During training sessions focused on shipping contracts and Incoterms® in the past few months, a number of stories and scenarios were provided that perfectly demonstrate the risk associated with the use of D terms.
The “D” terms, Delivered at Place (DAP), Delivered at Place Unloaded (DPU) and Delivered Duty Paid (DDP) all have similar characteristics. They all assume the transfer of risk and the destination are the same location. They all assume the Seller is responsible for the risk until the product arrives at the destination. But in a time of complete and total supply chain and shipping chaos, where anything that can go wrong does go wrong, using D terms can result in the Seller being responsible for costs and risk well beyond what could ever have been predicted.
In one scenario using DDP, a company shipping to a Buyer in Asia was not able to fit the truck carrying their container down the Buyer’s road for unloading. The road was about a metre too narrow and there was no way to move the container close enough to the Buyer’s location to effectively deliver. The container sat at the port while they worked on ways of getting their product to the Buyer with the daily demurrage charges and late fees.
Under DDP, the Seller was responsible for all of the costs of this delay, even though they had very little control over finding a solution. The destination was clearly written into the contract, but who would have ever thought that the physical delivery of a container to the Buyer’s location would not be possible?
Another example was a Seller using DPU, assuming it would be unloaded at the port and handed over to the Buyer after unloading. The Buyer was responsible for importing and needed three printed and notarized copies of the invoice and Bill of Lading (BoL) to proceed with claiming the goods and paying the applicable duties. But the offices where the paperwork needed to be delivered were not open – entry into the city was completely blocked due to the pandemic.
The BoL – which was required as documentation for both importing and clearing of the Letter of Credit to pay for the order – could not be delivered. And under Incoterms®, failure to provide the documentation that allows the Buyer to take possession of the goods transfers the risk back to the Seller. Two weeks and $8,000 USD in penalties later, the paperwork was delivered through another city. But the Seller was still liable, regardless of how unfair the situation was.
Most people are aware of the ship that blocked the Suez Canal for a number of weeks. Any Seller with D terms that had a delivery date or perishable items were liable. The product had not reached the destination and the risk had not transferred to the Buyer. A follow up study indicated that many of the Sellers with containers on this ship has used D terms and were forced to absorb a loss, with many not having any insurance or any short term method of recouping the loss.
D terms have their place, and for businesses that do shipping with their own fleets and have customs clearance and logistics staff in multiple countries, the risk is much lower. But for all others, especially first time exporters, it’s worth thinking through potential supply chain, blockages or port strikes and other shipping horrors that could be waiting. If the risk is too high, it’s time to consider a different Incoterm.