Incoterms or International Commercial Terms provide exporters and importers with rules on "who is responsible for what" when goods move between a seller and the buyer.  Although Incoterms are primarily designed for the movement of goods between two countries, they can also be used for domestic trade. Whilst considering the terms "seller" and "buyer" it is important to be aware that Incoterms does not stipulate the requirement for a sales contract to be in place, so the rules could apply for a movement of goods where there is no sale or purchase. Goods being exported to an overseas repair centre is one example. 

International Trade means that a variety of costs must be covered. Documentation, customs declarations, domestic haulage, international freight duty and tax will be incurred when goods move between two points. For every Incoterm rule, the seller and buyer obligations are clearly defined. With obligations agreed, both parties will be clear on their responsibilities to establish what the financial impact will be to adhere to the select rule. 

Separately, the seller of the goods will need to make a commercial decision on if they will pass any or some of the costs onto the buyer. 

It is important to remind ourselves that although the Incoterms rules stipulate the two parties as the “Seller” and “Buyer” there doesn’t need to be a sales contract in existence for Incoterms to apply. 

Obligations and Costs are only part of the story when understanding what Incoterms covers. The other considerations are when the seller delivers the goods to the buyer and when risk transfers from one party to another. 

A consignment could move by road from Aberdeen to London or by sea from Felixstowe to Yokohama. If there was loss or damage en-route to the final destination, who would have the responsibility to replace the goods? 

Incoterms do not work unless there is a delivery point named. Depending on the rule that has been selected, this might not be the final resting place of the goods. As an example, goods could be shipped under the Incoterm FCA which is Free Carrier. However, an Incoterm in isolation doesn’t provide enough detail. A clearer use of the rule would be FCA Middlesborough TS1 1HR (Incoterms® 2020) Now we have more detail to clarify that FCA has been applied and by checking the rule, we can establish that the risk is transferred from seller to buyer when the goods are loaded onto the vehicle at the sellers’ premises in Middlesborough. It is also clear which version of Incoterms applies. 

From this information, we are unable to ascertain the final delivery point of the goods, but this information will be needed for customs and logistics purposes. This detail could be provided on an invoice, despatch note or separate instruction. What is clear is that in the instance that there is any loss or damage to the goods after they have been loaded on the vehicle, the buyer will have the responsibility. This means that the buyer will need to consider if they wish to cover their risk with appropriate insurance cover, based on the goods and the journey the consignment will make. However, under this Incoterm, as well as 8 other rules, there is no responsibility for the seller or buyer to insure their risk. What must happen is the point that the risk is transferred from one party to another is clear to enable the decision to be made on insurance. A consignment could be worth £100 and if there is loss the party responsible may decide not to insure and take their chances that the goods will arrive in one piece. A consignment worth £100,000 is a different story. 

It might be wise to think about insurance for a container on the high seas or a pallet on an aircraft, but Incoterms and stipulating the delivery point could mean a consideration of risk for a domestic journey. 

Goods could be purchased from a supplier in China on DAP Southampton Port (Incoterms ® 2020) The Chinese seller will have the risk until the goods arrive at the UK Port. DAP is another example where the seller or buyer do not have to insure their risk. The consideration is where does the buyer require the goods delivering to in the UK? Their warehouse could be in Leeds. In this instance the buyer would have the domestic transport costs from the port to their warehouse. The buyer would also have the risk. The UK Haulier could have insurance, but is it sufficient for the buyers’ needs? 

Knowing where their risk begins, and ends, is vital to enable the seller and buyer to decide if they wish to insure the goods. 

The exceptions to risk and Incoterms are the C Terms. There are four in all, but two are for use when goods move as conventional freight or via in-land waterways. The other two can be used for other modes of transport, including multi-modal. 

Using an example, the seller agrees with the buyer a CPT Incoterm, Carriage Paid to. Using the example CPT Sydney Airport (Incoterms ® 2020), this confirms that the seller is agreeing to deliver the goods to the named point in Australia, but where does the risk transfer to the buyer? Based on this rule, it won’t be at Sydney Airport. 

The default position, if another point is not agreed, is when the goods have been delivered to the first carrier (the same as the FCA example) but the best practice is to agree exactly where the risk is transferred, as another named point is also possible. It will then be clear when the sellers’ and buyers’ insurance responsibilities begin and end (again) without the obligation to obtain cover. 

The only two Incoterms which stipulate insurance are CIP (Carriage and Insurance Paid To…) and the rule for conventional sea freight, CIF (Cost Insurance and Freight).         

In these two instances, the seller must insurance the buyers’ risk based on a level of cover that is stipulated in the rule, unless both parties agree a different policy. As with our previous example, CIP Sydney Airport doesn’t provide the clarity needed to confirm where the sellers’ risk transfers to the buyer, so that point must be clear to enable the seller to obtain the necessary insurance cover. Subsequently, the seller must provide the buyer with evidence of the insurance cover. 

Risk will always be an element whether goods are moving 10 miles or to the other side of the world. Insurance is mandatory for two Incoterms, but it could apply for the other terms. It is important to be aware that for many countries, the customs authority will want three components declared to establish the dutiable value. Sometimes known as the CIF Value and not to be confused with the Incoterms, the requirements are the Cost of the Goods, the Insurance Value, and the Freight Cost to the country of import. We have clarity that if the CIF Value is required and if the goods have been insured, this component must be included. 

International Trade can be complex, Incoterms are not a mandatory requirement to be included in a sales contract. If a rule is applied it is important that it is used correctly and both parties understand their obligations, costs and risks.       

While you are here you may be interested in some Strong & Herd LLP training courses & live clinics related to this topic:

Focus On: Incoterms® 2020 Rules

Beginners Guide to Exporting & Importing