Legal Definitions - Incoterm

An Incoterm, short for International Commercial Term, is a globally recognized standard set of rules published by the International Chamber of Commerce (ICC). These terms are used in international trade contracts to clearly define the responsibilities of buyers and sellers for the delivery of goods. Essentially, an Incoterm specifies:

• Which party is responsible for paying for and managing various tasks, such as transport, insurance, and customs clearance.
• The exact point at which the risk of loss or damage to the goods transfers from the seller to the buyer.
• The location where the goods are considered to have been delivered.

By choosing a specific Incoterm, both parties in an international transaction gain clarity and avoid misunderstandings regarding costs, risks, and obligations throughout the shipping process.

Examples of Incoterms in Practice:

• Scenario 1: Importing Luxury Goods

  A high-end fashion boutique in Paris orders a new collection of designer handbags from a manufacturer in Italy. They agree to use the Incoterm "FOB (Free On Board) Genoa Port." This means the Italian manufacturer is responsible for getting the handbags to the port of Genoa and loading them onto the designated ship. Once the goods are safely on board, the risk of damage or loss, along with the cost of ocean freight and insurance to Paris, transfers to the French boutique. If the ship encounters a storm and the handbags are damaged at sea, the boutique, not the manufacturer, would bear that financial risk and would need to file a claim with their insurer.

  This example illustrates how an Incoterm precisely defines the point of delivery and the transfer of risk and cost responsibilities between the seller and buyer in an international shipment.

• Scenario 2: Exporting Industrial Machinery

  A German company sells specialized industrial machinery to a factory in Brazil. They agree on the Incoterm "DDP (Delivered Duty Paid) São Paulo." Under this agreement, the German seller is responsible for almost everything: arranging and paying for the entire transport to the Brazilian factory, including all shipping costs, insurance, and even clearing the goods through Brazilian customs and paying any import duties and taxes. The machinery is only considered delivered when it arrives at the buyer's factory in São Paulo, ready for unloading.

  This demonstrates how an Incoterm can place maximum responsibility on the seller, ensuring the buyer receives the goods with all import formalities handled, simplifying the process for the importing party.

• Scenario 3: Selling Raw Materials

  A mining company in Australia sells a large shipment of iron ore to a steel mill in China. They opt for the Incoterm "EXW (Ex Works) Mine Site, Western Australia." With this term, the Australian mining company's only responsibility is to make the iron ore available at their mine site. The Chinese steel mill is then responsible for arranging all transportation from the mine, loading the ore, paying for all freight, insurance, and handling all export and import customs procedures and costs. The risk transfers to the buyer as soon as the ore is made available at the mine.

  This example highlights an Incoterm that places minimal responsibility on the seller, requiring the buyer to manage almost the entire logistics chain from the seller's premises.