The standardization of commercial international commercial terms ensures that all the parties understand their commitments clearly and avoid making mistakes that cost money or lead to disputes. The International Chamber of Commerce (ICC) has evolved a set of international trade terms or Incoterms as they are called, to govern contracts of sale of goods more transparently and reliably. ICC revises Incoterms periodically, and a new version of Incoterms has been released in 2020. According to ICC, Incoterms 2020 is available in as many as 29 languages. A set of 11 rules define the tasks, costs, and risks that all parties need to assume and also specify the place of delivery of goods, the transfer of risks, identification of responsibility of paying for the carriage and insurance, and the documentation.
Top Advantages of Using Incoterms
The principal advantage of using Incoterms is that all parties involved in international trade and commerce have only one set of rules and regulations to follow. Incoterms encompass a set of commercial terms that sellers, carriers, and buyers can follow to avoid confusion and disputes regarding who is responsible for what. For example, dpu incoterms 2020 puts the responsibility of unloading the goods at the destination on the seller, not the buyer.
You may think that a clearly defined language in a commercial contract will be adequate for defining the responsibilities of each party involved in international trade. However, often, people interpret them differently due to language and cultural barriers. By using Incoterms, you can eliminate inconsistencies in the language by providing the same definition of all the terms used in a trade contract. Since all parties to the agreement understand their rights and responsibilities under the contract, the risk of issues arising during the shipment is reduced.
Facilitates Monetary Gain and Competitive Advantage
Because the basic use of Incoterms is to define the procedural and monetary aspects of international trade and shipping practices, they are essential for ensuring timely and proper payment for goods and services. If the use of Incoterms in the contract is incorrect, it might lead to disputes resulting in one of the parties not accepting the payment in full for goods and services. Disputes are likely to cost all concerned parties heavily and result in financial losses and a lack of competitive advantage that is the basis of all international trade. Also, the lack of standardization of the commercial terms is likely to benefit companies in one country using local terminology over the parties on the other side. The adoption of Incoterms reduces the incidence of unfair trade practices and bribery in international trade and also provides the necessary clarity to all parties so that they can avoid the imposition of fines and penalties.
All parties in international trade contracts must clearly understand the definitions of all the trade terms as failing to do so will lead to problems cropping up at every stage of the trade. These issues are likely to negatively impact delivery schedules, inventory control, costs, and payment schedules, all of which will result in negative customer experience and reputational damage.