I hope the New Year is getting off to a great start for everyone. This week I would like to discuss INCO terms. If you are new to international shipping or a veteran, it is always a good idea to review these terms.
INCO Terms are internationally recognized terms of sale used to determine responsibility for shipping arrangements and transfer of goods shipped in international trade. These standard terms help eliminate or reduce legal disputes and misinterpretation of responsibilities to the export or import transaction. Per the International Chamber of Commerce, they “help traders avoid costly misunderstandings by clarifying the tasks, costs and risks involved in the delivery of goods from sellers to buyers.”
The terms are universal as they apply to all trading nations under all circumstances. They were first published in 1936 and have been updated 8 times, the most recent in 2010. The terms apply to both imports and exports. The terms are abbreviated to 3 letter codes broken down into 4 categories. The first letter of the code determines the category:
E Terms. The seller makes the goods available at the seller’s facility.
F Terms. The seller is required to deliver the goods to a carrier specified by the buyer.
C Terms. The seller contracts for carriage, but does not assume the risk of loss or damage to the goods after delivery to the carrier.
D Terms. The seller is responsible for all costs and risks required to bring the shipment to the destination country.
Additionally, some of the terms are rules for any mode of transport where others only apply to Sea and Inland Waterway transport.
Determining which term to use is a vital component of the sales process. A lot of the customers I work with often fail to grasp the importance of them. Most shippers in the U.S. are very familiar with the North America terms: FOB Shipping Point and FOB Destination. But they often forget to take into account that International shipments are handled by many more entities. Thus, who pays for what part of the shipment can become confusing.
Ultimately, it comes down to the level of trust that exists between the parties involved. Typically, for export shipments, the term DDP(Delivered Duties Paid) entails the most liability for the shipper. But companies may have their reasons for handling shipments in this manner.
For example, if an exporter here in the U.S. is very familiar with the company that it is shipping to in Germany, then shipping under DDPmay make complete sense. The company receiving the shipment may be a subsidiary or sister company. These two entities may have a complex accounting system by which they debit and credit each other internally for some or all of the shipping costs. But they prefer the Bills of Lading to be under DDP.
More often, however, in the case of a company here in the U.S. working with a customer outside the U.S., the customer may make demands of the seller as terms of the sale. They may state that they will not purchase the goods unless the seller handles all freight charges. Many times I have dealt with an exporter that has made this mistake, only to learn that their customer in the foreign country will allow the freight to sit in Customs limbo while they attempt to finalize a sale of the goods to their customer. Meanwhile, the freight starts to rack up storage charges and other fees that the U.S. Exporter is responsible for paying.
One way I advise customers to avoid this situation is to have their customer use brokers and trucking companies in their own domicile country. Have them get quotes for expected costs and offer to make this part of the sale negotiation. Perhaps they can offer the customer a credit of $2000 to handle the trucking and Customs clearance themselves. Then set up the Bills of Lading as DAP (Delivered At Place). This way, the seller’s liability ends once the goods are delivered to the named port or terminal.
One last thought regarding INCO terms is that the term is technically not complete without a “place” tied in with it. In other words, the term has to list the city, port or city to be complete. As Thomas Cook mentions in his book, Mastering Import & Export Management, “offering the INCO term without the ‘named place’ is only addressing part of the equation and leaving out a very integral component, leading to confusion and much frustration.”
If the seller has not taken into account the place of where responsibility lies, they may find themselves paying more of the freight charges than originally intended.