Top 10 Errors in using Incoterms Rules

In February 2011 we will be posting the top most common mistakes companies make when looking at the International Commercial Terms (Incoterms). These posts will appear at regular intervals on Twitter along with tips on using the new the Incoterms 2010 rules.

Common Mistakes:

1. Some companies think that the Incoterms rules show where title/ownership passes. They do not. Incoterms rules only relate to the physical movement of goods and indicate how costs should be divided and where risk passes. The passing of risk has nothing to do with title.

2. If using the FCA term then a place must be named. FCA can limit the seller's responsibilities at their premises or extend them to the port/airport of departure. Buyer beware because if the term is used without a place named then, if a dispute occurs, the seller can chose the delivery point that best suits their purposes.

3. Sellers quote DDP but don't know how to get the goods into the buyer's country. Under DDP the seller must be the importer overseas which can take months of planning and registering the overseas company with the correct authorities. Lack of care when using DDP can leas to extra costs, risks, delays when tax registrations are not in place and disappointed customers.

4. Buyers accept DDP terms but don't check if their foreign supplier is registered as an importer or has sorted out tax issues. By default this can lead to the buyer being named on the import paperwork and receiving bills for taxes, eg VAT/GST when they have no control over the shipment.

5. Exporters think it is easier to sell ExWorks. The goods are handed over to the buyer's carrier at the seller's premises but then the seller is unable to get evidence of export leading to problems with the tax authorities as, without this evidence, it is viewed as a domestic delivery.

6. Using FOB for containerised freight - this is old fashioned and doesn't fit the modern supply chain operations. One issue is that once goods are in a container the seller doesn't know where damage occurs so the "ship's rail" and loading point if useless. Therefore, by default, has risk to the buyer's premises.

7. CIF/CIP - the only two terms that indicate the goods must be insured - but neither party understands that insurance is taken out by the seller in the buyer's name and that the insurance must be for minimum 110% of the shipment value. Can lead to inadequate or no insurance.

8. Using Group C - CFR and CPT especially - misunderstood. Though the seller pays to the arrival point the seller does not have risk of loss or damage. If buyer doesn't understand this and fails to cover the insurable risk can lead to goods damaged during shipment and no claim allowed.

9. Using DAP (and DDU from the 2000 set) without naming a place. If not limited to the place/port of arrival then the seller could find themselves expected to arrange for the goods to be delivered all the way to the buyer's premises - with the extra cost and risk implications.

10. All of the Incoterms rules must have a place named after the 3-letter term. Leaving this vague causes problems. Example - shipping EU to Australia; term CPT Australia - vague place named so seller can choose the most appropriate delivery point. If wrong place - extra transport costs will be the buyers. Australia is a big country so be specific.

Comment on FOB being used for containerised freight

one of our contacts emailed the following response on Incoterms 2010 which you can also view via linkedin. Remember you can also follow S&H LLP on Twitter

Oh Sandra, how could I resist the opportunity of commenting on this?

1. why should we have extra risk and extra costs?
++You don’t, the risk has always been there because if you contract with your forwarder to pick up the cargo from the seller’s premises then surely you wear the risk from that point too. If you receive damaged LCL cargo how can you determine where that damage occurred, before or after your forwarder took delivery from the seller, before or after consolidation, before or after the container went on board the vessel? Clearly only the first and second are possible to track with any accuracy.

2. why should we try to control a forwarder in another country?
++ Because you do, simply by nominating your forwarder to handle the shipment.

3. why should we change what is working?
++ Incoterms 2010 doesn’t change what is working, they simply encourage you to call it the correct name.

4. why should we renegotiate contracts with freight companies?
++ Who is asking you to? You can negotiate with your seller that the terms are “FCA Seller’s premises, plus inland transport and THC” or “FCA Terminal, plus THC”. That means delivery occurs and risk pass to you when your forwarder takes hold of the goods, but the seller pays costs incurred in his country until the wharf, just like now. The freight cost typically includes stevedoring and loading the container on board.

5. why should we pay storage if the ship is loaded late?
++ why would that incur storage? If your forwarder took hold of the goods earlier than the receiving period for the vessel then you have to deal with why your forwarder didn’t book on an earlier vessel. It’s not the seller’s problem that your forwarder stuffed up.

6. why should we have to get involved in port security issues in another country?
++ You don’t, B10 of FCA clearly indicates that you must help the seller at his expense to arrange any security formalities required to export the goods, and you look after security formalities in your country of import and other countries through which the goods pass.
Bob Ronai • Australia

FCA not FOB for sea freight containers - practical for buyers?

