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Incoterms:
Incoterms, an acronym for International Commercial Terms, are a series of 13 trade terms used in international sales contracts, to clearly divide the risks and responsibilities of buyers and sellers with regard to the movement of goods between both parties.
They were first introduced in 1936 in Europe by the International Chamber of Commerce to prevent misunderstandings and disputes that may arise because of different trading practices among countries. These rules were known as Incoterms 1936.
They have been revised periodically. Amendments and additions were made in 1953, 1967, 1976, 1980 and 1990, to reflect current international trading practices.
Except in the United States, Incoterms are widely used for international trade throughout the world.
American businesses have been slow to adopt Incoterms, mainly because they are a European invention. They often use them incorrectly, confusing commonly used domestic sales terms like FOB Factory with Incoterms. There is no FOB Factory in Incoterms, because that term, Free on Board, refers to the point at which the goods cross the ships rail. The correct way to express the American concept of FOB Factory is FCA (Free Carrier), followed by the location of the factory.
However, Incoterms are very handy, because with three English letters followed by a place name (e.g. FCA Miami) a company can convey in its price quotation (pro-forma invoice) or sales contract, extensive information that would otherwise take pages to spell out. In the quotation process, Incoterms help determine the selling price by defining the responsibilities and costs, beyond the price of the goods, which the seller is willing to handle.
This includes:
Another important feature of Incoterms is that they delineate the exact point at which risk passes from seller to buyer in the event that the goods are damaged or lost en route.
Understanding exactly where this risk transfer point takes place is important for a company to make certain it has adequate insurance coverage up until that point.
What the use of Incoterms does not do is convey title or ownership of the goods. That is agreed on by the seller and buyer, independently of which Incoterm is used and occurs through separate documents. They are also not law, but they are written to conform with the UN Convention on Contracts for the International Sale of Goods, the default law applied to international contracts among signatory nations.
For more information about Incoterms, please click on the links located on the left and right side of this page.
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