Apply Incoterms in international goods sales contracts

Applying Incoterms in international goods sales contracts is the selection and use of appropriate Incoterms to determine the responsibilities, costs and risks of the buyer and seller. Correct application of Incoterms helps limit disputes and ensure the rights of parties in international trade transactions. This article will provide customers with general knowledge about Incoterms and instructions for applying Incoterms in international goods sales contracts.

What are Incoterms? Incoterms groups

Incoterms are a set of international commercial terms widely used in contracts for the sale of goods. Each Incoterms clause specifies the responsibilities of the buyer and seller regarding delivery, transfer of risk, payment of freight costs and insurance. Incoterms are published by the International Chamber of Commerce (ICC) and are periodically updated to reflect international trade practices.

Incoterms terms are divided into two main groups:

• First group applies to all modes of transport, including EXW, FCA, CPT, CIP, DAP, DPU and DDP.
• Second group applicable to sea and inland waterway transport, including FAS, FOB, CFR and CIF.

Understanding the Incoterms groups and the meaning of each clause is very important to apply them correctly and effectively in sales contracts.

Incoterms terms

Each Incoterms clause has a separate meaning, specifying the responsibilities of the parties in the contract. Incoterms 2020 terms include:

• EXW (Ex Works): The seller delivers the goods at his location, the buyer bears all costs and risks therefrom.
• FCA (Free Carrier): The seller delivers the goods to the carrier at the named place, risk passing there.
• CPT (Carriage Paid To): The seller pays freight to destination, risk passes when the goods are delivered to the carrier.
• CIP (Carriage and Insurance Paid To): Similar to CPT, but the seller must buy insurance for the goods.
• DAP (Delivered at Place): The seller delivers the goods at the named destination, ready for unloading.
• DPU (Delivered at Place Unloaded): The seller delivers and unloads the goods at the named destination.
• DDP (Delivered Duty Paid): The seller bears all costs and risks, including taxes and import fees.
• FAS (Free Alongside Ship): The seller delivers the goods alongside the vessel at the named port of shipment.
• FOB (Free On Board): The seller delivers the goods on board the vessel at the port of loading, risk transfers there.
• CFR (Cost and Freight): The seller pays freight to the port of destination, risk transfers when the goods are on board the ship.
• CIF (Cost, Insurance and Freight): Similar to CFR, but the seller must purchase insurance for the goods.

Accordingly:

EXW (Ex Works) is a term where the seller has the least responsibility, only needing to deliver the goods at the specified location.

DDP (Delivered Duty Paid) is the term in which the seller has the most responsibility, including delivery to the final destination and import customs clearance.

Sea transport group Incoterms terms such as FOB (Free On Board), CIF (Cost, Insurance and Freight) are often used in shipping goods by container.

Multimodal transport group Incoterms terms such as FCA (Free Carrier), CIP (Carriage and Insurance Paid to) are suitable for transporting goods by many different modes of transport.

Choosing the right Incoterms term depends on many factors, including the mode of transport, the parties’ desired level of control, and the specific commercial arrangements.

Choose the appropriate Incoterms terms

Choosing the appropriate Incoterms terms is a key factor to protect customers’ interests in international transactions. This requires careful consideration of key factors, including: mode of transport, delivery location, shipping costs, insurance and customs procedures.

1. Mode of transport:

• Sea transport: CIF and CFR are popular choices. CIF is suitable when the buyer wants the seller to handle insurance, CFR is suitable when the buyer purchases insurance himself.
• Air transport: CPT and CIP are commonly used. CIP includes insurance, CPT does not.
• Multimodal transport: FCA, DAP, DPU are suitable for transport combining many types.
• On-site delivery: EXW is for buyers to ship themselves, DDP is for sellers to be responsible to the end.

2. Delivery location:

• Sea port: FAS, FOB, CFR, CIF apply for port delivery.
• Domestic locations: EXW, FCA, CPT, CIP, DAP, DPU, DDP apply to deliveries at warehouses, factories, or other locations within the interior of the exporting or importing country.

