With the recent situation in the Suez Canal, I have been asked by a few companies how Incoterms may have played a role in mitigating risk and costs to each party. Assuming that your purchase terms do not have additional penalties for delayed arrival or similar clauses, then it comes down to the Incoterm® chosen. Let’s do a quick review.
E-Terms & F-Terms
As this was a container ship, the ocean & waterway terms – FAS, FOB, CFR and CIF – would not have been applicable, as they are only used for bulk goods that travel from pier to pier.
Using Ex-Works (EXW) and Free Carrier (FCA) would have ensured that all risk was transferred when the seller handed off the products to the buyer’s carrier in the country of origin. Any costs past this point would have been the responsibility of the buyer. As a result, the seller may need to manage a disgruntled customer, but would not be obligated to pay any additional costs.
Carriage Paid To (CPT) & Carriage & Insurance Paid To (CIP)
With the remaining C terms, the seller would be obligated to pay for the shipment of the goods to the final destination. Although the goods may not have made it, or were delayed, the transfer of risk would have happened earlier in the process, most likely in the country of origin. As such, the seller would not be responsible for any loss or costs due to the delay.
If the parties had used CIP, and the delay caused the destruction of the goods due to spoilage for example, then there may be a way for the buyer to recoup the cost from the insurance company. But if CPT was used and the only real outcome was a delay, then the buyer is on the hook.
D Terms – DAP, DPU & DDP
Under all D Terms, the seller takes responsibility for any delays, costs or extra fees that may incur. In these scenarios, there may be private insurance that could cover some costs, but typically the seller would be wholly responsible. Strong customer relationship management would be needed to mitigate inconveniences to the buyer.
What We Have Learned
Incoterms® help augment sales contracts or purchase terms by clearly outlining obligations, transfer of risk and allocation of costs between a seller and a buyer as it relates to shipping products between countries.
Choosing an Incoterm® should always involve a detailed risk assessment. What would be the risk, costs and impact on your business if this shipment was destroyed or delayed for 3 weeks due to the most bizarre of reasons? Using an Incoterm® that provides the least amount of risk is critical as part of any contract negotiation.
Exportspark can deliver Incoterms® 2020 training virtually to any company or organization globally, to allow for staff to learn all about these important considerations. Contact Exportspark today to book your training session!