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.

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.