How Incoterms 2021 Protect the Rights and Impose Duties/Responsibilities of Importers and Exporters?

Incoterms 2021 (International Commercial Terms) are a set of globally recognized rules that define the responsibilities of buyers (importers) and sellers (exporters) in international trade transactions. Developed and published by the International Chamber of Commerce (ICC), Incoterms determine who is responsible for the costs, risks, and duties related to the transportation and delivery of goods.

Incoterms are updated periodically, and the 2021 revision introduced some important changes from the previous 2010 version. These terms help importers and exporters understand their obligations and clarify the allocation of responsibilities, reducing the chances of disputes and confusion during international transactions.

How Incoterms 2021 Protect the Rights and Impose Duties/Responsibilities of Importers and Exporters?

Incoterms define:

• Who bears the cost (e.g., shipping, insurance, and handling).
• Who is responsible for the risk (e.g., damage or loss of goods),
• At what point the responsibility transfers from the seller to the buyer.

These terms help to clearly establish the rights and duties of each party in the international trade transaction.

Main Components of Incoterms 2021

• Seller's Responsibilities: This refers to the duties of the exporter, including arranging transportation, insurance, customs clearance, and any costs incurred until the goods are delivered.
• Buyer's Responsibilities: This refers to the obligations of the importer, such as paying for the goods, taking delivery, and bearing the risks and costs after the transfer of responsibility.

Incoterms are designed to protect the rights of both importers and exporters by specifying:

1. Who is responsible for each stage of the transportation process.
2. When the risk of damage or loss shifts from the seller to the buyer.
3. Who handles the formalities (like customs clearance) at the origin and destination points.

Categories of Incoterms 2021

Incoterms are classified into two categories based on the mode of transport and the allocation of costs and risks.

1. Terms for Any Mode of Transport (including sea freight and air freight)

• EXW (Ex Works):
  • Seller’s Responsibility: The seller makes the goods available at their premises (or another named place). The seller’s responsibility is minimized, and the buyer assumes all responsibility from the point of origin (including export customs clearance).
  • Buyer’s Responsibility: The buyer is responsible for all transportation costs, risks, insurance, import customs clearance, and duties.
  • Rights and Duties: This term protects the exporter by limiting their responsibilities to making the goods available for pick-up at their premises. The importer bears most of the responsibility, including risk and cost of transportation.
• FOB (Free On Board):
  • Seller’s Responsibility: The seller delivers the goods onto the vessel nominated by the buyer, and the seller is responsible for the costs and risks of loading the goods onto the ship.
  • Buyer’s Responsibility: Once the goods are loaded, the risk transfers to the buyer. The buyer takes responsibility for shipping costs, unloading costs, and import duties upon arrival.
  • Rights and Duties: This term splits the responsibility. The seller must ensure delivery to the port of departure and proper loading, while the buyer assumes risk once goods are loaded onto the ship. Both parties share responsibility for logistics, but the exporter is still responsible for costs up to the point of loading.
• CIF (Cost, Insurance, and Freight):
  • Seller’s Responsibility: The seller arranges and pays for transportation, insurance, and freight up to the destination port. The seller also provides the buyer with the necessary documents (e.g., bill of lading).
  • Buyer’s Responsibility: The buyer assumes responsibility once the goods are delivered to the destination port, including unloading and import clearance.
  • Rights and Duties: Protects the buyer by ensuring the goods are covered by insurance during transport. The seller carries a higher responsibility in terms of transportation costs, including arranging and paying for freight and insurance. The importer assumes risk and duties once the goods arrive at the port.
• DDP (Delivered Duty Paid):
  • Seller’s Responsibility: The seller assumes maximum responsibility, covering all costs and risks involved in delivering goods to the buyer’s specified location, including transportation, insurance, import duties, and customs clearance.
  • Buyer’s Responsibility: The buyer’s responsibility is limited to receiving the goods at the agreed-upon location.
  • Rights and Duties: Protects the importer significantly, as the seller takes on almost all responsibilities and risks. This term imposes substantial obligations on the exporter, who has to arrange for transport and handle all import customs duties, taxes, and other charges at the destination.

