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Incoterms provide a set of international guidelines used to designate the responsible party in trade interactions. They were created to make international trade easier and to provide standardized terms to be used across the board. And while most in the trade industry have had training on Incoterms, they are continually misused, leading to increased costs and risks.
Below is a list of common, yet easily avoidable Incoterms mistakes:
1. Incorrect Modes
Certain Incoterms are specific to certain transportation modes. The terms FAS, FOB, CFR, and CIF are clearly defined for use in sea and inland waterway transport.
Additionally, the four terms, FAS, FOB, CFR and CIF are not appropriate for containerized sea freight. Containerized freight is usually handed over to the carrier in a terminal and not loaded on or placed alongside the vessel immediately. Due to this timing gap, the risk remains with the shipper until the goods are loaded on the vessel, or placed alongside it for FAS. Any and all damage that is done during this time will be the sole responsibility of the shipper.
Tip: Use FCA, CPT, and CIP for containerized freight. When using CPT and CIP the risk of loss will no longer be with the seller once the goods are handed over to the carrier, and when using FCA, the risk is transferred once the agreed upon named place is reached.
2. No Named Place
Failure to use a specific named place can lead to disputes over responsibilities. An example would be if an Incoterm was identified simply as FCA Houston: the city of Houston is a wide ranging area and the lack of a specific address doesn’t narrow down where delivery takes place.
Tip: In order to ensure there is no ambiguity, the proper way would be to use the complete specific address such as FCA Houston 501 Crawford Street.
3. Incoterms Do Not Define Title Transfer
Incoterms only define who has certain obligations between the seller and buyer when delivery of the goods takes place, and which party is responsible for which costs. Incoterms do not define, nor do they imply where title transfer will take place.
Tip: Title transfer will need to be defined separately and specifically in a sales contract.
4. Understanding Customs Responsibilities and Capabilities
While Incoterms will define who has responsibilities for export and import formalities, it is important to remember that in order to properly handle these formalities, a buyer/seller must be set up and able to legally act as the exporter/importer. In EXW shipments the buyer must be able to complete export procedures compliantly in the seller’s country. There is a similar issue when it comes to DAP shipments, where the seller must, in fact, be able to complete import formalities and pay VAT in the buyer’s country.
Tip: Before EXW or DAP is used, ensure that the seller and buyer are set up to properly and can expeditiously complete export and import formalities. If they are not set up and cannot complete these duties then these terms should not be used.
5. Insurance Issues
It is important when using CIP or CIF that the amount of insurance placed on the goods by the seller be adequate. A minimum level of 110% contract value should be insured by the seller, but if a commercial contract calls for a higher level of insurance it would have to be met.
Tip: When using CIP or CIF, consult the commercial contract to verify that the level of insurance provided meets the requirements of the contract.
6. Terminal Handling Charges
Ocean carriers’ processes for issuing terminal handling fees for container movements vary by carrier and trade lane. Sometimes these charges are included in the freight rates and other times they are not. There is usually some confusion as to who is responsible, particularly when C- or D- terms are used. Confusion often leads to delays in the payment of the fees which will lead to demurrage.
Tip: Know your carrier and lanes as well as your trading partners. The buyer and seller should be on the same page as far as who will be responsible for any terminal handling charges, and the responsibilities should be outlined in the commercial contract.
Incoterms exist to make things easier for trading partners, but if they aren’t properly understood by all parties, they can add more confusion to an already hectic process. If you have any questions about Incoterms or any other logistics related questions please contact us at [email protected].
About Allyn International
Allyn International is dedicated to providing high quality, customer centric services and solutions for the global marketplace. Allyn's core products include transportation management, logistics sourcing, freight forwarding, supply chain consulting, tax management and global trade compliance. Allyn clients range from small local businesses to Fortune 500 firms. Allyn conducts business in more than 20 languages and has extensive experience in both developed and emerging markets. Highly trained experts are positioned throughout North America, Europe, and Asia. Allyn’s regional headquarters are strategically located in Fort Myers, FL U.S.A, Shanghai, P.R. China and Prague, Czech Republic. For more information, log on to www.allynintl.com.