3. Expense:

• Seller bears: DDP covers all costs. For other terms, the seller bears the costs up to the point of transfer of responsibility according to the provisions of each Incoterms clause.
• Buyer bears: EXW buyer bears all costs. For other terms, the buyer bears the costs from the point of transfer of responsibility according to the provisions of each Incoterms clause.

4. Insurance:

• Seller buys: CIF and CIP require the seller to purchase minimum insurance for the goods.
• Buyer buys: For other terms, the buyer decides whether to buy insurance or not and the desired level of insurance.

5. Customs procedures:

• Sellers do: DDP requires the seller to carry out export customs procedures in the exporting country and import customs procedures in the importing country.
• Buyers do: EXW requires buyers to complete export procedures. Other terms and division of responsibilities depend on specific terms.

For example:

• Vietnamese enterprises export rice to Japan by sea: You should choose CIF if you want insurance included, or CFR if you buy insurance yourself.
• Vietnamese enterprises import machinery from Germany by air: You can choose CIP if you want the seller to buy insurance or CPT if you buy insurance yourself.
• Vietnamese enterprises buy raw materials from domestic suppliers: You can choose FCA if you want to receive the goods at the seller’s warehouse, or DAP if you want the seller to deliver the goods to the factory.

Choosing the right Incoterms helps optimize costs, allocate costs reasonably between buyer and seller, minimize the risk of damage and loss of goods while avoiding complicated procedures and unnecessary disputes.

Customers need to carefully analyze the above factors to choose the Incoterms terms that best suit the specific needs and conditions of each transaction.

Consulting on application of Incoterms in international goods sales contracts

Long Phan Consulting Company provides in-depth consulting services on applying Incoterms in international goods sales contracts. With an experienced team, knowledgeable about international trade law and business practices, we will support customers:

• Choose the most suitable Incoterms terms for each specific transaction.
• Draft and review sales contracts, ensuring accuracy and clarity in the use of Incoterms.
• Advise on the responsibilities, costs and risks of the parties according to each Incoterms clause.
• Support in resolving disputes related to the application of Incoterms.

Long Phan is committed to accompanying customers, providing professional and effective consulting services, helping customers feel secure in their international business activities.

Frequently asked questions about the application of Incoterms in international goods sales contracts

Below are some common questions about Incoterms that we receive during the consultation process:

Are Incoterms a mandatory international law?

Incoterms are not laws but a set of voluntary rules. The parties can choose to apply or not apply in their contract.

What is the latest version of Incoterms today?

The latest version of Incoterms today is Incoterms 2020.

Which Incoterms terms are most suitable for shipping goods by sea containers?

FOB, CIF, CFR are Incoterms terms commonly used for shipping goods by sea containers.

When using the EXW clause, who is responsible for carrying out export customs procedures?

When using the EXW term, the buyer is responsible for completing export customs procedures.

What does the DDP clause mean for the seller’s liability?

DDP is the term in which the seller has the highest responsibility, must deliver the goods to the buyer’s location and bear all costs and risks, including taxes and import fees.

What is the main difference between CPT and CIP?

The main difference between CPT and CIP is that CIP requires the seller to insure the goods, while CPT does not.

How to choose the most suitable Incoterms term for my transaction?

Choosing the most appropriate Incoterms term depends on many factors, including the mode of transport, the desired level of risk, and the agreement between buyer and seller.

Who is responsible for unloading when using DAP terms?

When using DAP terms, the seller is responsible for delivering the goods to the named place but does not include unloading.

Does the FCA clause apply to sea transport?

FCA provisions may apply to sea transport, especially where the goods are delivered to the carrier at an inland location before being loaded onto the vessel.

Is it possible to change Incoterms after the contract has been signed?

Incoterms terms can be changed after the contract has been signed if both parties agree and sign a contract addendum.

Conclude:

Applying Incoterms in international goods sales contracts is necessary to ensure rights and minimize risks for parties involved in the transaction. For detailed advice on Incoterms and how to apply, please contact Long Phan via the hotline 0906735386.