We have published extensive materials including Incoterms charts to help traders understand Incoterms® 2020. However, the topic can still be very daunting and seemingly complex to many, as the rules require the understanding of many sub-disciplines within supply chain and logistics such as:
- Compliance and
- Customs procedures
Nonetheless, charts summarizing information remain one of the easiest ways to understand how the terms should be applied.
How to use Incoterm charts?
Firstly, any good Incoterm chart will mention:
- The modes of transport applicable to each Incoterm
- The delivery point of each term
- The point at which seller stops paying for transportation/other costs and buyer starts paying
- Whether or not insurance is required under the term
Other information that is usually not found on many charts is who bears costs and/or undertakes responsibilities of loading/unloading cargo. Who pays for required documentation and which terms are suitable for containerized cargo and which are not.
When referring to any chart is it important to see if any exceptions are mentioned. For example, under the FCA terms delivery can be made either in the seller’s warehouse or at a predetermined place agreed between buyer and seller.
It is usually a good idea to use Incoterm charts and diagrams to narrow down the relevant terms for any transaction, then to explore the text of the terms themselves to confirm that the chart represented the information correctly.
It is worthwhile to note that MANY traders – especially small and medium enterprises have no idea what the Incoterms really mean. Instead they rely on industry practice and make various assumptions when signing deals with traders. Hence, when dealing with a new trading partner, the seller should discuss details with the buyer and iron out minor but important details like:
- Will the invoice price reflect ex-factory price or the Incoterm price or both?
- Will the invoice price reflect the Customs valuation price?
- Who do loading/unloading of cargo – especially if specialized equipment is required?
- Who will pay for demurrage if the cargo is unable to clear Customs due to port congestion?
Some of these questions may seem to be simply answered within the Incoterm text, however – when one trading partner does not understand the texts fully, problems can still arise.
Incoterms can be superseded by agreements in sales contracts.
Many people do not understand that Incoterms are not laws. Neither are they regulations. Traders are free to totally not mention any terms in their dealings although that will create a lot of additional work for everybody. An issue that many traders face is that they agree to sales contracts that contradict the text of the Incoterms. For example, they may sell on EXW terms but still arrange for freight and export the shipment under their name. If the shipment gets stuck at export clearance, the question may arise as to who is liable for demurrage or even detention of the cargo.
The answer is clear – if the sales agreement specifically mentions that the seller will arrange for export and be responsible for all charges till export is complete, then the seller will still be liable for these charges even though the sale was on EXW terms!
A final note
It is a good idea to refer to several different versions of Incoterms® 2020 charts when doing any study or analysis. This ensures that you do not get mislead by referring to a chart presenting the wrong interpretation of the original text. The good news is that most companies only use a few (or just one) of the 11 available terms – so there is rarely a need for any shipper to be well versed in the nuances of all the terms.