COMMERCIAL TERMS GOVERNING THE INTERNATIONAL TRADE
Intro
International Trade can be quite a complex and daunting process to go through, especially when you are a new manufacturer; entrepreneur that is new to international trading, or simply a start-up trader, who just wants to get their products or stock to the customers, wherever they may be located.
To top it all off, unlike local sale transactions, international trades have quite a number of intermediaries involved, including SmooLink Forwarding (Pty) Ltd as your Clearing and Forwarding Agent, responsible for facilitating the arrangement and management of international transport from origin to destination, clearing your shipment into country of destination and finally ensuring your shipment is safely delivered to your specified delivery address. There are many other professionals involved in the supply chain, including, shipping line, port and customs control officials, to name a few, as well as your trade partner’s own clearing and Forwarding Agent.
All professionals in the supply chain or shipping industry, have to comply with international shipping laws, customs, as well as country ports regulations, and shipping line policies, which are also influenced by port and terminals’ protocols. Our actions or scope of responsibilities or involvement with your shipment is also guided by the Incoterms, which is a critical term in the contract of sale, which the primary parties (i.e. Exporter and Importer) essentially agreed on.
So what is the Incoterms?
The purpose of this Blog is shed the light on the fundamentals of the Incoterms and why every professional in the shipping industry will ask you “what your incoterm is, for your sale transaction.” You see, the answer to that question becomes the guiding map for every industry professional like SmooLink Forwarding (Pty), that will be involved with your shipment from origin to destination, after your contract of sale has been confirmed or agreed upon, between yourself and your Buyer or Supplier.
Incoterms defined:
Incoterms also referred to as the International Commercial Terms, are a set of rules that govern international sales contracts. To quickly wrap our heads around it, one should think of them as terms and conditions of a contract. These rules contain a set of eleven criterions under which a shipment may be delivered. They are pre-defined by the International Chamber of Commerce (ICC) and every Trader is expected to refer to them, to avoid confusion and dealing in poor faith by one party to the other.
Incoterms outline the responsibilities of each party in a sale contract – i.e the Consignor and the Consignee, by clearly listing who between the parties is responsible for
arranging and handling which tasks,
who pays for what and up to how far the liable party pays,
at which point does the risk transfer from the Consignor over to the Consignee,
stipulates the point at which the liable party should arrange marine insurance cover for the consignment being shipped, and
lastly, incoterms stipulate at which point does the consignor hand over the delivery over to the Consignee.
Incoterms also dictate the manner of delivery, such as whether the Transporter must offload the cargo, upon arrival at place, or whether the Consignee will offload / handle the cargo themselves, after arrival at place.
Incoterms are therefore categories of rules which are very important to know and understand, as each category has money, risk and certain activities / tasks attached to them. And as mentioned earlier on, Incoterms are a guiding map or manual that all professionals in the shipping industry, along with Governing bodies refer to, in order to handle or facilitate transport, clearance release and delivery. Thus, even though you have a business and trust Freight Forwarders to handle all your shipping affairs, it is also advisable, for Traders to be aware of these, and the implications of each, since the process essentially starts with them.
It should also be noted that there are numerous sets of incoterms, which are revised from time to time (or rather, every decade) by the international chamber of commerce, to accommodate changes and developments in international trades. In this blog we will mention the latest two only, which are: Incoterms 2010 and Incoterms 2020, which shippers may use alternatingly at their discretion. Therefore, when concluding your contract of sale, it is very important, as well as expected - for you to specify which year of Incoterms are you contracting under. For example, it should be stated as CIP terms of 2010 incoterms.
The reason we advise Shippers to specify which year of incoterms they are contracting under is that, while some Traders care to only memorize the acronyms and the definition attached to each, they usually overlook the gravity of not specifying the year. For example: CIP, which stands for “Carriage and Insurance Paid to,” has more financial liability for incoterm 2020, than CIP 2010.
The 2010 CIP terms, instruct that the Consignor is only responsible for arranging a minimum marine insurance cover, while CIP 2020 terms, state that the Consignor is responsible for arranging maximum marine insurance cover.
Now imagine, if you are a seller and you wished to pay for a minimum insurance cover, but failed to specify the year of incoterms on your contract, only to find that your customer expected maximum insurance cover; a dispute is raised against you and the court rules that the incoterm applicable will default to the latest year of incoterms publication relevant to the date upon which the contract was concluded, and you lose money you had not budgeted for. This way, please be specific and clear, to avoid costly oversights.
Some will have expected that, since there is incoterms 2020, then the incoterms 2010 and all former incoterms, naturally fall away, by virtue of succession by the later publication, i.e. incoterm 2020. However, this is not the case. According to the official site of the International Trade Administration, in America, “all contracts using any incoterms are valid if they are agreed upon by all parties to the transaction, and correctly identified on the export-related documents.” It is further stated that contracting parties are free to use any version of incoterms even after 2020, except – the year of incoterm needs to be clearly specified on your contract, to avoid confusion and conflicts. You can read further on what the American International Trade Administrator says regarding incoterms, on the following link: Know Your Incoterms (https://www.trade.gov/know-your-incoterms)
For a list of eleven incoterms, as published in the year 2020