Apparel Exports

Incoterms
In the second article on
International Commercial Terms or
Incoterms 2010, Vasant Kothari
discusses the importance of these
terms and how to choose them. 2010

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the International Commerce Terms,
known as ‘Incoterms’, are the most
commonly accepted terms of sale in
international business. It defines the
responsibilities of the exporter and
buyer in the arrangement of shipments
and transfer of liability involved in their
international sales.

Incoterms are international
rules accepted by governments,
legal authorities and practitioners
worldwide.
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Why Incoterms?
• Incoterms are international rules
accepted by governments, legal
authorities and practitioners
worldwide
• Reduces or removes uncertainties
arising from differing interpretations
of shipping terms in different
countries.
• Reference to a proper Incoterm in a
contract clearly defines each party’s
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When we buy, it tells us:
• If we have to make logistics
arrangements to move the goods
• If we have to make arrangements to
clear goods for export and or import
• What is included in our price
( freight, duties, import/export fees)
• If there is a problem in transit, who
holds the responsibility
When we sell, it tells us:
• How to price our sales transaction
(do we include freight, duties and
taxes in our price?)
• Do we have to export clear the
shipments or do we have to import
clear the shipments?
• Do we have to make the logistics
arrangements?
• What is our responsibility if there is a
problem in transit
Key points to remember
obligations, costs and
risks in the international
transaction and
reduces the risk of legal
complications.
• They can assist in defining
what costs the purchase
price includes (e.g. prepaid
international freight,
prepaid duties, insurance,
etc.), and clarify the risks
and liabilities.
 Incoterms
deals with cost
and risk as a result
of international
delivery.

• Incoterms deals with cost and risk as

a result of international delivery
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• Incoterms has nothing to do with the

following issues
o Title of the goods
o Quality of underlying goods
o Breach of contract
o Transfer of the property right
o Unforeseeable and country. The main reason for this is the commercially. If less favourable terms
unavoidable events desire for local shipping and insurance are offered ( for example, FOB rather
markets to benefit from the importing than DDP) one could lose out on the
industry rather than those of the business. For example, within the EU it
How to choose an exporting country. is a standard practice for goods to be
INCOTERM? sold on a ‘delivered’ basis.
The regulations of the country Standard practices
of the buyer Some countries and areas of the The method of transport used
Certain countries have regulations world may not have regulations There are certain Incoterms, which are
regarding the terms that must be regarding the terms that must be used. only suitable for traditional sea and
used when goods are brought into the However, it may be a normal practice inland waterway carriage.

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 Exporter should also remember that
the same Incoterm may not always be
suitable for the same customer.

Customer service
Although it is essential for the Exporter
to meet the Buyer’s obligations under
the chosen Incoterm, it is equally
important for him to offer competitive
terms. It is unwise for the Exporter to
offer terms that are easy for him, if they
are not suitable for the customer.

Availability of information
It is essential that the Buyer and the
Exporter are able to meet obligations
under the chosen Incoterm. For
example, there may be occasions when
Exporters are unable to obtain an
import license or clear the goods for
import - on these occasions the term
DDP cannot be used. Additionally, it
is important that the Exporter should
be able to obtain good services and
reasonable quotes for the services.
For instance, when exporting to some
remote regions in Russia, it may not
be possible to obtain a quote to the
customer’s premises or to ensure that
the service provided is reliable and that
the goods have arrived. In these cases,
a more appropriate Incoterm should
be used where one can take on lesser
responsibility.

Who chooses the

Incoterm – the Exporter
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or the Buyer?
Often the Incoterm to be used will be
decided by the customer. An enquiry
may be made for ‘the best price, CIF
Perth, for the following goods...’. When
faced with this situation the Exporter
may choose just to quote as requested.
At the other end of the spectrum, the partners negotiation can start from the decides to ‘contract for insurance’, the
Exporter may give a usual export quote beginning of the relationship, but even term used should be changed to CIF.
such as ‘EXW’ or ‘FOB’, especially if in an established trading relationship
they are in a niche market, and leave it is worth checking the terms used, Exporter should also remember that
the customer just to accept the terms perhaps once a year, to ensure that the same Incoterm may not always
as offered. they are still acceptable to both parties be suitable for the same customer. If
and just as importantly, that the terms the usual Incoterm used is FOB, but
However, it can be beneficial to both used are still applicable to the method an urgent consignment of spare parts
the Exporter and the Buyer to negotiate of trading. For example, if the term is needed and sent by air, then an
the terms to be used. With new trading usually quoted is CFR, but exporter alternative, such as FCA, should be used.

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It is essential
that the Buyer and
the Exporter are able
to meet obligations
under the chosen
Incoterm.
Obviously, the customer will usually
have more influence but finding a term
that suits both parties is often a way to
ensure that both the parties know and
understand their obligations and thus
avoid problems later.
Checklist
• What method of transport is to be
used?
• What are the terms currently used?
Who chooses these terms?
• Are there any company policies on
which terms should be used and how
much responsibility should be taken?
• Are there any restrictions on the
term to be used imposed by the
country of importation?
• Are there any commercial norms
in the country with which you are
dealing?
• Discuss the terms to be used with
your trading partner, taking their
point of view into account.
• Ensure that both parties understand
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and can carry out their obligations.
• Ensure that you are able to obtain
enough information to give a quote
for a certain Incoterm.
• Ensure all staff (especially those
involved in sales and marketing)
is properly trained in order to
understand the basic principles
of Incoterms and in particular the
details of the individual Incoterms.
• Incorporate the decided terms into
all relevant commercial paperwork
such as invoices, quotations, terms
and conditions of sale.
• Read Incoterms 2010.
Tips on using Incoterms
• Since it should be possible to use the
trade terms in differing trades and
regions, it is impossible to cover all
obligations with precision.
• It is important then for the
buyer to be very specific about
his requirements and add to the
Incoterms to clarify any doubt.
• For example Ex works (cleared for
export) Incoterms are not ‘cast in
concrete’ and can be tailored to suit
a particular circumstance.
• Wherever possible buyers must avoid
the use of ‘D’ terms as these create
problems.
• These terms put the cargo totally
out of the control of the buyer and
entirely at the mercy of the exporter
• Exporter rules movement and costs.
• Under certain circumstances where
the exporter is supplying Free of
Charge, or warranty parts at their
expense it may warrant ‘D’ Terms.
• Even in these cases confusion reigns
as to who should pay for what and this
should be clearly spelt out – e.g. DDU
(customs cleared, wharfage paid) or
DDP (Vat unpaid)
• In some cases, it may not be possible
to stipulate the exact point, at the time
the contract of sale is entered into. At
this stage reference may just be made
to a ‘range’ (e.g. FOB UK Port or CFR
SA Port).
• When this is the case, the buyer must
stipulate in the contract or indent
that the buyer reserves the right to
stipulate at a later date.
• The buyer is then obligated to do
so in a reasonable time before the
shipment takes place or must bear
the consequences of risk and cost for
failing to do so.
• Failure to stipulate any conditions or
requirements gives the exporter the
right to do so at the buyer’s expense
and risk.
• In most cases, both the parties know
what packaging is required for a
safe carriage, however the required
packing should be specified in the
contract e.g. EXW (Packed for sea
transport, cleared for export).
• Many insurance claims are repudiated
due to ‘insufficient packing’. r