International Commercial Terms (`Incoterms`) – a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC).
They are usually abbreviated to three letters (e.g. FOB, CIF, DDP, EXW) and are primarily intended to clearly communicate the tasks, costs and risks associated with the transportation and delivery of goods.
Incoterm rules are generally accepted worldwide for the interpretation of most commonly used sets of terms and conditions.
An Incoterm operates as a set of predefined parameters related to transportation, transfer of risk, insurance and delivery of sold goods. A contractual reference to an Incoterm implies the incorporation (by reference) of the parameters of the chosen Incoterm into the sales contract. If the parties provide differently as regards one or more of those parameters, this can be deemed to ‘overrule’ the relevant parameters of the Incoterm.
Delivery and risk. A key aspect of the Incoterms is to give a precise definition of the contractual place of delivery of the sold goods. Under the Incoterms, the place of delivery is also the place (under the sales contract) where the risk of loss of or damage to the goods transfers from the seller to the buyer. Paragraph A4 of each Incoterm specifies the place of delivery.
Point of delivery. By incorporating an Incoterm into a sales contract, the parties clarify precisely where the seller performs its obligation to deliver the goods. For an Incoterm to work properly, it is essential to identify a precise location as the place of delivery. Under most Incoterms, delivery takes place when the goods are handed over, not directly to the buyer, but to a third party (e.g. a carrier) at a pre-determined place. The practicalities for handing over goods to carriers may vary, depending on the location. Clearly identifying the place of delivery will make it impossible for different possible applicable laws to assign the passage of risk to different locations.
Cost implications. Choosing an Incoterm determines not only the transportation and delivery obligations of the parties, but also the answer to the question: “Who bears which costs?” Accordingly, to the extent that the seller takes responsibility for transportation and delivery costs, those costs are presumed to be incorporated into the purchase price of the goods.
Application. The Incoterms have traditionally been used for international sale contracts even though some geographical areas, such as the European Union (or even the WTO), have minimised import formalities. Incoterms 2010 can now also be used for domestic sales. This change may encourage greater use of the Incoterms in the U.S.