When it comes to the global trade network, there are plenty of opportunities for things to go wrong. Due to different languages and cultural barriers, buyers (importers) and sellers (exporters) can easily misunderstand one another. Unfortunately, these misunderstandings can lead to disputes.
In the past few months, the Fruit and Vegetable Dispute Resolution Corporation (DRC) has come across importers who were either unfamiliar with Incoterms® or how to use them correctly, especially first-time importers.
What are Incoterms, and why are they important for international trade?
International commercial terms (Incoterms) provide a universal set of rules and guidelines that help facilitate a successful trade. The International Chamber of Commerce (ICC) created and published Incoterms to set clear-cut rules that outline how sellers and buyers should conduct themselves during the exporting/importing process.
Incoterms are used in many ways to facilitate a smooth and easy trade. Of primary importance, each term clarifies the tasks, costs, and risks to be borne by buyers and sellers in these transactions. Among the things that Incoterms brings is the clarification of each party’s financial and legal responsibilities, an essential advantage during international trade.
Some things the buyer or seller might be responsible for based on the Incoterms they use include are:
• Proper documentation
• Customs clearance
• Shipping costs
• Risk of Transit
Familiarity with Incoterms will help improve smoother transactions by clearly defining who is responsible for what in each step of the transaction.
The Incoterms Insurance and the DRC
While it is important to understand that the Incoterms are part of the contract, the Incoterms are not in themselves a contract of sale. Incoterms do not deal with whether the other conditions of the contract are met or not or the law of dispute resolution in the event of a breach of contract.
Unless otherwise agreed, DRC members must follow DRC’s Trading Standards, Transportation Standards, and other guidelines. Therefore, a DRC member, regardless of their Incoterms insurance obligations, must first prove a breach of contract following DRC’s Operating Rules or the written contract prior to the application of the insurance.
For example, when using the Cost Insurance and Freight (CIF) Incoterms, the seller is required to buy cargo insurance with the buyer as the beneficiary and share that policy with the buyer. In the event of a maritime transportation claim, since the risk of transit under this term falls with the buyer, it is up to the buyer to invoke the insurance to make the proper claim against the shipping line. If the insurance bought by the seller does not have the buyer as the beneficiary, the payment of the transaction may be jeopardized.
We strongly recommend that when negotiating a transaction with product shipped by maritime transportation, both parties dedicate some time to discuss the Incoterms to ensure that the buyer and their supplier understand what the right Incoterms are for them. Transparency and agreement are essential in establishing the rights and responsibilities of all parties. Lack of agreement and confusion over terms may not only cost you money, but valuable trading partners as well.