Introduction to Incoterms
Incoterms (short for "International Commercial Terms") are a set of international rules established by the International Chamber of Commerce (ICC) to facilitate global trade. These standardized terms clearly define the responsibilities, costs, and risks associated with the transportation and delivery of goods in international and domestic commercial transactions.
First created in 1936, Incoterms are regularly updated to reflect the evolution of international trade practices. The current version, Incoterms 2020, came into effect on January 1, 2020, replacing Incoterms 2010. These rules have become a universal trade language, allowing parties involved in purchase and sale contracts to communicate precisely and unambiguously about the delivery conditions of goods.
Incoterms play a crucial role in air cargo transportation, as they precisely determine when the transfer of risks and costs occurs between the seller and the buyer. They also clarify the obligations of each party regarding customs formalities, insurance, and the preparation of documents necessary for international transport.
Importance of Incoterms in International Trade
Incoterms are essential for several reasons:
- Contractual clarity: They eliminate ambiguities by precisely defining the obligations of each party
- Dispute prevention: By clarifying responsibilities, they reduce the risk of costly disagreements
- Facilitation of exchanges: They simplify international trade negotiations
- Harmonization of practices: They establish a global standard recognized in over 140 countries
- Legal security: They are recognized by courts and customs authorities worldwide
A poor understanding or misuse of Incoterms can lead to significant additional costs, delivery delays, or complex commercial disputes. Therefore, it is essential for all international trade professionals to master these rules.
Fundamental Principles of Incoterms
What Incoterms Cover
Incoterms precisely define several essential aspects of the commercial transaction:
- Cost allocation: Who pays for what (main transport, insurance, loading, unloading, etc.)
- Risk transfer: The exact moment when responsibility for the goods passes from the seller to the buyer
- Documentary obligations: Which documents each party must provide
- Customs formalities: Who is responsible for customs clearance at export and import
- Packaging and marking: Obligations regarding the preparation of goods for transport
- Verification and inspection: Responsibilities regarding quality and compliance checks
What Incoterms Do Not Cover
It is equally important to understand the limitations of Incoterms, which do not address:
- Transfer of ownership: Incoterms do not determine when legal ownership of the goods is transferred
- Payment terms: They do not specify how or when payment should be made
- Remedies for breach: They do not establish the legal consequences of non-compliance with obligations
- Product specifications: They do not concern the quality or characteristics of the goods
- Export or import restrictions: They do not address specific prohibitions or licenses
- Force majeure: They do not cover unforeseeable events preventing contract execution
These aspects must be addressed separately in the sales contract or other contractual documents.
Classification of Incoterms 2020
The 11 Incoterms 2020 are organized into two main categories:
Rules for Any Mode of Transport
Seven Incoterms can be used regardless of the chosen mode of transport (maritime, air, road, rail) or for multimodal transport:
- EXW - Ex Works (At the factory)
- FCA - Free Carrier (Franco transporteur)
- CPT - Carriage Paid To (Port payé jusqu'à)
- CIP - Carriage and Insurance Paid to (Port payé, assurance comprise, jusqu'à)
- DAP - Delivered at Place (Rendu au lieu de destination)
- DPU - Delivered at Place Unloaded (Rendu au lieu de destination déchargé)
- DDP - Delivered Duty Paid (Rendu droits acquittés)
Rules for Sea and Inland Waterway Transport Only
Four Incoterms are specifically designed for sea or inland waterway transport:
- FAS - Free Alongside Ship (Franco le long du navire)
- FOB - Free on Board (Franco à bord)
- CFR - Cost and Freight (Coût et fret)
- CIF - Cost, Insurance and Freight (Coût, assurance et fret)
These terms should not be used for air transport, as they refer to concepts specific to sea transport such as the "ship's rail" or "quay".
Other Useful Classifications
To facilitate understanding, Incoterms can also be classified according to other criteria:
Classification by Level of Seller Responsibility
- Departure: EXW, FCA, FAS, FOB (minimal seller responsibility)
- Main Carriage Paid: CPT, CIP, CFR, CIF (seller organizes and pays for the main carriage)
- Arrival: DAP, DPU, DDP (maximum seller responsibility)
Classification by Point of Risk Transfer
- Group E: EXW (transfer at the seller's factory/warehouse)
- Group F: FCA, FAS, FOB (transfer before the main carriage)
- Group C: CPT, CIP, CFR, CIF (transfer before the main carriage, but seller pays for the carriage)
- Group D: DAP, DPU, DDP (transfer after the main carriage)
Evolutions of Incoterms 2020 Compared to Incoterms 2010
The main changes introduced by the 2020 version are:
- Replacement of DAT with DPU: "Delivered at Terminal" becomes "Delivered at Place Unloaded", expanding its application to any unloading location, not just terminals
- Level of insurance coverage in CIP: Change from minimum coverage to all-risk coverage (clause A of the Institute Cargo Clauses)
- Inclusion of transport with own means: Explicit recognition that transport can be carried out by the buyer's or seller's own means, not just by third-party carriers
- Bills of lading with "on board" notation in FCA: Possibility for the buyer to instruct their carrier to issue a bill of lading with "on board" notation to the seller
- Clarification of security obligations: More precise distribution of responsibilities related to transport security requirements
These changes reflect the evolution of trade practices and respond to the needs expressed by Incoterms users.
Conclusion
Incoterms 2020 are essential tools for clarifying responsibilities, costs, and risks in international commercial transactions. They allow parties to precisely define the delivery conditions of goods, thereby reducing ambiguities and the risk of disputes. For air freight professionals, a deep understanding of Incoterms is crucial to ensure smooth operations that meet client expectations.
By choosing the right Incoterm, companies can optimize their logistics costs, minimize risks, and improve customer satisfaction. Therefore, it is recommended to regularly train in Incoterms and integrate them into sales contracts to ensure effective management of international transactions.
