5 Common Incoterm Mistakes to Avoid
Incoterms are a set of internationally recognized rules that clearly define the responsibilities attached to the sellers and buyers. The International Chamber of Commerce (ICC) established incoterms to ensure each party performs their responsibility as determined by the incoterm. These incoterms encompass the payment and management of multiple aspects of international trade, such as documentation, shipment, customs clearance, logistical activities, and insurance.
These incoterms enable dispute resolution in the case of any disagreement or failure to comply by either party. Once an incoterm is chosen, both the importer and the exporter should understand and agree upon it. Be it FCA incoterms, DDP incoterms, FOB incoterms, or any other, each party should be able to fulfil the responsibility associated with them.
It is important to be aware of the key responsibilities of each incoterm and not commit common mistakes that could have adverse consequences.
Do not choose the FOB incoterm for containerized cargo
The FOB Incoterm should be used exclusively for non-containerized shipments. However, traders commonly misused the term that importers and exporters choose FOB without thinking it through. FOB means that the seller is free of any responsibility once the cargo is loaded. The main risk in this scenario arises at the port of origin.
So, what ends up happening is that the exporter ends up handing over the cargo to the carrier, who needs to load it onto the vessel. The seller feels their responsibility ends here as they have brought the goods to the carrier at the terminal. However, this is not the same as onboarding the cargo. Technically while the cargo sits there, it is still under the purview of the seller – so any damage that takes place during this time is on the seller. Therefore, the insurance should ideally cover this portion of the process.
Should a dispute arises, the shipper weans himself from the responsibility by saying he has done his bit. But the consignee is left to bear the brunt to prevent further delays to protect the vendor relationship.
As is the case for FOB, for the same reasons, FAS, CFR and CIF are not ideal incoterms for containerized cargo. One should select CPT, CIP, or FCA incoterms since they help transfer the risk at the origin when the cargo is handed to the carrier.
Specify the entire location
Many traders are unaware that Incoterm rules require the mentioning of specific locations. The failure to be specific about the address may lead to ambiguity as the seller can choose any area within the region to deliver. Transferring the cargo from the drop-off location may not be feasible or potentially very inconvenient for the buyer. Furthermore, the seller would waste additional time and cost to transfer the cargo to the final location.
For instance, the use of FCA Delhi as the incoterm should be discouraged due to ambiguity. The reasoning is because "FCA Delhi" could mean delivery within any part of Delhi that is agreed upon – whatever the seller finds the most convenient. You may realize this issue halfway through the process and decide to make changes. However, it would help if you kept in mind that a 'Change of destination' request is quite costly. Hence, we encourage you to always ask for the exact location and postal code.
As a seller, do not commit to DDP or DAP if you cannot handle the import responsibilities in the buyer’s country.
Under the DDP and DAP incoterms, the responsibility for arrival expenses such as local taxes, duties – GST, VAT, etc., and customs clearance falls on the seller. However, it can pose a problem to both the buyer and the seller. DAP doesn’t have a prepaid option for customs clearance. At the same time, the seller needs to register as an overseas importer in the receiving country to handle these formalities.
Depending on the country, the process can be lengthy and tedious, so a local consignee is preferred to carry out these formalities. There is also another catch here, under DDP, the consignee is not legally bound to do so. Hence, any failure will put the responsibility back onto the seller.
As a result, the buyers could potentially see a delay in the shipment received due to lengthy and drawn-out formality processes. Hence, the buyer should make sure that the seller is listed as a foreign importer.
Do not use CIP or CIF unless the insurance coverage is sufficient.
As per the CIP and CIF Incoterms, the obligation to provide insurance coverage for the shipment falls on the seller. And the Incoterm rules also state that only minimum coverage - 110% of the contract value is necessary. This value may be insufficient or inadequate to cover the merchandise cost.
As a buyer, do not commit to EXW if you cannot handle export procedures in the seller’s country.
As mentioned, a seller shouldn’t commit to DDP and DAP before being registered as a foreign importer and having a clear understanding of the technicalities involved. In the same vein, a buyer should not commit to EXW as this incoterm frees the seller of most responsibilities. In the EXQ option, after packing the merchandise, the entire responsibility falls on the buyer. It includes the whole export process, including communication with the authorities. It may become cumbersome for the buyer, especially if they are unfamiliar with the country-of-origin rules and regulations. Then, the seller would have to step in to assist. Hence, the buyer should consider the FCA incoterm as an alternative.
It is important to align the chosen incoterm with your payment handler, such as Tazapay. Online escrow service providers like Tazapay consider the terms of the incoterm agreed upon by the buyer and the seller and only transfer the payment once the proof of services fulfilled is presented.
Customs & Incoterms
5 Common Incoterm Mistakes to Avoid
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