2. Terms for Sea and Inland Waterway Transport

• FAS (Free Alongside Ship):
  • Seller’s Responsibility: The seller is responsible for delivering the goods alongside the ship at the port of shipment. The seller is also responsible for export customs clearance.
  • Buyer’s Responsibility: Once the goods are placed alongside the ship, the buyer takes on responsibility for loading, freight, and risk.
  • Rights and Duties: The seller has limited responsibility, ensuring that the goods are available at the port for the buyer’s shipment. The importer must handle the costs and risks from that point onward, including transportation and importation costs.
• CFR (Cost and Freight):
  • Seller’s Responsibility: The seller arranges and pays for the transportation costs to the port of destination but does not bear the risk once the goods are on board.
  • Buyer’s Responsibility: The buyer assumes the risk from the moment the goods are loaded onto the ship. The buyer is also responsible for unloading costs and import duties.
  • Rights and Duties: This protects the exporter by limiting their liability to transportation costs to the destination port. The importer bears the risk once goods are loaded onto the vessel.

Key Changes in Incoterms 2021

While most of the rules remain the same, there were some important updates in Incoterms 2021 that impact the responsibilities of the importer and exporter:

1. FCA (Free Carrier):
   • Change in responsibility for bills of lading: Under Incoterms 2021, if the seller has agreed to deliver goods to a carrier (or another named place), they may be required to arrange for a bill of lading (if required). This is a notable change from Incoterms 2010, where a bill of lading was optional under FCA.
2. DAT (Delivered At Terminal) was replaced by DPU (Delivered at Place Unloaded):
   • The change from DAT (Delivered at Terminal) to DPU (Delivered at Place Unloaded) broadens the scope of delivery options to any place, not just a terminal. The seller is responsible for unloading, and the buyer assumes responsibility after delivery to the agreed-upon place.
3. Insurance Requirements:
   • CIF and CIP now have slightly different insurance obligations. Under CIF, the seller must provide insurance with a minimum level of cover, while under CIP, the seller is required to provide insurance with a higher level of coverage (comparable to ICC A clauses, which cover more risks).

Importers' and Exporters' Rights & Responsibilities Under Incoterms 2021

Rights of the Importer:

1. Protection from Risk: Incoterms specify when the risk transfers from the seller to the buyer. For example, with CIF, the buyer is protected as the seller covers the risk and insurance during transit.
2. Control Over Import Costs: Under terms like DDP, the importer has the right to receive goods at a pre-agreed place with no additional costs beyond the agreed price, as the exporter assumes all risks and responsibilities.
3. Clarity on Customs Duties and Taxes: Incoterms like DDP ensure that the importer doesn't need to worry about handling import taxes and duties, as the exporter covers those costs.

Duties of the Importer:

1. Taking Delivery: The importer must take delivery of goods as per the terms, such as at the destination port (e.g., under FOB or CIF).
2. Clearing Customs at Destination: Unless specified otherwise (like under DDP), the importer must handle import customs clearance and pay applicable duties and taxes.

Rights of the Exporter:

1. Payment for Goods: The exporter has the right to be paid for the goods and to establish terms that cover the cost of goods, transport, and insurance.
2. Limitation of Liability: Under terms like EXW, the exporter is only responsible for making the goods available at their premises, limiting liability to a small part of the transaction.

Duties of the Exporter:

1. Delivery of Goods: The exporter must deliver the goods at the agreed location and time as per the terms of the contract.
2. Export Customs Clearance: The exporter is typically responsible for export customs clearance (unless the terms specify otherwise, like under DDP).

Conclusion

Incoterms 2021 serve to clearly allocate the rights and responsibilities of the importer and exporter in international transactions. By specifying the exact point at which

the risk, cost, and responsibility for the goods shift from one party to another, Incoterms provide legal clarity, reduce the potential for disputes, and ensure that each party's interests are protected. For importers, this means knowing when their liability begins, while for exporters, it means understanding their obligations and minimizing their risks.

These terms help mitigate the uncertainty of international trade and provide a structured framework for negotiating and executing contracts.

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