Despite being such an integral part of our everyday lives, most people don’t know much about freight, much less the jargon associated with it. That is why we designed this guide to provide comprehensive information about incoterms, clearly explaining each one in a way that anyone can understand.
Here’s what you need to know:
What are Incoterms?
Freight incoterms (International Commercial Terms) are the standard contract term used in sales contracts with importing/exporting to define responsibility and liability for shipment of the goods. In plain English – how far along the process will the supplier ensure that the goods are moved, and at what point does the buyer take over the shipment process.
FOB (Free On Board), EXW (Ex Works) and FCA (Free Carrier) are the most familiar incoterms but there’s much about these and the other options to learn. Because they are legal terms, written from a legal perspective, incoterms can be confusing or easily misunderstood. And making the wrong choice might turn your shipment into an expensive nightmare.
At What Point You Should Consider Incoterms?
Buyers should consider incoterms before the contract of sale is negotiated, or risk being stung by the supplier on the deal, and/or having unnecessary complications to the shipment.
Main Differences Specific to a Country
The above advice covers most countries in most circumstances. For instance, customs procedures are much more relaxed at porous borders, like within the EU. The three other exceptions likely to affect shipments are: the US is the only country that requires a Customs Bond, importing into the UK requires a Deferment Account, and exporting from India includes a withholding tax.
When to Challenge Advice
Some freight forwarders prefer only using a favored set of incoterms because they ‘seem to work’. Therefore don’t be surprised if some forwarders push back on your selection of incoterm, despite it being the most appropriate incoterm for your shipment.
What Incoterms Don’t Cover
Incoterms do not cover property rights, possible force majeure situations and breach of contract. Include of these within the contract of sale. Similarly, all incoterms except the C terms do not assign responsibility for arranging insurance. Cargo insurance is, therefore, a separate cost for buyers.
Define Named Place in the Sales Contract
When the incoterm is written in the sales contract, the named place should immediately follow the three letter incoterm abbreviation, e.g. “FCA Shenzen Yantian CFS”. Be precise when defining the location, especially with larger cities that may have several terminals, and with larger terminals that may have several drop-off points. You can use this global port finder to find specific port codes.
How Letters of Credit Limit Choice of Incoterm
If the sale is being completed with a letter of credit or documentary credit, the chain that releases funds begins with the seller providing several documents to the bank, including the bill of lading/air waybill. Letters of credit are used where there is limited trust between the seller and the buyer. That rules out EXW, because the supplier will be paid before pickup. F terms require trust because if the buyer cancels the international transit, the supplier won’t have a bill of lading to present to the bank. D terms require trust because the seller is bearing all of the transport costs. That leaves the four C terms as the best options to use with a letter of credit.