One of the most common set of terms used in international trade is INCOTERMS; this is short for International Commercial Terms, published by the International Chamber of Commerce and it’s possibly its most-read publication. It is also perhaps the least understood and most often misrepresented. Every logistics service provider, and this includes airfreight/ocean freight professionals, and user needs to have a thorough understanding of INCOTERMS. This statement will be oft repeated. The purpose of this booklet is to understand what INCOTERMS are and deal with some myths and misconceptions regarding the same. Later, we will get into INCOTERM strategy and arrive at how to choose the right INCOTERM.
By the definition an INCOTERM or International
Commercial Term is a formalized international term of trade, which specifies
the responsibility of the exporter and importer in an international transaction.
Whenever an international sales transaction takes
place i.e. when an exporter sells goods to a buyer in a foreign country, there
are a host of steps involved in getting the goods to the location required by
the buyer. This happens irrespective of
whether the transaction has taken place directly or through an intermediary.
So, certain services need to be purchased and fees levied by various
authorities and agencies. These have to be paid either by the seller (exporter)
or buyer (importer). The study of INCOTERMs is about how these tasks are shared
between buyer and seller.
These tasks include:
v Customs clearance of goods for export
v Organizing transport of the goods from the point of
origin to the location it needs to be delivered, often using more than one mode
of transportation. This includes three distinct stages:
Ø pre-carriage, or pick-up – this is the transportation
that takes place in the country of origin/export
Ø main carriage, i.e. the international transportation
between the country of origin (export) and country of destination (import)
Ø Clearing customs in the importing country
Movement of goods involves a buyer, seller and
transporter, with or without an intermediary.
An exporter and importer enter into an agreement under which the
responsibility of transportation and/or handling of goods and other formalities
passes from one to another with risks also being transferred. INCOTERMs were for the first time formalized
by the International Chamber of Commerce in 1936 and last published before the
current edition in 2009. They address some of the problems related to
international movement of goods. It
tries to bring clarity and reduces confusion about the duties and
responsibilities of the seller and buyer.
INCOTERMS, also called terms of trade, are
incorporated in the contract of sale and purchase. These determine which of the tasks are the
responsibility of the exporter and which are the responsibility of the
importer.
Some of the questions they address are:
Ø At what point should the seller deliver the goods?
Ø At what point are the risks passed from the seller to
the buyer?
Ø In case goods in transit are damaged, pilfered or
lost, who takes the liability for the loss?
There are a total of eleven INCOTERMs divided listed
in the chart below. Four of them are meant specifically for non-containerized
water transport, the other seven are applicable to all modes of transport. Every INCOTERM starts with one of the
following letters; C, D, E and F; or rather E,F, C & D. Having listed them out we will define each
term let us look at some of the misconception about them, their scope, and
areas covered and not covered by them.
List of INCOTERMS®
Non-Containerized Water Transport
FAS - Free
Alongside Ship
FOB - Free
On Board
CFR - Cost
& Freight
CIP - Cost, Insurance & Freight
Any Mode of Transportation
EXW - Ex Works
FCA - Free Carrier
CPT - Carriage Paid To
CIP - Carriage & Insurance Paid To
DAP - Delivered at Place
DPU - Delivered at Place Unloaded
DDP - Delivered Duty Paid
We shall then look at transfer of property or title –
whether this is decided by an INCOTERM, their structure, and the primary
responsibilities of different parties under various terms.
After dealing with this, we shall delve into how to
choose the right INCOTERM. Looked at in
a proper perspective they can be a powerful tool in buyer/seller contracts,
leading to a win-win situation.
INCOTERMs deal with the relationship between seller
and buyer under a contract of sale. The
distinct areas they deal with include:
Ø Provision of goods in conformity with the contract and
paying the price of the same.
Ø Procuring licenses, authorization and formalities.
Ø Entering into a contract of carriage and procuring
insurance as may be necessary.
Ø Point of delivery of goods, i.e. the transfer of
responsibility from seller to buyer.
Ø Transfer of risks from seller to buyer.
Ø Division of costs between the buyer and seller.
Ø Notice to the buyer or seller.
Ø Proof of delivery, transport documents either paper or
electronic.
Ø Checking the packing, marking etc.
The whole arrangement of INCOTERMs is based on the
above heads. Each term defines the
precise obligation of the seller and buyer.
