Incoterms®: Their common (mis)use in international shipping and preventing costly errors

 

Are you moving containerised goods or airfreight around the world? Great! now, do you see “FOB Shanghai” or “CIF Toronto” on your paperwork? Well, it’s wrong.
 
The terms CIF, CFR , FAS and FOB should only be used for conventional sea freight (not containerised) and inland waterway transport only.
 
If international shipping is a part of your role or business you should make it a priority to understand the 11 Incoterms®. The International Chamber of Commerce (ICC) who create and govern these rules and provide a quick reference guide here: http://www.iccwbo.org/products-and-services/trade-facilitation/incoterms-2010/the-incoterms-rules/
 
The correct use of Incoterms® can help significantly in avoiding costly misunderstandings between buyers and sellers, or as UPS states “using international standards like Incoterms® can help you identify areas for allocating risk, and preventing costly surprises”.
 
Recently I was discussing this subject with a shipping manager who has over 40 years of experience and I was really surprised when his reaction was, “we have always used FOB for our air import shipments and we have never had any problems”.
 
Doing things correctly and doing things the way they have always been done are often two different things!
 
You don’t need to put your business at risk by having this same attitude.
 
Let me explain why it is risky to misuse the above terms and how you can get it right on your next shipment.
 
The ICC creates the rules and provides the guidance for their use, and; they specify that the four terms – CIF, CFR, FAS and FOB – should be used for conventional sea freight (not containerised) and inland waterway transport only. As soon as one of these terms is used for airfreight or containerised sea freight and any loss or damage occurs then there is huge potential for a dispute between buyer and seller as to who is responsible for the loss or damage.

 

Let me use an example of one such dispute.

A UK based business agrees to sell to a US based business
-‘FOB Felixstowe Port’ terms are agreed upon
-The goods are loaded in a container and shipped
-The buyer unpacks the goods from the container and it would appear that some sea-water related damage has occurred
-The seller claims the buyer is responsible as the transfer of risk changed from seller to buyer at Felixstowe Port
-The buyer claims the seller is responsible as they incorrectly containerised the goods
-To some it would appear that the buyer is taking advantage of the situation; however, the seller has little defence under the Incoterms® rules

 

If Incoterms® had been used correctly, for example, FCA Felixstowe Port, then this dispute could have easily been avoided.
 
It only takes one shipment to go wrong and a dispute to cost you a lot of time, energy and potentially a lot money. Protect yourself by using Incoterms® correctly and never assume that because nothing has gone wrong in the past, that it can’t go wrong in the future.

 

Please also see the following related articles:
Article 1: International Commercial Terms (Incoterms®)
Article 2: The 11 Incoterms®