Page 38 - Banking Finance June 2021

ARTICLE

2. Simplifies the negotiations involved in different languages, follow different trade practices, adopt
International Commerce: divergent business customs. In 1980, the United Nations
Convention on Contracts for the International Sale of Goods
Buyers across the world want to know the "landed cost" of
("CISG") announced a set of principles which serves as a legal
the goods they wish to buy which is the final price inclusive
of shipping and taxes before they finalize the contract. But framework to international contracts for the sale of goods.
The Incoterms® are in synchronization with the CISG.
the seller may not be able to provide the same as tariffs
Incoterms are generally letters of abbreviations that are
and taxes vary widely throughout the world. But the usage
global and have a universal meaning as to the responsibility
of INCOTERMS® makes it easier to calculate the final cost
of the goods and promotes transparent delivery system. of the parties, terms of sale, point of origin and destination.
When parties decide on a given INCOTERM, they are
implicitly agreeing to a set of obligations; these obligations
3. Ensures common understanding of
are not to be referred to again in the sales contract. Since
Obligations: Incoterms® are not law themselves, they must be written
Incoterms® help in avoiding the confusion created by various into a sales contract in order to be bound to a contract.
interpretations of the rules followed in different countries.
They specify the exporting seller's and importing buyer's Classification of INCOTERMS®:
obligations regarding carriage, risk and costs. They also help
in establishing the basic transport and delivery terms. In prior versions, the rules were divided into four categories,
but the rules in the current version of Incoterms 2020 are
Information from Incoterms®: subdivided into two categories based only on the method
of delivery. The larger group of 7 rules (EXW, FCA, CPT, CIP,
Incoterms® rules when used in international trade
DPU, DAP & DDP) may be used in any contract regardless
transactions basically provide three basic pieces of
of the mode of transport used in fulfilling the sale. While,
information. They are:
the smaller group of 4 rules (FAS, FOB, CFR & CIF) is
1. Transfer of Risk: applicable only in contracts where the transportation of the
Incoterms® define at which place the risks of cargo loss and goods is only through water and the same can be verified
damage is transferred from the seller to buyer during the at the point of loading on board the ship. So, they are
transport operations normally not used for containerized freight, other combined
methods of transport or for transport by road, air or rail.
2. Division of Costs:
Incoterms® provide information about how the costs How to use Incoterms®?
resulting from the transport operations are shared between
Incoterms® are used in International trade contracts in a 3-
the buyer and seller. For eg, Cost of dispatch, carriage & letter format followed by a named place of delivery or
delivery, Customs clearance for export and import, Insurance
etc.

3. Documents:
Incoterms® define who will provide the
required documents in order to complete
the trade transaction like transport
documents, proof of delivery, certificate of
inspection, Insurance etc.

Legal Validity of Incoterms:
Parties, who undertake international
trade transactions normally speak and use Fig 2: Classification of Incoterms®

38 | 2021 | JUNE | BANKING FINANCE