It helps give precise understanding of the objectives of the parties to
the contract. Finally, it minimizes, if
not totally eliminates the space for confusion or dispute.
In spite of their clarity, misconceptions do exist
about their applicability. INCOTERMs
apply to the contract of sale and not their carriage. They do not provide for all the duties and
responsibilities which parties may wish to include in a contract of sale.
As just indicated, INCOTERMS deal with the contract of
sale, they do not cover carriage, insurance and finance. However, when parties agree on the use of a
particular INCOTERM, there would be implication for other contracts. For example, a CIF/CIP or CFR/CPT contract
cannot be performed without a contract of carriage. Under these terms, the seller must present to
the buyer a bill of lading, air waybill, or any other transportation document,
depending on the mode of transport used.
This is also important from the point of view of documentary credit.
Here, documents required would invariably depend upon the means of transport
which may be used in a particular transaction.
INCOTERM, therefore, identify the obligation that
various parties to a transaction have; for example, the seller’s obligation to
place goods at the disposal of the buyer; or hand them over for carriage; or
deliver them at the destination. They
further deal with the obligation to clear the goods for export/import, the
packing, the obligation to take delivery and to provide proof of any complied
with respective obligations. Thus, these
terms deal with issues which are extremely important for the implementation of
the contract of sale. Although INCOTERMs
are primarily intended for use in international trade they are also widely used
in domestic sales and purchasers.
It should be noted that INCOTERMs do not cover all
possible legal or transport issues arising out of an international sale. What the terms do is specify the following:
Ø The portion of the transportation cost shared between
buyer and seller.
Ø The point at which the risk of loss will be
transferred from the buyer to seller.
Ø The party responsible for handling of customs
formalities and dues, including customs duties, payable at the origin and/ or
destination.
Ø Seller’s responsibility for providing insurance cover
in case stipulated by the buyer.
Areas not covered under INCOTERMs include:
Ø Transfer of ownership and property rights.
Ø Breach of contract and the consequences flowing from
such breach
Ø Exemption of liability in certain situations.
These areas need to be taken care of by providing for
specific stipulation in the contract of sale under the applicable law. It is therefore prudent to include in the
sale contract precise details on the exact place and method of delivery,
loading and unloading charges, extent of insurance and mode of transport.
The ICC reviews INCOTERMS from time to time to ensure
that they reflect and respond to current trade practices and trends. INCOTERMS
2020 is the ninth revision of INCOTERMS since their inception in 1936. By
definition, INCOTERMS are a series of internationally recognized standardized
trade terms published by the International Chamber of Commerce (ICC) and widely
used in international sales.
Let us look at what
they cover. In simple layman’s terms
they cover the following:
Ø Who does what
Ø Who pays for what
Ø When do risks pass from seller to buyer
Ø When delivery occurs
In addition to the above, INCOTERMS also cover such
issues as insurance, export & import clearance and the division of other
costs pertaining to the delivery of goods. We've already seen what they don't
cover. Besides those points there's nothing on ownership/title to the goods,
nothing in detail on payment obligations, viz. when, how, what security,
against what documents or for that matter nothing on detailed vessel
requirements, force majeure, termination, insolvency, etc. In short,
INCOTERMS do not constitute a complete contract of sale. However, they provide
convenient internationally recognized rules for the sale of goods.
Now we shall look at how they are used. INCOTERMS are incorporated into many
contracts by express reference. E.g. DAP
one safe berth (please note the full address of the location must be mentioned)
Rotterdam, INCOTERMS 2020. They may be
referred to in standard format contracts.
They may also provide some guidance as to the generally accepted meaning
of trade terms such as CIF/FOB/DAP.
However, it is important that one expressly refers to them if one wants
them to apply. Logistics services purchasers and service providers need to
understand each INCOTERM. Let us look at this aspect of international movement
of goods.
