Despite being one of the most important features of international trade, most of those who should understand Incoterms 2010 rules, don’t. Mike Wingrove explains the issue.
Incoterms are probably one of the most important features of international trade, but despite this, it is actually one of the most misunderstood. And not understanding what they mean can be a very costly error.
Take the infamous collision and sinking of cargo ship “MV Tricolor” in 2002 for example. This 50,000 tonne, £25m Norwegian-flagged vehicle carrier was involved in three English Channel collisions within a fortnight. This meant massive damage, marine pollution and probably the biggest loss in auto exporting industry. At the time of its sinking, the Tricolor was on its way to Southampton from Belgium with a shipment of almost 3,000 luxury cars from BMW, Saab, and Volvo. Imagine trying to establish who pays for the damage to all those cares? Well, it probably all came down to the Incoterms.
Incoterms 2010 are published by the International Chamber of Commerce (ICC). They are the rules, or standard trading terms and conditions used by vendors when goods are sold and transported. They dictate three important points:
- Who bears the ‘risk’ in case of any loss or damage to goods at any specific point in an international journey;
- Which party is responsible for loading or unloading goods, or for arranging and paying for inspections to cargo; and
- Who is responsible for producing documentation, submitting export and import customs entries, or arranging export and import licenses, as well as a range of other contractual obligations.
Incoterms are often associated with freight charges, so you will see freight forwarders and carriers include them when issuing freight quotations. However, because they cover a much wider range of responsibilities and obligations for a vendor, my advice is that anyone involved in exporting or importing – from sales and customer service, to purchasing, and shipping – should understand the Incoterms that should be applied to every international transaction.
So, what are the 11 Incoterms 2010 rules?
Rules for any transport mode
- Ex Works (EXW)
- Free Carrier (FCA)
- Carriage Paid To (CPT)
- Carriage & Insurance Paid to (CIP)
- Delivered At Terminal (DAT)
- Delivered At Place (DAP)
- Delivered Duty Paid (DDP)
Rules for sea & inland waterway only
- Free Alongside Ship (FAS)
- Free On Board (FOB)
- Cost and Freight (CFR)
- Cost Insurance and Freight (CIF)
You can see more details about all of these in this helpful website however there are broadly four groups:
- Buyer arranges main carriage – FAS; FOB; FCA
- Seller arranges main carriage, risk passes after main carriage – DAT; DAP; DDP
- Seller arranges main carriage, but risk passes before main carriage – CFR; CIF; CPT; CIP
- Buyer responsible for all carriage – EXW
Ex Works or EXW is the most commonly used, but probably the most misunderstood rule. It’s often described by exporters as ‘the easy Incoterm’, believing that it simplifies the export process by taking responsibilities away from them. In fact, under Incoterms 2010, using Ex Works in the wrong circumstances can lead to problems and issues which can be far more dangerous and costly for the business.
Plus, although these terms have been in circulation for several years, it is still not unusual to find individuals or companies who continue to use old terms, which no longer feature.
Manage your risk with the right Incoterm rule
The importance of understanding these rules – from both a vendor’s and buyer’s perspective, should not be underestimated. The World Shipping Council (WSC), estimate that on average there are approximately 546 containers lost at sea each year excluding catastrophic events. In addition, an average 1,679 containers are lost every year when the catastrophic losses are calculated. That is a lot of risk.
The correct Incoterms are vital to provide the provide certainty over costs and reduce the risk of disputes and disagreements with clients or suppliers. Using the wrong Incoterms can lead to unexpected costs, delays or unhappy clients.
Make sure you get the right advice on your international transactions, speak to us about your logistics and manage your risk.
Learn more about logistics services here