Incoterms applied to the Maritime Sector

Terms governing International Maritime Trade

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Incoterms and Maritime Trade

Before starting any project involving the international transport of goods, it is necessary to know certain terms and procedures that must be carried out to always remain within the legal framework and ensure that imports and exports are carried out without any setbacks. One of the aspects that usually generates more doubts and that should always be taken into account in international trade are the incoterms (international commercial terms or international terms of trade).

Incoterms are a group of commercial terms (three letters each) used in international transactions to clarify costs and determine the commercial clauses included in a sales contract.

These terms were created in 1936 by the International Chamber of Commerce (ICC) under the name Incoterms 1936, although over time they have been adapted to the various changes in commercial practices until reaching the current Incoterms 2020, which came into force on January 1, 2011.

However, this update does not mean that all Incoterms belonging to previous versions are no longer in use. Therefore, it is necessary to always specify the incoterm together with the year of the corresponding version in order to avoid confusion.

Importance

The main purpose of incoterms is to establish the criteria for the distribution of costs and the transfer of risks between buyer and seller in the contract of an international commercial transaction.

It is important to emphasize that these terms are not a legal scheme of mandatory compliance. Rather, they are a set of standardized conditions accepted by both buyer and seller. Thanks to this standardization, both parties are aware at all times of the requirements to which they must adhere.

Basically, they regulate four fundamental aspects of an international sales contract: delivery of goods, transfer of risks, sharing of costs, customs formalities.

The types of Incoterms 2020 most commonly used in maritime transport are the following:

Group F (Indirect Delivery).

The seller disposes the goods to a carrier selected and paid by the buyer. Incoterms of this type are:

FCA (Free Carrier): the seller delivers the goods at an agreed place assuming the risks and expenses, including the costs of customs clearance for export. The buyer is responsible from loading to final unloading.  The buyer can ask the carrier to issue a B/L (Bill of Landing or Bill of Lading) to the seller under the specification “on board” to justify the delivery of the goods. This facilitates the procedure with the documentary credits and the payment of the credit to the exporter.

FAS (Free Alongside Ship): Used in maritime transport for bulk cargoes or cargoes with a very large volume. The seller transmits the goods at the dock or port of shipment agreed next to the vessel on which the goods will travel. At that moment, the importer incurs all costs and damages.

FOB (Free On Board): The FOB Incoterm, establishes that the seller provides the goods on the vessel established assuming all responsibility. Then, the buyer is responsible for everything until their arrival at the final destination.

Group C (Indirect Delivery).

The seller hires the vehicle to transport the goods. However, the exporter is exempted from any liability for damage or additional costs from the time of departure.

CFR (Cost and Freight) the selling party is responsible for the cost until the goods arrive at their destination. However, when the goods are loaded on the ship, the risk becomes the responsibility of the buyer.

CIF (Cost, Insurance and Freight): meets the same parameters as the CFR but with the addition that the seller must take out insurance.

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