INCOTERMS ® Strategy
How do buyers and sellers arrive at a decision on what
INCOTERM to use either in a single transaction or as a general policy? This is
generally contingent upon the strategy followed by the exporting company (the
seller). However, the decisions are jointly arrived at by the buyer and seller
at the conclusion of their negotiation process. These decisions are somewhat
constrained by the following parameters:
·
The type of commodity
being sold: Sellers and buyers in certain industries prefer using
one particular term over the others. E.g. sellers of iron ore, fertilizers and
cement, besides some other commodities, prefer FOB over CFR and CIF
·
The mode of
transport: Four terms, FAS, FOB, CFR and CIF refer specifically to
non-containerized water transport, i.e. bulk, break-bulk, barge, etc. These
four are the oldest surviving INCOTERMs with buyers and sellers preferring
these over the other seven, even though the seven don't exclude these modes
·
The size and
dimensions of packages (this applies to uncrated machinery and equipment as
well): Depending on whether commodities are packed in small packager (e.g.
corrugated boxes, small sized drums/jerry cans, etc), large crates or uncrated;
depending on whether the same is containerized or not, different INCOTERMS are
used and modes also differ
·
The ability for either party to perform certain tasks
·
The willingness to perform the tasks despite the
ability
·
The ability, through volumes, to negotiate favourable
rates with carriers and other service providers
·
The amount of trust that the party has over another;
also, the mutual trust or lack of it.
Before we proceed with INCOTERMs strategy there's a
question often asked:
Can a shipment have multiple INCOTERMs rules? INCOTERMs
rules have now become the standard in international business rules and
recognized by UNCITRAL as the global standard for the interpretation of most
common terms in international trade. Though this version has come into effect
from January 1, 2020, all contracts agreed upon under previous versions are
still valid. The answer to the question asked is an extremely simple and
emphatic no. One cannon have multiple
INCOTERMS for any shipment. So, another question asked is ~ what about master
prepaid and house collect? This will be answered when we discuss the features
of each INCOTERM.
Can a single shipment have multiple buyers and
sellers? In a sea shipment, it is possible that one can use a negotiable bill
of lading, with the consignee box left blank or the words to order put. This cannot be done for an air shipment. We have seen
what the term non-negotiable means and also looked at the shipper's right of disposition where it's very clear that the air
waybill is not a document of title. The consignee can only be changed by the
shipper before the consignee picks up the documents. In case of a negotiable
bill of lading however, the consignee may endorse the BL to another person.
Non-air shipments may have multiple buyers and sellers while in transit. This
is called string sales. This happens
is when the first seller, the original shipper, can sell the goods to the first
buyer, in what is turned as sale on high
seas. This buyer, in turn, may sell to a second buyer and the string
continues. Risks too are passed for the new seller to the next buyer. There is
no limit to the number of sellers and buyers who may be involved in multiple
transactions.
Who pays for the various services purchased? One needs
to remember, that regardless of the INCOTERM used, ultimately the importer is
the one who is paying for the same because pricing would depend on the term
used and place of delivery. Just because the exporter is prepaying and making
arrangements for certain services doesn't mean that the burden of these costs
will be on them. The final invoice for the commodity sold will incorporate all
these costs. Often, the exporter may even mark up this cost and thus increase
their margins.
However, in most cases, the exporter chooses the
INCOTERM to be used. They stick to their decisions for various reasons which
we've already discussed when dealing with the role of freight forwarders. They
find it either difficult or bothersome to adapt to the requirements of the
importer. It may also entail them to perform certain tasks that they prefer not
to perform. They don't mind losing business but prefer to stick to their guns.
Ultimately, it is a joint decision.
Very often the choice becomes a crucial decision for
the company involved. It could be because
it is an integral part of the company's export strategy. It could also
be, as seen in iron ore exports, the exporters' reluctance to perform certain
service due to a lack of trust or an inability to leverage deals with carriers.
Before listing out the INCOTERMs and discussing them
in further detail let us look at the various steps that an international
shipment takes from the exporter's premises to the importer's premises. Often,
it may involve delivery to a bonded or non-bonded warehouse/terminal. It could
involve delivery at a road border crossing. Although our emphasis is on ocean
and, to some extent air, we'll be taking a cursory glance at other modes as
well. Even for air shipments often, delivery takes place at a land terminal,
especially in the United States.
The following are the steps involved:
1.
Packing for international carriage: This includes labelling,
marking and numbering the packages. More than 95% of commodities require some
form of external packing, the few exceptions being commodities like iron ore,
coal, etc. and un-crated items like granite blocks, locomotives, massive pieces
of equipment, etc. Packaging is a topic we'll be dealing with in detail
2.
Loading cargo on the conveyance provided: This could
be a pick-up truck, a courier who picks up small packages from the exporter's
desk, a marine container, or any other type of conveyance used.
3.
