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Incoterms 2010: what you really need to know.

The latest revision of Incoterms[R] 2010 issued by the International Chamber of Commerce (ICC) offers positive changes for international and domestic trade participants. The changes more accurately address today's logistics requirements, risks and liabilities. Representatives from 130 countries submitted revision requests yielding more flexible and inclusive decisions that can be applied to any country. The "official" acceptance of automation in the new Incoterms 2010 is a noteworthy change. The rules recognize digital signatures that reinforce web-based solutions for the online submission of documents.

Automation still has not carried over to the general acceptance of presentation of ocean bills of lading. For now, we are stuck in the current practice of requiring hard copies of bills of lading. Securing accurate bills of lading from the steamship line combined with couriering documents can take days off the standard examination turnaround of 21 days.

Many outdated rules have been eliminated and replaced with those that provide more practical transportation applications. The new rules being namely DAP (delivered at place), DAT (delivered at terminal) and DDP (delivered duty paid) will seamlessly replace DEQ (delivered ex quay), DAF (delivered at frontier), DES (delivered ex-ship) and DDU (delivered duty unpaid).

Incoterms 2010 Impact on Container Shipments

Most sellers utilizing containers have been maneuvering within the rules of the Incoterms 2010 unaware of the potential pitfalls that still exist within some of the rules. Rules for containerized shipments have been separated by the ICC to minimize risks, namely FCA (free carrier), CPT (carriage paid to place/point), CIP (carriage, insurance paid to place/point), DAT (delivered at terminal), DAP (delivered at place) and DDP (delivered duty paid). Rules not suitable for containers are FAS (free alongside), FOB (free on board), CFR (cost and freight) and CIF (cost, insurance, freight).

Ex Works (EXW) should not be used for containers due to a conflict with Incoterms versus standard trucking practices. Trucking companies require the shipper to stow and load the goods into the container and seal it. The EXW rule calls for the buyer to load the goods on the inland conveyance. Courier/forwarder integrated companies pick up goods inside the shippers' facility making an exception to this conflict. EXW is better suited for non-containerized cargo and domestic sales.

EXW is not designed for international shipments regardless of the mode of transport. This is a real story of how a simple EXW order from a U.S. shipper to an overseas buyer can go awry.
   The exporter received a seemingly simple and
   straightforward letter of credit (LC). The documents
   required were a commercial invoice and an air waybill.
   The buyer's appointed forwarder picked up the
   goods and gave the seller a receipt. Days were spent
   trying to retrieve a copy of the air waybill from the
   forwarder without success. The latest shipment date
   passed and the LC expired. The whereabouts of the
   goods were unknown. This exporter's nightmare
   had just begun.

The lesson learned in this example is EXW is not suitable for international shipments. If the buyer insists on EXW terms, use a courier receipt or FCR (forwarders cargo receipt) in lieu of an air waybill. With the FCR, the exporter's forwarder will pick up the goods and issue the applicable receipt(s). The seller can then present the documents and get paid quickly. A buyer adamant about appointing the forwarder should have the terms of sale changed to FCA (free to named carrier), but it should be noted that with this minimum obligation and cost comes the burden of minimal control and greater risks.

The remaining non-container rules are FAS, FOB, CFR and CIF. These rules are not point specific, whereas there will be multiple transfers of the container from origin to destination. Each transfer point will carry risks of theft, damage, fire, environmental conditions or total loss. Loading and/or unloading mishaps can cause concealed damage that may go unnoticed until the buyer unloads the container.

The CFR rule requires the buyer to secure adequate insurance. If the buyer secures FPA or similar minimal coverage, there may be little compensation for the seller and the claims process will be complex. Sellers should consider contingency insurance coverage for CFR/CPT shipments. Consider when the specific point liability terminates for the seller. Is it when the vessel berths or when the goods are off-loaded? What if the container is dropped during unloading? The best policy is to fully understand the new rules and apply them correctly.

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 liability 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.

In summary, container shipments are better managed under the rules designed specifically for containerized cargo. Demurrage is the responsibility of the importer. Anticipate the problem areas, their risks and related costs. It is better to use the rules that best suit the needs of your buyer and transaction within their context to assure payment under the LC. An open line of communications between all parties is always the best bandage to an international dilemma. The best practice is to err on the side of caution and look before you leap into an impending disaster. Here's to a healthy bottom line!

Sherri Lane, director of consulting and cargo insurance services for Trade Technologies, can be reached at
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)
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Title Annotation:SELECTED TOPIC
Author:Lane, Sherri
Publication:Business Credit
Date:Jun 1, 2012
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