Incoterms 2010: What You

N a ti o n a l a S S o ci a ti o n o f C r e d it M a n a g e m e nt J u n e 2 0 1 2

The Publication For Credit & Finance Professionals $7.00

Sherri Lane

t o p i c Incoterms 2010: What You

Really Need to Know

he latest revision of Incoterms 2010 issued by carrier), CPT (carriage paid to place/point), CIP (car- s e l e c t e d ® the International Chamber of Commerce (ICC) riage, insurance paid to place/point), DAT (delivered at t o p i c T offers positive changes for international and domestic terminal), DAP (delivered at place) and DDP (deliv- trade participants. The changes more accurately address ered duty paid). Rules not suitable for containers are today’s logistics requirements, risks and liabilities. Rep- FAS (free alongside), FOB (free on board), CFR (cost resentatives from 130 countries submitted revision and freight) and CIF (cost, insurance, freight). requests yielding more flexible and inclusive decisions that can be applied to any country. The “official” accep- Ex Works (EXW) should not be used for containers due tance of automation in the new Incoterms 2010 is a to a conflict with Incoterms versus standard trucking s e l e c t e d selected topic noteworthy change. The rules recognize digital signa- practices. Trucking companies require the shipper to tures that reinforce web-based solutions for the online stow and load the goods into the container and seal it. submission of documents. The EXW rule calls for the buyer to load the goods on the inland conveyance. Courier/forwarder integrated Automation still has not carried over to the general companies pick up goods inside the shippers’ facility acceptance of presentation of ocean bills of lading. For making an exception to this conflict. EXW is better now, we are stuck in the current practice of requiring suited for non-containerized cargo and domestic sales. hard copies of bills of lading. Securing accurate bills of lading from the steamship line combined with courier- EXW is not designed for international shipments ing documents can take days off the standard examina- regardless of the mode of transport. This is a real story tion turnaround of 21 days when shipping against a let- of how a simple EXW order from a U.S. shipper to an ter of credit (LC). overseas buyer can go awry.

Many outdated rules have been eliminated and replaced The exporter received a seemingly simple and with those that provide more practical transportation straightforward letter of credit. The documents applications. The new rules being namely DAP (deliv- required were a commercial invoice and an air way- ered at place), DAT (delivered at terminal) and DDP bill. The buyer’s appointed forwarder picked up the (delivered duty paid) will seamlessly replace DEQ goods and gave the seller a receipt. Days were spent (delivered ex quay), DAF (delivered at frontier), DES trying to retrieve a copy of the air waybill from the (delivered ex-ship) and DDU (delivered duty unpaid). forwarder without success. The latest shipment date passed and the LC expired. The whereabouts of the Incoterms 2010 Impact on goods were unknown. This exporter’s nightmare Container Shipments had just begun. Most sellers utilizing containers have been maneuver- ing within the rules of the Incoterms 2010 unaware of The lesson learned from this example is: EXW is not the potential pitfalls that still exist within some of the suitable for international shipments. If the buyer insists rules. Rules for containerized shipments have been sep- on EXW terms, use a courier receipt or FCR (forward- arated by the ICC to minimize risks, namely FCA (free ers cargo receipt) in lieu of an air waybill. With the

1 B u s i n e s s C r e d i t J u n e 2 0 1 2 FCR, the exporter’s forwarder will pick up the goods and issue In summary, container shipments are better managed under the applicable receipt(s). The seller can then present the doc- the rules designed specifically for containerized cargo. uments and get paid quickly. A buyer adamant about appoint- Demurrage is the responsibility of the importer. Anticipate ing the forwarder should have the terms of sale changed to the problem areas, their risks and related costs. It is better to FCA (free to named carrier), but it should be noted that with use the rules that best suit the needs of your buyer and trans- this minimum obligation and cost comes the burden of mini- action within their context to assure payment under the LC. mal control and greater risks. If the exporter does not comply with the needed documenta- tion requirement of such country, the buyer will try to pass The remaining non-container rules are FAS, FOB, CFR and the demurrage fees on to the seller. Be especially aware if you CIF. These rules are not point specific, whereas there will be have discrepant documents and are trying to renegotiate with multiple transfers of the container from origin to destination. the buyer. The buyer will insist upon a deducted amount in Each transfer point will carry risks of theft, damage, fire, order to cover the demurrage cost. An open line of commu- environmental conditions or total loss. Loading and/or nications between all parties is always the best bandage to an unloading mishaps can cause concealed damage that may go international dilemma. The best practice is to err on the side unnoticed until the buyer unloads the container. of caution and look before you leap into an impending disas- ter. Here’s to a healthy bottom line! ● The CFR rule requires the buyer to secure adequate insur- ance. If the buyer secures FPA or similar minimal coverage, Sherri Lane, director of consulting and cargo insurance services for there may be little compensation for the seller and the claims Trade Technologies, can be reached at [email protected]. process will be complex. Sellers should consider contingency insurance coverage for CFR/CPT shipments. Consider when *This is reprinted from Business Credit magazine, a publication of the the specific point liability terminates for the seller. Is it when National Association of Credit Management. This article may not be the vessel berths or when the goods are off-loaded? What if forwarded electronically or reproduced in any way without written the container is dropped during unloading? The best policy is permission from the Editor of Business Credit magazine. to fully understand the new rules and apply them correctly.

Incoterms Rules for Containerized Cargo

Don’t use these rules: Use these rules: FAS (Free alongside ship) FCA (Free carrier) FOB (Free on board) FCA (Free carrier) CFR (Cost and freight) CPT (Carriage paid to) CIF (Cost, insurance CIP (Carriage and and freight) Insurance Paid To)

The rules designed for containerized cargo are FCA, CPT, CIP, DAT, DAP and DDP, and are all suitable rules for the shipment of containers. These rules allow the exporter to specify the exact point or place that transfer of risks and lia- bility will take place.

There is one more area of concern for exporters and that is demurrage. Demurrage is a fine that occurs when containers, or LCL cargo, are unloaded from the vessel and not moved to the appropriate holding area within the given time frame of that port. Most ports in the world have specific rules of unloading as well as up-to-date technology. In today’s world, automation allows buyers to notify carriers of their unloading instructions well in advance of the vessels’ arrival at port. It is the responsibility of the importer to know the rules of their port and when to move cargo prior to the assessment of demurrage. Lack of documentation does not hold water either, since any document is only a mouse click away.

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