Inland carriage from the exporter's premises to a
terminal at a port, airport, inland container or any place from where the first
part of international carriage takes place. This could be termed a pre-carriage
or pick-up
4.
Customs clearance for exports: This includes
preparation of all documents required for the purpose. Documentation is a topic
we'll be dealing with in detail. Also, payment of terminal charges, export
duties and other statutory levies, etc.
5.
Loading cargo on to a vessel: This applies only to
non-containerized water transportation
6.
Main international carriage: This includes arranging
for space in a flight/voyage, arranging for a container and liaising with a
container liner/steamer agent, arranging for a vessel, etc. and paying for
carriage.
7.
Purchase of insurance
8.
Unloading cargo from the vessel: Like #5 above, this
applies only to non-containerized water transportation
9.
Import clearance
10. Payment of Import
Duty
11. Destination delivery
There could be two possible extremes here. One, where
the cargo is picked up at the exporter's premises by the importer's
representative. Here, the importer has only to make the cargo and available to
the exporter's nominated agent or carrier who will take care of all formalities
and tasks till the cargo is delivered at the importer's premises. The other
extreme is where the exporter arranges delivery of the cargo at the importer's
premises after paying all duties and levies. This graphic will give a clear
picture on how these tasks and costs are shared between sell and buyer.
So, lets us start with the first extreme and we'll end with the second. As stated, all INCOTERMS start with one of these letters: E, F, C & D. The terms are about sharing of tasks/responsibility/payments of services and transferring of risks and responsibilities, not about transfer of title. So, depending on how these are shared under different INCOTERMs, the point of transfer is decided. Under terms starting with E & F, this point is somewhere in the country of origin while, under terms starting with C & D, it is in the destination country. So, let's look at each of the terms.
EX WORKS (EXW)
The term should be used with the following syntax:
EXW - 33, Peenya Industrial Estate,
Bangalore 560077, India, INCOTERMs 2020
The address stated is the exact location at which the
merchandise will be made available to the buyer's representative. A full
address has to be mandatorily stated. Stating Bangalore factory or Peenya
warehouse isn't allowed.
Here the exporter informs the importer as soon as the
cargo is ready. The latter then arranges to pick the same up at the former's
premises with all formalities being taken care of by the importer. This,
obviously, is the easiest term for the seller with the opposite being true for
the importer. To be able to complete all the formalities the buyer must
necessarily have a network of service providers in the exporting country who
will be able to render the necessary services. The seller ought to cooperate with
the buyer's representative and make available all documents, copies of licenses
and whatever else is required for customs clearance and transportation.
While the term is meant for all modes of
transportation, it is ideally suited for small consignments that can be picked
up by a courier agency.
Transfer of risks and responsibility takes place once
the cargo is loaded in the vehicle provided by the buyer's representative and
necessary documents transferred.
FREE CARRIER
(FCA)
Syntax:
FCA - ICD Bangalore -
Container Corporation of India Ltd.
Inland Container Depot, Whitefield
Road, Bangalore-560066, India - INCOTERMs
2020
The goods have to be customs cleared and handed over
to the nominated carrier. They could be stuffed in a container at the
exporter's premises, an airport/inland CFS/port, etc., generally close to the
exporter's premises. However, in certain cases, it may be in a neighbouring
state or country. For example, an exporter from Mysore may be asked to clear
the cargo at Mumbai airport, even though Bangalore may be closer and more
convenient.
Transfer of risk and responsibility takes place once
the cargo is handed over to the carrier after making it ready for
carriage.
FREE ALONGSIDE
SHIP (FAS)
Syntax:
FAS - Belikere Jetty
#6, Beilkere, Dist Uttar Kannada, Karnataka, India
- INCOTERMS 2020
Cargo has to be delivered at the designated jetty or
anchorage point at the port of origin, after customs clearance.
Transfer of risk and responsibility takes place once the cargo is kept at the disposal of the carrier nominated by the importer and
ready for loading on the vessel. This is ideally meant for delivery at a port
where no equipment for loading cargo on the vessel is available. The vessel
should be equipped with the necessary facilities to load the cargo.
FREE ON-BOARD
(FOB)
Syntax:
FOB - Jetty #12 New Mangalore Port,
Karnataka, India - INCOTERMS 2020
Here the exporter has to get the cargo loaded on a
vessel arranged for by the importer at the designated port at the port of
origin. Loading charges are on the exporter's account.
