Page 48 - DMGT546_INTERNATIONAL_TRADE_PROCEDURE_AND_DOCUMENTATION

Unit 2: Methods of Payment and Incoterms

Choosing an Incoterm for International Trade Deal Notes

There are certain precautions to be taken in the use of incoterms.
1. Name/place handover along with shipping term: The exporter and importer while signing
the international sales contract shall take care to mention the name of place; where the
goods are to be handed over to the importer or his authorized carriage. For example; if it
is a free on board (FOB) incoterm and the place of handover of goods is Bombay; it shall be
mentioned as FOB Bombay in the international sales contract. It is to be noted that all
incoterms are abbreviated in three letters, to be written in capital letters in the international
sales contract.
2. Clear mention of incoterms edition: The exporter and importer shall also take care regarding
the mentioning of a particular edition of incoterms while quoting incoterm in the sales
contract and contract of carriage. For example, for FOB incoterms; it shall also be mentioned
that it is a 2000 version of incoterms and shall be quoted as FOB 2000 Bombay. As per the
International Chamber of Commerce, the “INCOTERMS shall not apply unless the
particular edition of a shipping term is not incorporated into the international sales contract
by clearly mentioning that this particular shipment is governed by INCOTERMS-2000”.
3. Clarity in soul and spirit of incoterms used: There has to be clarity in the use of incoterms.
For example, if the agreed incoterm is EXW and it was also decided that the exporter shall
bear the expenses for the loading of cargo to importer’s carriage/vehicle and the place of
loading is Kolkata, it shall be mentioned as “EXW, Kolkata loaded on truck” in the
international sales contract, which is to be agreed upon and signed between the exporter
and importer. The same shall also be entered in the contact of carriage between contracting
parties.

4. Understanding the cost, responsibilities and obligations aspects: Another important point
to be considered is with respect to the cost, obligations and responsibilities of the exporter
and importer. For example, the shipping terms CFR and DES have the same point of
transfer of cost between the exporter and importer but the fundamental difference to be
considered is that CFR is used for the port of shipment and DES is used for Port of
Destination. Therefore, the risks, obligations and responsibilities of the exporter shall be
higher in case of DES as compared to those of the importer.
5. Avoid risky incoterms: Some incoterms are very risky for exporters, such as DEQ, DDP,
DDU and DES, while others such as EXW, FAS, FCA, are risky for importers. What is
required for the exporter and importer is that they should trade-off and chose an incoterm
whereby their costs, risks, obligations and responsibilities are distributed in an equitable
manner and would be acceptable to both exporter and importer.
6. Same incoterm not suitable for each importer: The exporter should understand that the
same incoterm might not be suitable for each importer. Both exporter and importer need
to discuss, appraise and agree, keeping in mind the prevailing circumstances; about the
incoterm to be used in the international sales contract for the benefit of both the parties
and also reduce the cost involved in trade transactions.
7. Understand rules and regulations of importer’s country: The exporter should understand
the rules and regulations of the importer’s country as some countries in the world have
certain laws in place for the use of incoterms. Such countries are usually underdeveloped
countries beset with difficulties of foreign exchange and balance of payments. These
countries have made it mandatory for their importers to ask the exporter to deliver the
goods duty paid. As such countries are trying to control their imports by imposing heavy
import duties, controlling the carriage charges to be a part of their policy. The exporter

LOVELY PROFESSIONAL UNIVERSITY 43