Incoterms® (International Commercial Terms) are the common language of international trade. Despite their importance and the potential consequences misuse may bring, many buyers and sellers remain unaware of how critical they are.
Entering the world of global trade and ocean shipping means understanding your roles and responsibilities when it comes to importing or exporting goods. Here, the Incoterms® are rules that define the terms of trade for the sale of goods all around the world, especially when you’re planning to use ocean freight.
Here are some of the most common mistakes to stay clear of.
1. Using the wrong Incoterms® rule
It seems obvious, but it’s essential! Make sure you know which of the 11 Incoterms® rules is best for your cargo – and don't rely on someone else to tell you. You could end up paying more or opening yourself up to more risk than necessary.
2. Using FOB or CIF for containerised cargo
A common mistake is to use a traditional “sea and inland waterway only” rule such as FOB Incoterms® (Free on Board) or CIF Incoterms® (Cost, Insurance, and Freight) for containerised goods, instead of a rule for “all transport modes”. This exposes the exporter to unnecessary risks. The main risk lies at the port of origin. Under FOB, the risk is officially transferred when the cargo is loaded onboard the vessel. However, it’s common practice for shippers to hand over the cargo to the carrier at the terminal where it awaits to be loaded onto the vessel.
Use FCA (Free Carrier), CPT (Carriage Paid To), and CIP (Carriage and Insurance Paid To), instead of CIF or FOB, as these are the correct alternatives and are meant for containerised freight. For each of these, risk is transferred at the origin when the cargo is handed over to the carrier at the agreed upon location at the origin.
When choosing between CIF versus FOB for shipping, CIF (Cost, Insurance, and Freight) should be used when you have direct access to the vessel for loading, including non-containerised goods. By contrast, FOB (Free on Board) refers to when the risk transfers from the seller to the buyer once the cargo is loaded.
3. Confusing ownership and risk
Incoterms® rules do not regulate the passing of title (ownership) from the seller to the buyer. They only cover the risk during the period of delivery and divide the costs accordingly. Make sure to define in your sales contract when the ownership changes.
4. Using Delivered Duty Paid (DDP) without knowing import regulations
Another common mistake is to use DDP Incoterms® (Delivery Duty Paid) without thinking through whether the seller can undertake all the necessary formalities in the buyer’s country, e.g. paying GST or VAT.
DDP requires the seller to cover the import process costs and duties. This means they need to have import knowledge of the destination – which is different for every country or even for different states within a country. If the seller doesn’t know this, it could lead to added costs or delays. Accordingly, the seller must know specific import regulations.
5. Misunderstandings with CIF and CIP Incoterms®
Under CIF (Cost, Insurance, and Freight) and CIP (Carriage and Insurance Paid To), the seller must provide insurance coverage. When using CIF and CIP Incoterms® rules, the seller arranges insurance in the buyer’s name – and it must cover a minimum of 110% of the total shipment value. Confusion often happens with these Incoterms®, and the cargo may end up without insurance.
Therefore, make sure that you know your responsibilities and those of your partner. We recommend checking whether the insurance coverage is sufficient and matches the requirements of the commercial contract.
6. Not being specific when naming places or destinations
Many people are not aware that Incoterms® rules allow locations to be specified. Failure to specify a full address may cause a dispute as it allows the seller to choose any delivery point within the general location provided. This may not be convenient for the buyer, especially if they must spend extra time and money transferring the cargo to the originally intended final location.
Many Incoterms® rely on an exact place, terminal, port etc., and at these stages, the risk and responsibility change hands. Therefore, it’s crucial to be specific when naming these places or addresses so if something happens, both parties know exactly whose hands the cargo was in, and where the responsibility lies.
7. Not determining who pays the terminal handling charges
Understanding who pays terminal handling charges is especially important for those Incoterms® where the seller is responsible for the cargo beyond the port of shipment. Not determining who is paying the terminal handling charges can be troublesome and cost you extra time and money.
We recommend that you outline who is handling charges in your contract to avoid complications, delays, and unforeseen costs.
Incoterms® and the Incoterms® 2020 logo are trademarks of ICC. Use of these trademarks does not imply association with, approval of or sponsorship by ICC unless specifically stated above. The Incoterms® Rules are protected by copyright owned by ICC. Further information on the Incoterms® Rules may be obtained from the ICC website iccwbo.org.