Transfer takes place once all the cargo is loaded on
the vessel and the master of vessel signs for it.
CARRIAGE PAID
TO (CPT)
Syntax:
CPT - Frankfurt Airport, Frankfurt,
Germany - INCOTERMS 2020
The exporter has to pay the freight charges and ensure
that the cargo is delivered at an airport/port or terminal at a designated
place in the country of destination. Customs clearance for import.
Transfer takes place once the cargo is handed over to
the first carrier.
CARRIAGE AND
INSURANCE PAID TO (CIP)
Exactly identical to CPT except for the fact that
purchase of insurance is on the exporter's account. It differs slightly from
the same term in the 2010 edition. How, will be seen in the next unit.
COST AND
FREIGHT (CFR)
Identical to CIP but applicable only to
non-containerized water transportation
COST,
INSURANCE AND FREIGHT (CIF)
Identical to
CIP but applicable only to non-containerized water transportation
DELIVERED AT
PLACE (DAP)
Syntax:
DAP - National
Warehousing Company, 330, Whitefield Industrial Estate, Bangalore 560077, India
Here cargo has to be delivered at a place designated
by the importer, generally a bonded warehouse because the onus on customs
clearing the goods and payment of duty is on the importer.
DELIVERED AT
PLACE UNLOADED (DPU)
This is a new term introduced in the 2020 version with
the term DAT - Delivered at Terminal having been removed. Almost identical to
DAP but here the cargo remains in the delivery vehicle.
DELIVERED DUTY
PAID (DDP)
This, as we have seen, involves all tasks to be
performed by the exporter, including import customs clearance and payment of
duty. The exporter has to complete all formalities, pay the duty and deliver
the cargo to the buyer at its premises. Transfer takes place when the cargo is
delivered.
Now that we've described the eleven INCOTERMS let's
see what has changed between INCOTERMS 2010 and 2020. We need to understand
this because many contracts will still continue to be performed under the
previous edition.
What has
Changed between INCOTERMS® 2020 and 2010
We've already
seen that the ICC reviews and updates the INCOTERMS periodically. For close to
half a century this has been happening every ten years, with previous one being
published in 2010, 2000, 1990, &c. These changes are necessary so the ICC
could respond to market conditions and ensure that they are relevant and
suitable to the current situation on international and domestic trade. The
changes made in this edition address various issues. Among them are the
increased security requirements, improved clarity on cost allocation and the
need to tackle insurance concerns that were hitherto not looked into. One
should note that, as we've stated already, contracts referring to previous
versions of the INCOTERMS Rules are still valid. Each order is governed by the
version that was referred to in the contract of sale and purchase. If the
contract doesn't mention which version of the terms are referred to, i.e. the
specific year is not mentioned, then, in case of a dispute, the version in
force at the time of contracting will automatically apply. Using the latest
version is a best practice in international trade.
So, let us
look at what the changes are between the 2010 and 2020 versions.
1.
Bills of Lading/Sea
Waybills/Air Waybills
The term FOB, i.e. Free on Board is meant and designed for non containerized water
transportation. It should be used for carriage only in bulk, break-bulk vessels
and barges, not for containerized cargo. The main reason why FOB should not be
used for containerized cargo and air consignments is that the seller usually
loses control of their cargo one the consignment reaches arrives at the
airport/port/inland terminal and handed over to the first carrier ready for carriage. Under FOB terms the
risk and responsibility is with the seller till the cargo is loaded onboard the
vessel. FCA is the term that should be used for other modes of transport.
Many logistics professionals continue mentioning FOB instead of FCA. Often a letter of credit (LC) may specify the need for an on-board bill of lading or a departure certificate. An on-board BL is only issued by the container liner once cargo is loaded on the vessel. Similarly, a departure certificate is issued by the issuing carrier of an air shipment after it's been loaded on board its flight. This is needed whenever the first carrier is not the issuing carrier.
2.
Insurance
under CIF and CIP
Under CIP
& CIF the seller is not only responsible to deliver the goods to the
carrier after customs clearance but is also has the responsibility of
purchasing international carriage and insurance. INCOTERMS 2020 has retained
the same level of insurance under CIF but has increased it under CIP. The
responsibility of purchasing insurance under these terms lies with the seller.
