Incoterms: 5 Errors to avoid

Although Incoterms are not mandatory, they can play an important role in international transactions. Incoterms are a set of rules which define the responsibilities of sellers and buyers for the delivery of goods under sales contracts. They are published by the International Chamber of Commerce (ICC) and are widely used in commercial transactions.

When global companies enter into contracts to buy and sell goods they are free to negotiate specific terms. The Incoterms (international commercial terms) determine who pays the cost of each transaction segment, who is responsible for the loading and unloading of goods, and who bears the risk of loss at any given point during an international shipment.  To gain more clarity on the different types of Incoterms, we’ve prepared an easy-to-understand manual which provides a broad overview of the definitions and risks involved when using Incoterms. You can read it here.

There are 5 common errors that people make when using certain incoterms:

1). Incoterms: Buyers and Sellers confused about ownership and risk

Most people think that Incoterms rules refer to the passing of title/ownership, when in fact it refers to the passing of risk and the dividing of costs during the physical movement of goods.

2). FCA (free carrier) – Neglecting to mention a place

If using the FCA term then a place must be named. The FCA Incoterm means that the seller is responsible for the cost and risk of the cargo up until the named place. This can be at the seller’s premises or extend to the port/airport of departure. However, if no place has been mentioned, and a dispute occurs, then the seller can choose the delivery point that best suits their purpose.

3). DDP (delivered duty paid) – Sellers lack knowledge about getting goods into the buyer’s country

Some sellers quote DDP without the adequate knowledge to get goods, cleared through customs, to the buyer’s address. Under DDP it is the seller’s responsibility to handle the customs clearance, pay the import duties and arrange local delivery at the named place. Without the necessary skills or care, DDP can lead to extra costs, risks, delays due to customs hold-ups or problems with local transport companies. Also, some buyers do not confirm whether a seller is registered as an importer in the buyer’s country. By default this can lead to the buyer being named on the import paperwork and receiving bills for taxes, when they have no control over the shipment.

4). FOB (free on board) – Seller doesn’t know where damage occurs, which puts buyer at risk

FOB requires the seller to hold the risk for the goods up until it’s loaded on the transportation vessel. Using FOB for containerized freight doesn’t fit the modern supply chain operations. Goods are often loaded into containers long before they are loaded onto the ship. One issue with that is, once goods are in a container, the seller doesn’t know where damage occurs. This might create a risk for the buyer, because as soon as the goods are loaded unto the ship and cleared by exports, the buyer bears all costs of damage.

5). CIF (cost of insurance freight) / CIP (carriage and insurance paid to) – Neither parties understand insurance

CIF/CIP – the only two terms that indicate the goods must be insured – but it is common that neither party understands that insurance is taken out by the seller in the buyer’s name and that the insurance must be for a minimum of 110% of the shipment value. This can lead to inadequate or no insurance.

For more information on Incoterms, Trade Logistics will be presenting a 1 Day Training course on Monday, 30 March 2015 in Johannesburg. To book or to view the rest of our training schedule contact us. For more details please contact Trade Logistics here.

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