Incoterms are an essential part of any international ocean cargo. It is established by the International Chamber of Commerce or the ICC and sets out clear guidelines that buyers and sellers must execute transactions according to the parts of the transaction identified by each Incoterm.
Incoterms establish rules and responsibilities for both parties that can be used to resolve differences in the event of a dispute. The choice of Incoterm is determined and agreed upon by the buyer and the seller, who not only understand the responsibilities involved with each Incoterm, but also ensure that he/she is able to meet them.
Despite its importance and the potential consequences of misuse, many buyers and sellers are still unaware of some of the key responsibilities of every Incoterm.
In this article, we'll cover the six most common mistakes in Incoterms listed in Incoterms 2010.
1. Containerized goods use FOB
Despite common belief and practice, FOB Incoterm should only be used for non-contained ocean freight. This error is so common that it becomes a misunderstanding that is deeply ingrained in the minds of importers and exporters.
The main risk involved is the port of origin. Under FOB, the risk is formally transferred when the cargo is loaded on board. However, it is common practice for the shipper to hand over the cargo to the carrier at the terminal awaiting loading.
Since the cargo is at the dock, it has not yet been considered on board. Any damage sustained during this period is still technically the shipper's responsibility and the shipper's insurance should cover this part of the process as well.
However, when disputes arise, the shipper can and does often argue that he has done his part. So, in order to avoid hassle, delays and, more importantly, disputes that can lead to a deterioration in the relationship with the supplier, often the result is that the consignee has to bear the cost.
Apart from FOB, FAS, CFR and CIF are also not suitable for containerized cargo due to the above reasons.
2. Do not specify a location
Many people are unaware that Incoterms rules allow specifying locations. In fact, the failure to specify the full address may be controversial, as the ambiguity allows the seller to choose any delivery point he wishes within the general location provided.
This may be inconvenient for the buyer at all, especially if he has to spend extra time and money to transfer the goods to the final location he originally booked.
3. Seller commits to DDP or DAP without checking if he/she can handle import responsibility in buyer country
Under DDP and DAP, the seller is responsible for paying all arrival charges at the destination. With DDP, this includes paying local taxes (eg GST, VAT, etc.) and handling customs clearance at the destination. Note that unlike DDP, DAP does not require upfront customs clearance fees.
The latter requires him to register as an overseas importer in the destination country, a country-dependent process that can require a lengthy and lengthy program.
4. Buyer uses EXW regardless of his/her influence in the export process
This is similar to the role-reversal point of view mentioned earlier. Under EXW, the seller's responsibility is minimal and ultimately ends with the correct packaging of the item.
From then on, the buyer is responsible for export procedures from the country of origin and any necessary communication with the exporting authorities. For the buyer, it may not be that simple, especially if he/she is not familiar with the export process in the country of origin. In some cases, the seller may be required to participate.
5. Using CIP or CIF without checking that insurance coverage is adequate and complies with commercial contract requirements
According to CIP and CIF Incoterms, sellers are obliged to insure the goods. According to Incoterms rules, only minimum coverage (110% of contract value) is required.
However, depending on the conditions of the contract of sale, this may be insufficient and insufficient for the item being shipped. This amount needs to be met if the commercial contract requires more coverage.
6. Failure to align Incoterm with the bank's payment security requirements
This applies to international payment methods, such as letters of credit, whose secure and reliable nature suggests a lack of complete trust between buyers and sellers.
For letters of credit, payment can only be made after submitting the required documents to the bank to demonstrate that the trading conditions have been met.
