What are the risks of using the wrong Incoterm in a contract? (2024)

One of the main risks of using the wrong Incoterm is that it can lead to costly disputes between the parties. For example, if you use EXW (Ex Works), you are only responsible for making the goods available at your premises. The buyer has to arrange and pay for everything else, including loading, transport, insurance, and customs. However, if the buyer expects you to load the goods or provide some assistance, and you refuse, this can cause a conflict. Similarly, if you use DDP (Delivered Duty Paid), you have to pay for all the costs and risks until the goods reach the final destination. But if the buyer delays the customs clearance or rejects the goods, you may incur additional expenses and liabilities. To avoid these situations, you should always clarify the expectations and obligations of each party before signing the contract.

Another risk of using the wrong Incoterm is that it can result in a loss of control over the shipment. For example, if you use FOB (Free On Board), you transfer the risk and cost to the buyer once the goods are on board the vessel. However, you may not have any visibility or influence over the transport mode, route, carrier, or schedule that the buyer chooses. This can affect your delivery time, customer satisfaction, and reputation. On the other hand, if you use CIP (Carriage and Insurance Paid To), you have to arrange and pay for the transport and insurance until the agreed destination. However, you may not have any control over the insurance coverage, terms, or claims that the buyer requires. This can expose you to unexpected risks and losses. To avoid these problems, you should always select the Incoterm that gives you the optimal level of control over the shipment.

A third risk of using the wrong Incoterm is that it can create legal complications in case of disputes or claims. For example, if you use CIF (Cost, Insurance, and Freight), you have to provide the buyer with a document that proves that you have paid for the transport and insurance. However, this document may not be sufficient to transfer the ownership or title of the goods to the buyer. The buyer may need to obtain a bill of lading or a letter of credit from the carrier or the bank. However, if you do not have access to these documents, or if they are inconsistent with the contract, this can cause delays or disputes. Similarly, if you use DAP (Delivered At Place), you have to deliver the goods to the agreed place, but not unload them. However, this may not comply with the local laws or regulations that require you to unload the goods or provide some documentation. This can result in fines or penalties. To avoid these issues, you should always check the legal requirements and implications of the Incoterm you use.

A final risk of using the wrong Incoterm is that it can reduce your competitiveness in the market. For example, if you use FCA (Free Carrier), you have to deliver the goods to the carrier nominated by the buyer at a specified location. However, this may not be convenient or efficient for you, as you may have to incur extra costs or delays. You may also lose the opportunity to negotiate better rates or terms with the carrier. On the other hand, if you use CFR (Cost and Freight), you have to pay for the transport to the destination port, but not the insurance. However, this may not be attractive or secure for the buyer, as they may have to bear the risk or cost of any damage or loss during the transit. You may also lose the chance to offer a more comprehensive or competitive service to the buyer. To avoid these drawbacks, you should always choose the Incoterm that suits your business goals and capabilities.

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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