Incoterms are rules developed by the International Chamber of Commerce, which are used in international sales contracts. Its name comes from international commercial terms (international terms of trade).
These terms are used to determine at what time of the purchase the risk on the merchandise and the responsibilities of the buyer and seller are transferred. Although they are voluntary, most international transactions are governed by the rules established in the incoterms. The CISG convention itself recognizes the importance of incoterms.
Since 1936, the International Chamber of Commerce has been in charge of updating the incoterms as international trade develops. The fact that these contractual uses are updated does not mean that the previous incoterms are invalid, so the incoterm and the year of the version will have to be specified in the contract.
What aspects of international sales do incoterms regulate?
- The delivery of goods: It is the primary obligation of the seller.
- Transfer of risks: It is important not to confuse transfer of risks with transfer of property. The risks are transmitted in the place (factory, dock, ship) and at the time specified in the contract and in the incoterm.
- The distribution of expenses: Generally the seller bears the necessary expenses to make the merchandise available to the seller. You can also agree to take out insurance for the goods until they arrive at the destination.
- Customs procedures: Usually, the seller is responsible for the export, except in the case of the EXW Incoterm (Ex Works), where the buyer will be responsible for the export procedures, for which he will hire a customs agent.
The most used incoterms
- CIF (Cost, Insurance and Freight, Coste, Seguro y Freight): The seller is responsible for the transport and insurance until the merchandise reaches the destination port.
- CFR (Cost and Freight, Coste y Freight): The seller is responsible for the transport but not the insurance, so the buyer would be unprotected against possible risks.
- DDP (Delivery Duty Paid): This incoterm allows the seller to make the merchandise available to the buyer in the designated destination country. The use of the term DDP implies that the seller must pay any import or export duty as well as carry out all customs procedures.
- EXW (Ex Works, Ex Works): Delivery is made at the seller's premises or at another designated location when the merchandise is made available to the buyer.
- FOB (Free on Board): The seller is responsible for the merchandise until it is loaded onto the ship.
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