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Get StartedIncoterms play a vital role in international trade by defining the responsibilities of buyers and sellers in the delivery of goods.
However, misuse or misunderstanding of these terms can lead to costly errors and disputes.
There are common mistakes and pitfalls in using Incoterms, but there is guidance on how to avoid them.
One of the most common mistakes is misinterpreting what Incoterms cover. Incoterms define the responsibilities for transportation, risk, and costs, but they do not cover other aspects such as payment terms, ownership, or the conditions of the sale contract.
Traders often assume that Incoterms address all aspects of the trade agreement, leading to confusion and disputes.
A buyer might assume that by using a certain Incoterm, the seller is responsible for any payment delays or product quality issues, which is not the case.
For instance, using CIF (Cost, Insurance, and Freight) does not mean the seller is responsible for ensuring timely payment or addressing product defects upon arrival.
Clearly distinguish between Incoterms and other contractual terms and ensure that all aspects of the trade agreement are covered in the sales contract and separate from Incoterms.
Explicitly define payment terms, product specifications, and quality assurance measures within the main contract.
Another common error is incorrectly assigning responsibilities between the buyer and seller.
Each Incoterm defines who is responsible for transportation, loading, unloading, and customs duties. Misallocating these responsibilities can lead to additional costs and delays.
Using EXW (Ex Works) when the buyer lacks the capability to manage the entire logistics process can result in unexpected expenses and logistical challenges.
EXW places the maximum burden on the buyer, including collecting goods from the seller’s premises and handling all subsequent transportation, export, and import duties.
Thoroughly understand the responsibilities assigned by each Incoterm and choose an Incoterm that aligns with both parties’ logistical capabilities and preferences.
For instance, if the buyer lacks logistics support, consider using FCA (Free Carrier), in which the seller delivers goods to a specified carrier, simplifying the process for the buyer.
A crucial aspect of Incoterms is the point at which risk transfers from the seller to the buyer. The third common mistake is misunderstanding when this transfer of risk takes place. This can result in disputes if goods are damaged or lost during transit.
Under FOB (Free on Board), the risk is transferred to the buyer once the goods are on board the vessel. If the buyer is unaware of this and assumes the seller covers the risk until arrival, disputes can arise if the goods are damaged during shipping.
For instance, if goods are damaged while being loaded onto the vessel, the buyer, not the seller, must handle the insurance claim.
Identify and communicate the risk transfer points defined by the chosen Incoterm and ensure both parties know when and where the risk transitions.
Document these details in the contract to avoid misunderstandings and provide a clear reference point.
Failing to specify the exact place or port of delivery can lead to confusion and disputes.
Each Incoterm requires precise information about the delivery location to ensure smooth logistics and clear responsibilities.
Using FCA (Free Carrier) without specifying the exact location can create confusion about where the goods should be handed over, leading to delays and additional costs.
The buyer might assume the goods will be delivered to a nearby facility, while the seller may have a different location in mind.
Always specify the precise place or port in the Incoterm agreement and provide clear details to avoid ambiguity and ensure both parties have a shared understanding.
For example, instead of stating ‘FCA’, specify ‘FCA – Carrier’s Warehouse, 123 Shipping Lane, Port City’.
Certain Incoterms, like CIF (Cost, Insurance, and Freight) and CIP (Carriage and Insurance Paid To), require the seller to provide insurance coverage.
Overlooking or inadequately addressing these insurance requirements can result in insufficient coverage and financial losses.
A seller might arrange minimal insurance coverage under CIF, not meeting the buyer’s expectations for comprehensive coverage.
If the goods are damaged or lost, the buyer may find that the insurance payout is insufficient to cover the full value of the shipment.
Verify the insurance requirements of the chosen Incoterm to ensure adequate coverage is arranged and communicate clearly with the other party about the level of insurance provided.
For CIP, ensure the insurance covers the value of the goods at least 110% of their price, as per Clause A of the Institute Cargo Clauses.
Each country may have specific regulations that affect the responsibilities and costs outlined by Incoterms, and not following these local trade regulations can lead to legal issues and delays.
A seller might choose DDP (Delivered Duty Paid) without understanding the import regulations in the buyer’s country, leading to unexpected legal and financial complications.
The seller may face delays and penalties for failing to comply with local customs procedures.
Research and comply with local trade regulations in the buyer’s and seller’s countries and consult with customs experts if necessary to ensure compliance.
For instance, in some countries, specific documentation or pre-approval is required for certain types of goods, which must be considered when choosing DDP.
There are several general tips to avoid these and other Incoterms mistakes.
By being aware of common Incoterms mistakes and taking proactive steps to avoid them, traders can ensure clearer agreements, reduce risks, and foster more successful international transactions.
Proper use of Incoterms facilitates smoother logistics and enhances trust and cooperation between trade partners.