Incoterms, or International Commercial Terms, are a set of standards, established by the International Chamber of Commerce (ICC) to standardize international trade practices. These rules define the obligations and responsibilities of buyers and sellers in international trade transactions, including the freight of goods and the payment of duties and fees. Despite their importance and, on the other hand, the serious consequences of their misuse/incoterms mistakes, many importers and exporters are not fully aware of the duties associated with each of the incoterms.

Therefore, we wanted to summaries the most common incoterms mistakes buyers and sellers make regarding incoterms and explain how to avoid them.

The most common Incoterms mistakes

1. Using FOB for containerized cargo

Despite its practical use, the FOB Incoterm should only be used for non-containerized ocean freight shipments.

The main risk involved in this case lies at the port of origin, since the risk is transferred when the cargo is loaded on board the vessel.

However, it is common practice for shippers to deliver cargo at the terminal, where it awaits to be loaded onto the vessel.

Although the cargo is not yet on board the vessel, any damage it suffers during the time on the terminal technically falls under the responsibility of the shipper. Therefore, the shipper’s insurance should also cover this part of the process.

However, in the case of disputes, shippers often argue that they have already done their part, which can lead to complications, delays and disputes that could risk souring the business relationship with a partner. As a result, the consignee is often the one who ends up bearing this cost.

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2. Not specifying the location

Most buyers are unaware that incoterms rules allow specifying the location, which can be a problem if a complete address is not provided.

Lack of detail can mean that the seller ends up delivering the goods anywhere within the general location indicated, which can lead to significant errors.

For example, “FCA Miami” may refer to many delivery locations within a wide area. Therefore, there is a chance that the seller may choose the delivery location that is most convenient for him, but not for the buyer.

To avoid confusion, it is sufficient to specify the exact address (e.g. “Port of Miami CFS”) and/or zip code. This ensures that the seller delivers the goods to the required location and avoids misunderstandings that can lead to delays and additional costs for the buyer.

3. Committing to DDP or DAP without certification

Under the terms of the DDP and DAP Incoterm, the seller assumes responsibility for paying all costs at destination. In the case of DDP, this includes payment of duties and taxes (such as GST, VAT, VAT, etc.), as well as the handling of customs clearance at destination.

It is important to note that, unlike  DDP,  DAP does not require advance payment of customs clearance fees.

In this latter case, the difficulty lies in the fact that, in order to avoid problems at customs, the seller must register as an overseas importer in the destination country. A process that, in some countries, is extremely cumbersome.

In most countries, it is much faster and more agile to have the consignee handle customs clearance.

At this point it is important to stress that, under DDP, the consignee is not legally obliged to do so and, in that case, the ultimate responsibility will lie with the seller.

Exporters working with unfamiliar importers should ensure that they can fulfill all required responsibilities at destination before committing to Group D terms.

For their part, importers should ensure that their suppliers are registered as foreign importers in the destination country and are able to fulfill their responsibilities, especially with regard to payment of taxes and duties.

4. Buying on EXW terms without considering the implications in the export procedure

This mistake is similar to the previous one, with a reversal of roles. If the EXW Incoterm is used, the seller is relieved of most responsibilities. His responsibility ends with the proper packing of the goods for safe shipment.

From that point on, all responsibility falls on the buyer, including the export procedure from the origin to the destination, as well as communication with intermediaries and authorities.

If the buyer is not familiar with the export process at origin, it can be costly. Occasionally, it is essential to enlist the seller’s help.

For example, under an EXW context, the supplier is not obliged to load the container on the truck during pick-up. It is the buyer’s responsibility to hire someone who can do the loading at source.

Sometimes the seller may get involved on their own initiative, but it is important to remember that they are not legally obligated to do so.

A common scenario where this may occur is when the supplier does not allow an unauthorized person to handle the cargo on their premises for liability reasons. When this happens, the supplier takes over this task, which is contrary to EXW stipulations.

The problem here is to determine who is responsible in the case that the goods are damaged during loading.

An alternative to this approach is to consider the use of the FCA Incoterm.

5. Using CIP or CIF without checking the policy coverage and the requirements of the commercial contract

The CIF and CIP Incoterm stipulates that the seller must provide insurance coverage for the goods. Nevertheless, the seller is only obliged for a minimum coverage of 110% of the contract value.

This may, however, be insufficient for certain goods and may not meet the requirements of the international sales contract.

If necessary, it should be guaranteed a higher coverage in order to comply with the terms of the commercial agreement.

6. Matching the Wrong Incoterms with Bank Security Requirements

This section applies to international payment methods, such as letters of credit. Due to the lack of trust between buyer and seller, these methods are considered secure.

Therefore, payment will only be made after the bank has received documents proving that the conditions of the transaction have been met.

Group C Incoterms are more suitable for L/C payments, as the seller controls two essential documents for payment: the bill of lading and the commercial invoice.

On the contrary, Group F Incoterms assign responsibility for the carriage of the goods to the buyer, which may prevent the seller from getting paid, since the buyer has the power to intervene in the issuance of the bill of lading

Did you like this blog on ‘Incoterms Mistake’? Is there any incoterms mistake you have been doing in your logistics operations? Write us in comment below and we’ll be glad to answer.

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