Entering the world of International Trade is synonymous with understanding the roles and responsibilities in the import and export of goods – which requires Incoterms understanding.
Incoterms are a key part of international freight as they establish clear guidelines regarding the transaction between buyer and seller.
Due to its importance, especially in cases of disagreements and disputes, in this post we approach the most common mistakes made during its use.
- FOB use for containerized cargo
FOB is one of the most balanced Incoterms of all, as it divides responsibilities between buyers and sellers fairly. However, both buyers and sellers make the mistake of using this Incoterm in containerised cargo.
What happens is that as the cargo is delivered to a carrier in a terminal where it is waiting to be loaded on a ship – which is not yet considered on board – any damage suffered during that period is technically responsibility of the sender. Consequently your insurance should cover this part of the process.
Nevertheless, in case of dispute, expeditors can and often argue that they did all they could. For this reason, in order to avoid hassles, delays and disputes, the recipient often ends up taking this cost.
Other Incoterms that are also not applicable to container transfers are: FAS, CFR and CIF .
FCA, CPT and CIP are the most suitable alternatives for containerized cargo as the risk is transferred at source when cargo is delivered to the carrier at the agreed location.
- Do not specify the location
Destination ambiguity can trigger a dispute regarding delivery point specificity. The buyer will face the challenge of spending additional time and money to transfer the cargo to the final location.
This will cause a great inconvenience to the buyer who will have to locate the cargo and spend even more resources for cargo delivery. To prevent this from happening, a specific address must be indicated: door number and postcode.
Using the name of a city like “FCA Miami” or “FCA Los Angeles” can be confusing because it might mean different delivery places. To avoid setbacks, it is recommended to indicate an exact point (e.g. Port of Miami, CFS of Miami and/or Postal Code).
- Sellers using DDP or DAP without checking whether they are able to handle import liabilities in the buyer’s country
By using DDP and DAP incoterms the seller is responsible for the payment of all arrival expenses at the destination. DDP includes: taxes (GST, VAT) payment and customs clearance at destination. Unlike DDP, DAP does not require customs clearance fees to be prepaid. However, it is required to register the seller as an importer in the country of destination, which takes longer.
Please note that the buyer is not legally obliged to have to deal with taxes and customs clearance processes. On the other hand, whenever sellers collaborate with an unknown consignee it is important to ensure all responsibilities at the destination before committing to D-Incoterms.
Buyers should also make sure that suppliers are registered as foreign importers in the country of destination, and that they are able to comply with tax and duty responsibilities.
- Buyers using EXW without considering its implications for export procedures
Under EXW the seller has minimum responsibilities, which end upon proper merchandise packing.
Thereafter buyer assumes full responsibility. This includes exporting procedures, from the country of origin, and all communications that need to be established with authorities.
In cases when the buyer is not familiar with the export procedures, in the country of origin, the seller may be obliged to get involved in the matter.
When EXW is used the shipper is not responsible to load the cargo on the truck. This responsibility lies with the buyer who often needs to hire someone at the origin to do the loading. However, to ensure that the shipment is being handled by authorized personnel, it may be the shipper who takes charge of the loading, contrary to EXW’s policy. The issue is that the responsibility for cargo eventually disperses.
It can be impractical and unrealistic to force the buyer to take full responsibility. In such cases you should consider FCA.
- Misunderstandings in insurance obligations
According to CIP and CIF Incoterms the seller is required to provide cargo insurance coverage. Insurance must have a minimum coverage corresponding to what’s established in the contract plus 10% (i. e. 110%). Depending on sales conditions contract this amount may be insufficient.
In 2011 Japan’s tsunami destroyed Sendai container terminal. Hundreds of goods were damaged and exporters who used the wrong incoterm were responsible for losses that could have been avoided.
- Mismatch between Incoterms and banking security requirements
For letters of credit, payments can only be made when the documentation required to prove the terms of the transaction has been sent to the bank. Additionally, Incoterms should correspond the requirements of the seller’s bank, and if they don’t, the documents must be sent to the buyer’s bank in order to demonstrate that both parties have faith in one another and the terms that have been agreed upon.
Incoterms most suitable for this type of payment credit are those of category C, such as CIP or CIF.
- Thinking that Incoterms define title transfers
The rules of Incoterms are silent, so the sales contract must define specifically when title passes from the seller to the buyer.
- Unfamiliarity with import regulations of certain countries
A seller who does not follow the customs regulations of the buyer’s country may face numerous constraints. In this sense, buyer must ensure that the seller is aware of the customs obligations of the buyer’s country before agree on the D category Incoterms.
iContainers. (2019). 6 common Incoterms mistakes to avoid. Consultado a 17 de julho de 2023, em: https://www.icontainers.com/us/2019/03/26/6-common-incoterms-mistakes-to-avoid/
Twill. (2021). Incoterms® guide: How to avoid the seven most common Incoterms® mistakes. Consultado a 17 de julho de 2023, em: https://www.twill.net/knowledge-hub/logistics-know-how/how-to-avoid-the-7-most-common-incoterm-mistakes
USA Customs Clearance. (2022). Incoterms Mistakes and Some Easy Ways To Avoid Them. Consultado a 17 de julho de 2023, em: https://usacustomsclearance.com/process/incoterms-mistakes/
Incoterms Explained.com . (s.d). Ten common mistakes in using the Incoterms rules. Consultado a 17 de julho de 2023, em: https://www.incotermsexplained.com/the-incoterms-rules/common-mistakes/