and that this also makes sense in relation to the delivery (and payment) terms.

• If it ain’t broke, don’t fix it

  While Incoterms® Rules do not include all relevant terms (see above), they do contain clear provisions on many aspects of the delivery and transportation of goods. Therefore be careful to ensure that the terms of the supply contract do not include inconsistent clauses with the Incoterms® Rules, which may cause confusion. If the supply contract also includes an order of precedence clause that puts the supply contract above all else, it may have the unintended consequence of amending the Incoterms® Rules.

• Not all Incoterms® Rules are born equal

  While some Incoterms® Rules are quite interchangeable in any given situation, not all are appropriate for every mode of transportation. For example, FOB (Free On Board) is generally only used for sea/waterway shipments and is not appropriate for other modes of transportation, whereas FCA (Free Carrier) is very flexible.

• To export or not to export

  Take care when considering the use of Incoterms® Rules in international supply contracts where one or more of the parties do not have extensive networks to export and/or import goods. For example, DDP (Delivered Duty Paid) requires the supplier to clear goods for import and pay any related import duties (as well as handle the inland transportation). This could be impractical if the supplier has no base in the country of destination, unless you have a very good freight forwarder/carrier. Conversely, for a customer, if the supplier is insisting on delivering the goods EXW (Ex Works) at their factory in another country, you will need to plan the logistics and absorb the cost of collecting the goods.

• It’s Terminal (Handling Charges)

  Linked to the above point, check with your logistics provider how costs such as terminal handling charges (applied by the terminal operator) are treated – depending on the Incoterm® Rule in use, the customer should check how these will be paid and if included in the costs of the logistics provider/carrier.

If this is an area where you would like some guidance, we can help.  Please feel free to get in touch.

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