S&H has been doing a lot of training on the Incoterms 2010 set since Sept 2010, mainly to UK businesses but also in the EU and couple of USA businesses. There has been a recurring issue with importers (predominantly retail importers) - they don't want to move from FOB to FCA for their containerised shipments coming to the EU/UK. It can be a hard sell to exporters too - think this is mainly down to the centuries FOB has been around (pre-Incoterms) - but eventually they do see the logic in the delivery point and risk passing once the goods are either loaded in the container at their premises or delivered to the buyer's agent at the port for LCL shipments.

Not so buyers ... why should we have extra risk and extra costs? why should we try to control a forwarder in another country? why should we change what is working? why should we renegotiate contracts with freight companies? why should we pay storage if the ship is loaded late? and a new one .... why should we have to get involved in port security issues in another country. They say the benefits as neglible but the aggravation it will cause costly and risky. These arguments are not new .. FOB hasn't been applicable to containerised freight for decades but a new set brings new debates!

The ICC have said that FOB "is not appropriate" for containerised freight - not that it can't be used; but this was just a legal nicety to allow the use in some small ports around the world that don't operate big container bases. Unfortunately if you weren't on the review committees you won't know that as they didn't make the concerns on using FOB for containerised freight clear. Would love comments.

See also topics on our main blog at: Strong & Herd

DDP shipments - product liability issues

It has been reported that during a recent ICC Masterclass on the Incoterms 2010 set the question of using DDP came up in discussion. We have a list of warnings about using DDP for both a seller and a buyer but this was a new one - product liability. To quote: They did mention that seller's should consider under DDP that as "proper importer" you might have product liability insurance issues in other countries that one might otherwise not be aware of.

Not being lawyers or experienced with product liability, we can see that this is something to consider but do wonder how it would be enforced - ie: product liability being placed in a country outside the authorities normal jurisdiction. How would someone in the buyer's country go about enforcing that product liability matter? We suppose this could work because of the need to be registered as an importer (EORI in the EU). Like lots of contractual things product liability is actually outside the scope of Incoterms.

Other concerns relating to DDP are:
1. Can the seller act as importer in an overseas country? Many countries, including the EU, have a registration system for importers (EU one is called EORI) and import entries must have a valid EORI before they can be made.
2. Paying local taxes, eg VAT - if the seller is not registered for the local tax scheme then, at best, it will take a long time for them to recover their money but normally they will never be able to recover it.
3. DDP named place excluding local taxes (eg VAT) - though this is acceptable under Incoterms 2010 in practice it either means the buyer getting involved in customs issues (which they obviously didn't really want to do or they won't buy DDP) or the seller/ freight company "using" the buyer's VAT/tax ID ... I once heard this called "technically illegal" by a customs officer.
4. Customs duties - for sellers: can you be sure you know the correct amount and recover it from the buyer? for buyers: how do you know the seller is paying the right amount and that you couldn't have used a procedure that meant no duty paid?
5. "Legal importer" - if seller's are not set up in the receiving country and use the buyer's details then the buyer becomes the legal importer and is therefore legally responsible for everything, including errors made on import entries by freight companies they have no control over.

I could go on, but I won't.

Are Incoterms perfect?

It is interesting to consider the point that the Incoterms ® Rules are not intrinsically perfect despite the many revisions that have taken place since 1936. They are certainly a brave and robust attempt to provide an international trade language to define where delivery takes place legally in supply contracts. That is not to say that in the wide and complicated world of international trade there are not some inconsistencies and disagreements as to the interpretation of some elements of individual terms.

The ICC publication ‘The Incoterms 2000 Forum of Experts’ (Publication No. 617) is a transcript of the international forum held in Paris in September 1999 to launch the latest version. It illuminated some of the difficulties of interpretation but in the overview to the publication it stresses that Rules are the perfect illustration of a global standard, elaborated by business to respond to the need of business to provide flexible rules for governing its activity. We hope to receive a similar overview to the new 2010 set.

Terms that businesses appear to struggle with when trying to put them into practical use are ExWorks, FCA, the 4 remaining sea freight terms (FAS, FOB, CFR, CIF)and Group C in general. Why isn't Exworks suitable for international trade? If it isn't suitable why didn't the ICC take it out of the new Incoterms 2010 set? Why must a seller not only be responsible for export customs clearance but also have to pay for it under FCA Seller's Premises? And, how in practice, does a seller pay for export customs clearance when using air express operators such as UPS, TNT, DHL and Fedex who do not split down the costs? Why can't I have goods moving in a sea freight container delivered on board the ship under FOB - why must it be FCA port of departure? Moving away from FOB increases the costs and risks of the buyer?

We could go on. It appears to some that in the new set of Incoterms the ICC are hoping to shape the way international trade uses delivery terms rather than following what the international trading companies actually do. Incoterms Training is essentials and it must be done for the business as a whole not just a couple of logistics people. Incoterms in sales contracts and the use of Incoterms in purchasing departments should be given a higher profile than it appears to have in the majority of businesses.

Would love your comments.