Incoterms 2010 / Terms of sale - insight into the basics

Good afternoon

Here's the first of our posts on topics which are useful and important for both our existing and future customers.

If you trade internationally, the Incoterms rules are a common language which, from a transportation perspective, clearly define the tasks, costs and risks involved in the movement of the goods. This is vitally important as it makes it clear who is responsible for the costs involved in physically getting the goods from shipper to consignee.

It may be that the consignee bears all transportation costs (Ex Works/ EXW) or at the other extreme, the shipper bears all costs (Delivered Duty Paid/DDP). More often it's something in between, where the seller/consignor and buyer/consignee pay a clearly defined part of the costs involved in moving the shipment from door to door (for example CFR). 

Crucially, it also defines at what point risk passes from seller to buyer, which is critical as often there's a misunderstanding and often goods are not fully insured, save the woefully inadequate standard liability provided by shipping lines which isn't sufficient in 90% of cases. Airlines offer more generous standard liability cover but if you have higher value goods, you really should consider your own marine insurance policy which means you won;t get any nasty financial shocks if your shipments are either lost or damaged.

Back to Incoterms 2010.

These terms are denoted by three letter codes such as EXW, DAP, FCA etc and in some cases they need to be supplemented with a place to denote exactly when delivery has taken place. In this context, delivery doesn't always mean delivery in the general sense (ie delivery to your factory or warehouse), it refers to the point when the seller has fulfilled his obligations under the contract. It could therefore be that "delivery" is effected when the goods pass over the ships rail at origin (under terms FOB).

The risk part is a grey area for many customers and, for example, they might reasonably assume that if the Shanghai supplier sends the goods CFR Felixstowe where they organise transport and pay for ocean freight to arrival Felixstowe that they would also carry the risk until the container has passed over the ships rail (ie Terminal Handling Charges, Customs Clearance, Delivery etc). Not the case, the risk passes once the container has been loaded onto the vessel at SHA.

In the latest edition, Incoterms 2010 (which were published in 2011), the number of different Incoterms was reduced from 13 to 11 along with a clearer and simpler definition of the rules.

Many of you will have heard some common Incoterms such as FOB (Free On Board) and Ex Works mentioned by colleagues who deal with international suppliers or customers, and often by your freight forwarders.

Couriers or FPOs (Fast Parcel Operators) such as DHL, UPS rarely mention the Incoterms, they're more likely to use general terms such as door to door or give detail on the service levels, next day, time critical etc and they're often very export driven and not flexible enough to apportion some costs to the shipper and some to the consignee as is the case with many Incoterms.

More later...