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Managing risk with Incoterms® 2020

Incoterms are internationally accepted definitions for the most common terms used in contracts for the sale of goods. Incoterms 2020 came into force on Jan. 1, 2020, superseding the earlier Incoterms 2010.

What are Incoterms?

Incoterms are formal terms used in most international sales contracts to reduce the logistical risks of doing business internationally. These three-letter acronyms mean the same thing in any contract anywhere. As a result, both sellers and buyers can clearly understand their contractual rights and responsibilities when delivering or receiving goods internationally. 

More specifically, according to the Forum for International Trade Training (FITT), Incoterms “are used in negotiations to resolve who is responsible for the expenses associated with a shipment at a specific point in the shipment’s journey, such as export packing costs, the main transport costs and custom duties.” 

There are 11 Incoterms in all. A familiar example is Free on Board (FOB), which means that you deliver the goods to your buyer on board the vessel chosen by the buyer at the named port of shipment. 

Why are Incoterms so important to international logistics?

Global trade moves goods among many different markets with many different languages and business cultures. Because Incoterms provide a common logistics vocabulary, using them significantly reduces the potential for disputes over logistics.

“Having a contract is simply not enough,” says Agnew from the Canadian Chamber of Commerce, “especially given the potential language barriers and different meanings around a particular term or phrase. Incoterms greatly reduce the challenges by ensuring that the parties involved in a transaction know their responsibilities at every step along the way.”

How can Incoterms reduce your risks?

  •       They can help you avoid disagreements over who carries the risk at various points in the logistics process. This helps you get the right insurance for the period during which you carry the risk.
  •       They can help you avoid disputes over alleged late delivery and lower your risk of late-delivery penalties.
  •       They provide a stable risk environment by imposing certainty on a sales contract. For example, using the appropriate Incoterms rules can help ensure that you get paid for a shipment. 

“Using the correct Incoterms in an international transaction helps the parties involved identify the risks for which they’re responsible,” says Philip Turi, EDC’s director of strategy and innovation. “ At the same time, they can take pre-emptive steps to mitigate those risks and not wait until something goes wrong.”

What can happen if you don’t use Incoterms properly?

“Using the wrong Incoterm,” says Agnew, “can lead a company to misunderstand and/or misrepresent the costs, obligations and division of responsibilities that are being negotiated between the buyer and the seller. This can lead to significant unanticipated liabilities for a company, which can be very costly.”

More generally, adds Turi, “Companies often don’t ensure that the Incoterms in their sales agreements match across all the contracts involved in the transaction. When something goes wrong, the disagreements tend to focus on risks and responsibilities that could have been managed through the accurate use of an Incoterm. I have seen this happen and it can cost companies inordinate amounts of time and money to resolve.”

(credit: EDC)

Given the critical importance of aligning Incoterms in sales agreements to mitigate risks and avoid costly disputes, we are excited to announce an upcoming Incoterms training session. This training will equip participants with the knowledge and skills needed to accurately apply Incoterms rules in their international transactions, ensuring compliance, minimizing risks, and maximizing efficiency.

To register for this valuable training opportunity and safeguard your business against potential pitfalls in international trade, simply visit https://www.procurementlogistic.com/nos-sessions-de-formation/ and secure your spot today. Don't miss out on this chance to enhance your understanding of Incoterms and elevate your global trade practices."

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