Introduction
Incoterms are rules for interpreting international trade terms used in the conclusion of sales contracts, which were created by the International Chamber of Commerce, which unites thousands of national chambers of commerce and industry today. Incoterms regulates several issues related to the distribution of costs during the transportation of goods, determining the transfer of risks from the seller to the buyer, and fixing the time of goods delivery.
The Meaning of Incoterms
The Purpose
The purpose of Incoterms is to provide a set of international rules for the interpretation of trade terms most commonly used in foreign trade. In this way, it is possible to avoid or at least significantly reduce the uncertainty of different interpretations of such terms in individual countries. Often, the parties to the contract are not familiar with the various trading practices in the respective countries. This can cause misunderstandings, disputes, and litigation and waste time and money. To solve these problems, the International Chamber of Commerce 1936 published for the first time a set of international rules for the interpretation of trade terms.
The Scope
It should be emphasized that the scope of Incoterms is limited to issues related to the rights and obligations of the parties to the contract of sale about the delivery of goods sold. It was revealed that there are often two misunderstandings regarding Incoterms. Firstly, it is often assumed that Incoterms apply to contracts of carriage and not to a contract of sale. Secondly, it is sometimes believed that Incoterms provide for all the obligations that the parties would like to include in the contract of sale (Stojanović & Ivetić, 2020). As has always been emphasized by the International Chamber of Commerce, Incoterms regulate only the relations between sellers and buyers under purchase and sale agreements and only on certain aspects.
The Regulation
Incoterms generally do not regulate the consequences of breach of contract and exemption from liability due to various obstacles. These issues are subject to resolution by other terms of the contract of sale and the applicable law. Incoterms have always been used primarily when goods are sold for delivery across national borders, so these are international trade terms. However, in practice, Incoterms are often included in contracts to sell goods within national markets. With this application, Incoterms paragraphs A2 and B2 and the provisions of other articles relating to exports and imports become superfluous.
Assistance
Under the above, significant ‘assistance’ to the subjects of various states in the conclusion of contracts for the international sale of goods can be provided by the systematization and standardization of goods delivery terms. for their uniform understanding by these participants in international trade relations, are carried out precisely at the level of an authoritative (influential) international non-governmental organization, as which the International Chamber of Commerce can be considered.
The Definition
Incoterms, developed and published by the International Chamber of Commerce, acting as the main systematization and standardization of the terms of contracts for the international sale of goods. This international non-governmental organization ‘facilitates’ the parties’ understanding of the contract of international sale (Yi, 2021). Goods of each other systematize the terms of the contract of international sale of goods by compiling a set of trade terms and publishing such a set.
Criticism
Sometimes Incoterms are criticized for too wide a choice of terms, considering it possible to limit the number of terms. The answer to this question is the variety of delivery methods for various cargoes existing in commercial practice. Goods such as petroleum products, coal, ore, or grains are often transported on specially chartered vessels that accept goods for transportation only in the form of a full shipment. With this type of trade, the final buyer may not be known at all since the goods may be sold during transportation. This circumstance makes it necessary to provide such a negotiable transport document as a bill of lading. In addition, even if the final buyer is determined, as a general rule, he is not ready to assume the costs and risks that may arise in the seller’s country. This leads to the need for various maritime terms widely used in world trade. Therefore, one of the advantages of incoterms is that by using standard terms, the participants of the purchase and sale will avoid confusion and misunderstandings. However, one of the disadvantages is the difficulty in memorizing all the terms for beginners.
Choosing a Term
As for insurance, it should be noted here that if it is impossible to sell the goods during transportation, it is advisable to assign the seller the obligation to ensure it is in favor of the buyer. In other cases, it is more convenient for the buyer to realize insurance himself to meet his specific needs. The choice of one or another Incoterms term is due to several reasons. For example, the need for the seller to refrain from accepting any additional obligation, and the willingness of the seller to do more than provide the goods at the disposal of the buyer in their premises (Stojanović, 2021). Which basic delivery condition is preferable for the seller, and which for the buyer – this question is solved about a specific situation.
Examples
Thus, for a seller who wants to sell an export product on terms closest to the usual sale of goods on the domestic market, the EXW (ex-factory) condition is more convenient. This term means that the goods are placed at the buyer’s disposal at the seller’s factory (the place of shipment of the goods). Here, the risk of accidental death or damage to the goods also passes to the buyer (Hajdukiewicz & Pera, 2021). The buyer bears all the loading, transportation, and insurance of the goods and pays customs duties. Russian exporters and importers often use this condition, and the latter has the opportunity to avoid excessive expenses in foreign currency (Matvieiev, 2021). For example, at least in the fact that they organize the delivery of goods on their transport or on the transport of the owner, who does not require payment in foreign currency. This is already a big saving for domestic entrepreneurs, considering that the cost of transporting goods can reach half of its cost, and Russian importers, as a rule, experience an acute shortage of foreign currency.
Practice
In practice, there are often cases when the parties, forming the basis of delivery, use Incoterms terms, which in principle cannot be used in specific situations. Inaccuracies in the application of terminology are often allowed. There are also ridiculous mistakes because the person who drew up the contract did not familiarize himself with the terms of Incoterms but “automatically” made a reference to them (Hajdukiewicz & Pera, 2021). For example, the terms intended for the carriage of goods by sea (CIF, FOB) are used for transportation by other modes of transport, which causes complications in solving several fundamental issues.
Conclusion
In conclusion, when choosing a particular delivery basis, it is necessary to adhere to Incoterm’s terminology strictly. When understanding trade terms, it is necessary to adhere to the interpretation contained in Incoterms. The parties’ different understanding of the trade terms contained in the contract often leads to disputes. When concluding a foreign economic contract, it is necessary to define the basic terms of delivery clearly. As practice shows, just a reference to the relevant term Incoterms is not enough since the provisions of Incoterms on many issues are general, offering only a moral solution.
References
Yi, B. (2021). Application of Incoterms in international engineering based on information platform.International Conference on Information Management and Technology (ICIMTECH 21), 6(7), 1–4. Web.
Hajdukiewicz, A., & Pera, B. (2021). Factors affecting the choice of Incoterms: The case of companies operating in Poland.International Entrepreneurship Review, 7(4), 35-50. Web.
Matvieiev, P., Klepikova, O., Kornuta, L., Abbaszade, M., & Kuznetsov, S. (2021). Public and private economic and legal interests in the field of international transport in the latest edition of Incoterms.Amazonia Investiga, 10(46), 217-224. Web.
Stojanović, Đ., Ivetić, J., Veličković, M. (2021). Assessment of international trade-related transport CO2 emissions—A logistics responsibility perspective. Sustainability, 13(3):1138. Web.
Stojanović, Đ., & Ivetić, J. (2020). Possibilities of using Incoterms clauses in a country logistics performance assessment and benchmarking.Transport Policy, 98, 217-228. Web.