The reasoning behind this is that CIF is mainly used for raw materials while
CIP for manufactured goods.. The latter require a higher level of cover. While
negotiating price, the parties must consider whether additional insurance cover
is required. Risk management and insurance will be dealt with in detail.
3.
DAT (Delivered
at Terminal) has been changed to DPU (Delivered at Place Unloaded
The term DAT
referred to delivering the goods unloaded at a named terminal. This has limited
the place of delivery to a terminal. Now the reference to the terminal has been
removed. The result is that it has become more general. Under DPU goods may be
delivered to the consignee at any named place, not necessarily a terminal. This
has taken away unnecessary ambiguities. No other change has taken place. If DAT
was being used so far, it needs to be changed to DPU.
4.
Security
Requirements
Events keep
taking place, even post September 11, 2001, resulting in more stringent security requirements.
INCOTERMs 2020 reflects these changes by detailing security requirements for
each term. Non-compliance by either party could result in cost increases and
delayed transit.
Besides the
above changes, the ICC has added, considering the fact that we live in the
digital age, a brand-new matrix comparison tool. This makes is easier and
faster for users to be able to identify the right tool for their transactions.
This, they say, helps even the lay user.
Incorrect use of INCOTERMS and their Consequences
It's been 84 years since INCOTEERMs were first
published. INCOTERMs 2020 is its thirteenth edition. However, to date there is
plenty of confusion with even senior representatives from buyers, sellers,
traders, freight forwarders, shipping lines and other service providers
involved in the business of international trade not having a clear
understanding of them. At times a wrong term is used. It is essential that
every person involved in global trade learn and periodically relearn them.
Among the most common errors in their usage is the use of terms used in
domestic trade. Many countries, including the USA, have different
interpretations for terms using the same nomenclature for domestic movements as
for international ones. A term FOB factory, for example, used in domestic
movements there is used in domestic trade. There are other reasons why
incorrect terms are used. Here are some of them:
The most common among these is the inappropriate
INCOTERM use for a given mode of transport, e.g. CIF Bangalore Airport or FOB
Bangalore Airport. FOB is term for non-containerized water transport and nor
air. The FOB point can never therefore be an airport. It was designed for
ocean, coastal or inland waterways, for carriage by bulk & break-bulk
vessels, barges, etc. It is only suitable when the exporter has the ability and
willingness to get the cargo loaded on-board the vessel and, of-course, the
port of origin has the necessary facilities for the job to be carried out. The buyer
has to make arrangements for the vessel to reach the port or origin. Risks and
responsibilities pass from seller to buyer when all the cargo is loaded on
board the vessel. It is not to be used for any other means of transport
including containerized cargo moving by ship. For these modes FCA is the right
term.
However, incorrect usage tends to continue. It is
still quite prevalent worldwide. This incorrect usage results in sellers and
buyers being exposed to unnecessary risks. There is also a danger of extra
costs being borne nor no reason whatsoever. The representatives of users and
service providers lack a clear understanding of how costs are shared between
seller and buyer reinforcing the need for beginners' training and refresher
courses.
Incorrect version of the INCOTERMs® Rules. It is
recommended that the current edition, rather than an old one, be used. The
version of the INCOTERMs Rules ought to, as far as possibly, be incorporated
into the contract. In its absence, the current ones apply as a default. So,
they need to be aware of the changes.
INCOTERMs Rules very clearly lays out the allocation
of costs along with risks and responsibilities between the seller and buyer.
Yet, very often, disputes and disagreements arise. The reason for this is the
lack of a clear understanding among those involved. For example, discussion
goes on about who bears the cost of the issuance of a bill of lading or charter
party. Often disputes arise over certain statutory costs such as terminal handling charges (THC) or other port levies.
Under CIF and CIP, insurance is on the shipper's
account. However, what is the type of cover to be taken? Both parties need to
arrive at a clear-cut understanding on the nature of cover to be taken. The
rules do state the minimum coverage needed. Insurance will be dealt with in
detail later in the course. A lack of understanding of what exactly is required
can lead to a cost dispute or shipping delays or both.
As stated repeatedly, it is always appropriate to
mention the version of the INCOTERMs Rules being applied. This is more so
during the first two years of the currency of the INCOTERMs Rules. Although, if
the year of publication isn't mentioned by default it should be the current
version, it could be open by a judge or arbitrator, if one of the parties has
hired a smart lawyer. This could result in further escalation of costs. Also,
there is danger that cargo could be stuck indefinitely in a vessel or port.
