Global trade can be tricky due to language and trading practices, ultimately leading to disputes between importers and exporters. The Fruit and Vegetable Dispute Resolution Corporation (DRC) has encountered importers and exporters unfamiliar with Incoterms®, or if they were familiar, they did not understand how to use them correctly.
What are Incoterms, and why are they important for international trade?
International commercial terms (Incoterms) provide a universal set of rules and guidelines that help facilitate a successful trade. The International Chamber of Commerce (ICC) published Incoterms to set clear-cut rules outlining how sellers and buyers should conduct themselves during the trading process.
Incoterms are used in many ways to facilitate a smooth and easy trade. Of primary importance, each term clarifies the tasks, costs, and risks to be adopted by buyers and sellers in these transactions. Incoterms also clarify each party's financial and legal responsibilities.
Some things the buyer or seller might be responsible for based on the Incoterms they use include:
- Proper documentation
- Customs clearance
- Shipping costs
- Risk of Transit
Incoterms Insurance and the DRC
While it is important to understand that the Incoterms are part of the contract, they are not in themselves a contract of sale. Incoterms do not deal with whether the other conditions of the contract are met or not or the law of dispute resolution in the event of a breach of contract.
Unless otherwise agreed, DRC members must follow DRC's Trading Standards, Transportation Standards, and other guidelines. Therefore, regardless of their Incoterms insurance obligations, a member must first prove a breach of contract following DRC's Operating Rules or the written contract before applying for the insurance.
"When using the Cost Insurance and Freight (CIF) Incoterms, the seller must obtain cargo insurance with the buyer as the beneficiary and share that policy with the buyer," says Jaime Bustamante, Director of Trading Assistance for the DRC. "In the event of a maritime transportation claim, the risk of transit under this term falls with the buyer. It is up to the buyer to invoke the insurance to make the proper claim against the shipping line. If the insurance doesn't have the buyer as the beneficiary, it may jeopardize the payment of the transaction," Bustamante said.
The DRC strongly recommends that when negotiating a transaction with a product shipped by maritime transportation, both parties dedicate some time to discuss the Incoterms. Transparency and agreements are essential in establishing the rights and responsibilities of all parties.
Who can become a member?
"Anyone who grows, buys, sells, brokers, or provides transportation services for produce could be a DRC member to reduce financial risk and improve profitability," said Bustamante. The DRC's jurisdiction extends to disputes between members who are party to transactions entered into commerce in North America. "Recognized internationally, we offer cost-effective dispute resolution services. We provide our members with consultation, mediation, and arbitration services." In addition, the DRC collaborates with industry associations and governments to improve legislation, formulate best practices, and ensure a fair playing field for all participants.