Choosing the right shipping Incoterms ensures that all parties are made aware of their responsibilities during the process of shipping goods from the seller to the buyer and provides contractually binding guidelines for resolving any disputes that happen to arise. To help you select the Incoterms that will best serve your needs, we'll cover everything you need to know about Incoterms, including the Incoterms’ meaning in shipping and how Incoterms are used, challenges and common errors associated with utilizing Incoterms, and frequently asked Incoterms questions.
What Are Incoterms?
While clauses of global trade such as the Harmonized Tariff Schedule of the United States are in place worldwide, these clauses are not globally accepted. Incoterms, however, if agreed upon by all parties, can define the responsibilities of buyers and sellers conducting international transactions.
The term Incoterms itself refers to a product offered by the International Chamber of Commerce called Incoterms 2020 (which is the latest Incoterms edition following Incoterms 2010). Incoterms include eleven rules regarding buyer and seller responsibilities, such as shipping payment, insurance, documentation, and customs clearance — along with detailed guidelines for how these rules should be applied.
Among the eleven Incoterms rules are seven rules for governing any mode of transport and four that are specific to sea and inland waterway modes of transport. The details of each are in the Incoterms 2020 chart below.
Incoterms 2020 Rules for Any Mode(s) of Transport
- Ex Works (EXW): The seller is only responsible for having the goods packed and made available at the seller's premises. The buyer takes on all expenses and risks from there to the destination.
- Free Carrier (FCA): The seller is responsible for delivering the goods to a named destination. All expenses and risks are then transferred to the buyer upon delivery.
- Carrier Paid To (CPT): The seller is responsible for arranging and paying for the delivery of goods to a named destination. All expenses and risks are then transferred to the buyer upon delivery.
- Carrier and Insurance Paid To (CIP): The seller is responsible for arranging and paying for the delivery of goods to a named destination and is also responsible for purchasing insurance on the transported goods. All expenses and risks are then transferred to the buyer upon delivery.
- Delivered at Place (DAP): The seller is responsible for delivering the goods to a named destination, bearing all expenses and risks until the goods are ready for unloading.
- Delivered at Place Unloaded (DPU): The seller is responsible for delivering the goods to a named destination and is also responsible for unloading the goods. The buyer is responsible for completing customs formalities.
- Delivered Duty Paid (DDP): The seller is responsible for delivering the goods to a named destination and absorbs all expenses and risks until the goods are ready for unloading, including customs formalities.
Incoterms 2020 Rules for Sea and Inland Waterway Transport
- Free Alongside Ship (FAS): The seller is responsible for delivering the goods at the port alongside the vessel. From there, all expenses and risks transfer to the buyer.
- Free on Board (FOB): The seller is responsible for delivering the goods to the port and loading them on board the vessel. From there, all expenses and risks transfer to the buyer.
- Cost and Freight (CFR): The seller is responsible for paying costs associated with delivering the goods to a named port or destination. The buyer assumes all risks as soon as the goods are loaded onboard the vessel.
- Cost Insurance and Freight (CIF): The seller is responsible for paying costs associated with delivering the goods to a named port or destination as well as paying for insurance. The buyer assumes all risks as soon as the goods are loaded onboard the vessel.
These eleven rules give buyers and sellers plenty of options to choose from when it comes time to reach an agreement that is acceptable to both parties. Selecting the wrong Incoterms rules, though, is something that can potentially lead to a lot of costly issues.
Challenges and Common Errors Associated With Utilizing Incoterms
To avoid the headaches and expenses associated with choosing the wrong Incoterms, you must be aware of several common mistakes to avoid.
Failing to Specify the Delivery Location
Incoterms rules allow buyers to specify the exact location where they want their goods delivered. If buyers aren't specific enough when naming this delivery location, though, sellers are allowed to choose any delivery point within the general location provided, sometimes leading to disputes. Rather than simply naming the city where you wish for your goods to be delivered, therefore, it is essential to include a complete address.
Utilizing FOB for Containerized Cargo
Utilizing the Free on Board (FOB) Incoterms rule for cargo shipped in containers is probably the most common mistake that buyers make when choosing Incoterms. Under FOB, the risk does not officially transfer to the buyer until the cargo gets loaded onto the vessel. However, it is common practice for containerized cargo too often sit at the port of origin for extended periods before it gets loaded onto a vessel. During this time, the seller is still technically responsible if the cargo becomes damaged. However, many sellers often argue during these instances that their responsibilities have concluded once the cargo has been delivered to the port. To avoid such disputes, choosing FCA, CPT, or CIP is a much better option when shipping containerized freight.
Not Checking if Insurance Coverage is Sufficient When Using CIP or CIF
The CIP and CIF Incoterms both require the seller to provide insurance coverage for the goods until they are delivered to the named destination. However, only minimum coverage (110% of the contract value) is required. Depending on the conditions of your sales contract, 110% of the contract value may not be enough to fully cover the value of the shipped merchandise. This makes it essential for buyers utilizing the CIP and CIF Incoterms to ensure that the insurance provided by the seller is fully sufficient to cover the shipped merchandise.
Incoterms Frequently Asked Questions
Q: Can I Still Use Incoterms 2010?
A: Incoterms 2010 was recently replaced by the updated Incoterms 2020. However, Incoterms 2010 is still valid and supported as long as all parties clearly specify and agree upon the chosen Incoterms version.
Q: Are Incoterms Valid for Domestic Transactions?
A: Yes, the use of Incoterms is not limited to international trade, and Incoterms rules can also be applied to transactions where the buyer and seller live in the same country. In fact, all of the provisions of Incoterms rules were written with this possibility in mind.
Q: Can I Add Qualifications or Variations to an Incoterms Rule?
A: Yes, it is possible to adjust the wording of Incoterms rules to accommodate special situations or create a more precise definition of obligations as long as all parties agree upon these changes.
Q: What do Incoterms Rules Say About the Transfer of Title?
A: Incoterms rules do not specify when the title to the shipped goods passes from the seller to the buyer. Instead, this is an issue that should be addressed elsewhere in the commercial agreement between the buyer and seller.
Utilizing Incoterms is by far the most straightforward and hassle-free way to ensure that all parties are made aware of their specific obligations and liabilities regarding the expenses and risks incurred when goods are transported from the seller to the buyer. However, choosing the wrong Incoterms for your specific situation can sometimes lead to costly issues and relationship-damaging pursuits. By taking the time to thoroughly familiarize yourself with all eleven Incoterms 2020 rules and by taking care to avoid common Incoterms mistakes, you can ensure that the Incoterms you choose will work in favor of your business rather than against it.
At VIZION, we are committed to providing buyers and shippers alike with the tools and resources they need to navigate the many challenges of global transportation. To learn more about how VIZION can help you optimize your global supply chains via real-time container tracking data, be sure to check out the many uses and benefits of VIZION API for BCOs and shippers.