Users and service providers need to understand that
the rules are not geographically specific. It's extremely important that there
is geographic precision when deciding on the place of delivery at the
destination or even the pickup point at the origin. That is why, since
INCOTERMs Rules 2010 came into force, the syntax has to mention the detailed
postal address of the pickup or delivery point. FCA Bangalore or CIP Mumbai
isn't enough. In an FOB transaction, not specifying the exact terminal and
jetty, may result in cargo having to be moved from one place to another
resulting in unnecessary costs. So, it goes without saying, the geographic
precision is absolutely necessary.
Lack of a
clear-cut understanding as to what is allowed and what is not is very much a
possibility. Also, they may not understand what the rules do and what they
don't. The consequences could be disastrous. Everyone ought to understand that,
though the INCOTERM to be used is mentioned in the contract for sale and
purchase, it, in itself, isn't. Neither is it a contract for sale and purchase
nor does it apply to specific cargoes. It does not specify the time, place
method or currency of payment for the goods. Even the freight amount along with
the terms and currency of payment (for the freight) is not specified here. This
is an agreed deal between the carrier and the party who's paying the freight.
There is often
a grave danger of choosing a term that does not suit the business. Before
entering into a contract, buyers and sellers, must understand that there are,
in all likelihood, big differences in the way business is done in different
countries and accordingly arrive at an understanding. To cite an example, DDP
places the onus of customs clearance at the destination, import duty payment
and delivery on the exporter. The seller's representative at the destination
must the requirements and be confident that they can undertake all the needed
responsibilities to complete the task. Failure to do so could jeopardize the
transaction and future business as well. Looking at the other extreme, EXW
places full responsibility on the importer once cargo is handed over to their
representative at their premises. Whoever is doing the work must be clear on
what the formalities on both sides are.
To conclude our discussion on the incorrect use of
INCOTERMS and their consequences, we need to know, that purpose behind the
initial creation of INCOTERMs and their regular revision has been to address
the risk of misunderstanding and unnecessarily expensive disputes in domestic
and international trade. If a contract has not been properly drafted problems
could arise. With every generation, trade volumes have been growing and, with
it, their complexity. The ICC has done the trading communities across the globe
a great service by publishing them. According to them, INCOTERMs Rules seek
to “offer a simpler and clearer presentation
of all the rules, featuring revised language, an expanded introduction,
explanatory notes, and articles reordered to better reflect the logic of a sale
transaction."
Users need to have a clear understanding of what it
means when the three-letters referring to the INCOTERM for that particular
movement or set of movements are incorporated into a contract. There can be
very grave consequences if an incorrect term is used. INCOTERMs reflect
business-to-business practices in contracts for sale and purchase. They also
describe the responsibilities of buyer and seller with regard to carriage,
documentation, customs clearance, etc. They are very clear about the point at
which risks and responsibilities get transferred from seller to buyer. They
also state who bears what costs.
Users also need to understand that INCOTERMS don't
decide on the transfer of title. To
conclude we'll see how they can be used as a marketing tool.
We've repeatedly discussed that the principal criteria
to be considered when a particular INCOTERM is agreed upon is the willingness
of either party to perform their part of the contract and the willingness to
pay for the services purchased, i.e. the tasks involved in moving the shipment
from the exporter's to the importer's premises. The exporter could be dealing
with a first-time importer, or vice versa. In either case, the exporter and
importer could gain a strategic advantage in the sale of the product. We have
also seen how companies with huge global operations can leverage their shipping
volumes to negotiate better deals with carriers and international forwarders.
They are in a better position, whether acting as a buyer or seller, to perform
all or most of the tasks involved in their sale and purchase.
In most cases, the exporter does not look at each and
every shipment individually to consider what INCOTERM to use. Generally, the
company will have a policy, depending on various factors. As we've seen in the
Bosch case, the company which has multiple manufacturing operations across the
globe, changed from leaving the decision to local manager to their centralized
logistics department. This was a change of strategy through which they could
leverage their worldwide volumes and consolidate them. They did this by calling
for international bids. Forwarders take part in these bids by responding to
RFQs. Obviously, only those forwarders with a well spread-out international
operations and a strong presence in the locations where Bosch operates from or
has vendors will be able to take part. GE and Tyco Electronics also follow a
system of international bids, although the latter leaves certain decisions to
the local offices.
