10 common errors made by importers and/or exporters in the use of Incoterms in contracts

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10 common errors made by importers and/or exporters in the use of Incoterms in contracts

by NOVEL » Wed Mar 28, 2018 10:14 am

Despite the fact that Incoterms were developed to simplify international transactions and to make their application in international trade more precise, there are still a number of reasons why they often fail to achieve their intended purpose. In most cases, it is due to lack of knowledge of the terms as well as inaccuracy and even too little effort put in when utilizing or applying them. The following have been identified as the problems most frequently associated with use of Incoterms:

1. Most people use a sea-freight term such as FOB or CIF when consigning goods by air or road freight.

2. Incoterms are not quoted at all in the contracts. This makes it very difficult to apportion responsibilities to either the buyer or seller and even to manage and/or monitor these contracts

3. Doing more under the term than required, for example, loading under ‘Ex-Works’.

4. Out-dated Incoterms being used. Many people are not aware that a new version of the Incoterms was issued in January 2010 and that some original Incoterms—such as DDU, DES DAF and DEQ—are no longer in use. Many, however, still continue making use of them. Worse still, one may find that an Incoterm is quoted followed by 2000 instead of year 2010 or no year at all. Although, in a few cases, this may not mean much difference when considering the obligations, but in certain cases, for example FCA, there are very significant differences and the use of the wrong edition can be critical.

5. Incorrect abbreviation of the Incoterm are being quoted. One will occasionally come across situations where the invoice does not indicate the full Incoterm. For example using Ex-works instead of EXW and while it may still be possible or logical to work out which Incoterm was involved it should be pointed out the seller or buyer that the correct version always has three letters

6. Not being protected against when things go wrong because the ‘term’ quoted has never been reviewed against the legal issues. In practice, some contracts have quoted the unrecognised Incoterms such as Delivered Cost Included (DCI) or Delivery Cost Excluded (DCE). This is dangerous as these terms are not recognised by legal authorities and therefore using these terms might lead a company having no recourse should a dispute arises out of the use of these unrecognised or illegal terms.

7. Parties choose the wrong Incoterm for their particular trade. It is common practice that some people use DDP, when the seller is unable to meet the registration requirements of overseas customs authorities.

8. Parties fail to reference the Incoterm with sufficient clarity. The issue of precision where lack of familiarity with the terminology results in terms such as: FOB South African port being quoted or shown. This will result in all the relevant costs covered by the Incoterms rule being included. While this may be due to the parties wanting to cover all eventualities, it is critical for the preparation of the quotation or estimate that the exact port is known when working out the transport costs,

9. The mode of transport not taken into consideration. Certain shipments are more suited to a particular Incoterm, owing to the method/mode of transport used. It is therefore critical, when, if the way in which the cargo is transported changes, then the existing Incoterm should be reviewed for suitability. With the advent of multi-modalism there are certain commodities and cargo that are now being containerised which were previously transported as break-bulk.

10. Resistant to change—conservatism. Sellers may have used terms such as FOB or DDP for several years without an issue and it is not easy to convince clients that they are using an inappropriate or unsuitable Incoterm until an issue arises and a loss is suffered.

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