Having said this, we need to remember that it is
impossible for an exporter to adapt its INCOTERMs strategy to accommodate every
importer's requirements. This will result in the exporter having to perform
tasks that it would rather not want to perform. Another point is that certain
services like customs clearance entail handing over to the customs broker (CHA
in India) documents which reveal confidential information of the client
[Gokuldas Exports case]. This can be solved by asking the client's own customs
broker to complete the formalities and bill the international forwarder instead
of the client. So, it often makes sense to be a bit flexible in approach. Of
course, there are exporters who say they'd rather lose business that deal with
unknown forwarders.
Still, arriving at a decision to choose the right
INCOTERM is very crucial for any business organization. [more cases from the
garment industry] Most garment buying houses in Europe and America prefer to
nominate their own forwarder so they can avoid dealing with multiple parties.
An exporter having multiple clients has to deal with the situation. Another
situation that we repeatedly encounter is delays in production resulting in sea
shipments being converted to air with the exporter having to bear the
additional cost. This would result in a change of INCOTERMs for that particular
or a set of shipments. Exporters prefer to pay the extra freight rather than
losing out on future orders.
Not just the choice of INCOTERM, whether for an
individual shipment or as a general rule, a crucial decision for the business
organization, it is also an important factor in providing the level of customer
service it wishes to render. It this becomes an integral part of its export
strategy.
Therefore, when one looks at it from this perspective,
it makes a great deal of sense for their personnel to master expertise in
international logistics and be prepared, with the help of 3PL service
providers, to include as many of the logistics functions as possible,
especially at the country of origin. Every exporter wishes to increase their
sales. Therefore, they need of offer their clients the services they wish for.
They need to, at the beginning at least, offer the most customer friendly
INCOTERM. Therefore, they need to use the services of the most competent and
competitively priced freight forwarder. As we've seen, the forwarding business
itself has become very competitive owing to the increase in the number of
players. This has resulted in them working on wafer-thin margins often at
unreasonable terms. Of course, the importers may be willing to, in due course,
take care of more and more services at the destinations. It may do so using the
services of the exporter's forwarder itself. So, from 'D' terms they would
shift to 'C' or 'F' terms. The ideal situation would be where the exporter
gives the importer a choice of terms to choose from as illustrated in the
following illustration:
EXW
FCA Air Bangalore Airport
FCA Sea Our factory
CIP Air LHR airport
CIP Sea Your factory at London
DAP Air Your factory at London
DAP Sea Your factory at London
No figures have been given. This is just an
illustration to state what alternatives can be offered to the potential buyer.
The latter could make their own inquiries and decide on which terms to use.
How to choose the right Incoterm and Method of
Payment
Terms of Trade and Terms of Payment are two points
that an exporter an importer must agree upon.
The Terms of Trade decides which costs the exporter will pay, which the
importer will pay and the point at which the responsibility shifts from the
former to the latter. This is determined
by the Incoterm chosen. The terms of
sale under which the transaction is performed specifies the point at which the
exporter gets paid. However, one issue
still exists for the importer and exporter to consider. It is the currency under which the
transaction is undertaken.
However, there are some points that need to be looked
at before we come to the point. What we
have dealt with so far has been more from an exporter's than an importer's
perspective. With international
purchases of raw materials and components increasing, importers need also to be
guided on parking. The following are
tips that an importer will find useful in international purchases:
1.
List out your needs
and find out who can fulfil them
2.
Choose a good customs
expert, a CHA or a Customs Consultant.
You may save huge amounts in duty and storage charges if the right
advise is given.
3.
Manage your
documents. Ensure that you have the
right papers before the consignment reaches its destination. Improper documentation could lead to delays in clearance and unnecessary
storage charges.
4.
Know your
rights. Even if the documentation is not
complete goods could be moved from airport or CFS to a bonded area where the
storage charges are much less.
5.
Use a bank that will
give a good exchange rate. With the
right bankers you could save huge amounts in your foreign exchange
remittances. Also, if you have an open
account system with your suppliers, make remittances when the rates are low.
6.
Get as many quotes as
possible, with different possible incoterms.
Look for hidden costs. Most
freight forwarders, when they do not know a figure, put a term at actuals. It is advisable to know what actuals
are.
