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Why are companies getting Incoterms® wrong, globally?

Even though Incoterms® is reviewed every ten years, there is still a huge problem with how it is used around the world. We explore and discuss.

This is not a new topic, which is, of course, the most frustrating part. Even though Incoterms® is reviewed every ten years, there is still a huge problem with how it is used around the world. As the terms provide the basic structure for international, regional, and sometimes even domestic sales contracts, it is very important that the parties understand how the terms affect risk, delivery, responsibility, and cost. Even so, if you ask people around the world, "What are Incoterms®?" they will say, "Oh yes, that's FOB, C&F, and CIF, isn't it?" In 1936, that might have been the right answer, but not now!

Most of the time, these words are used wrongly in one or more of the following ways: Using terms that don't fit the mode of transportation, like using FOB, CFR, and CIF for multimodal containerized shipping. Changing or making changes to terms, like "Ex Works Loaded." Or, using a term that is out of date but quoting the latest version, like DAT Incoterms® 2020. Misuses like these are unfortunately not that rare, and many readers will be able to give examples from their own lives.

Why does this happen? and What can we do about it? "Is it really important?" A quick look at the LinkedIn Incoterms group will show that most questions about Incoterms® can be answered by telling the person to read the book. This is actually very good advice, as long as it is backed up by training that is structured and fits the situation. In many countries, the cost of publishing is too high for small and medium-sized businesses (SMEs), so internet research is often seen as the best choice. But this is a bad idea for many reasons. With just one Google search, you can find pages of information about Incoterms®, but a lot of it is wrong or at least very badly made. As with any Internet search, the source of the information must be checked for accuracy and reliability. The only way to do this is to read the ICC publication and get the right training. During the current review of Incoterms® 2020, it's possible that new ways to spread the terms will be looked at. Training is also important so that people who trade and other interested parties not only know the rules but also understand why they are there. This would help make sure that the terms are used correctly in both internal processes and contracts. It would also give businesses the confidence to teach their partners how to use the right terms in a sensitive way.

Does it make a difference? Actually, it does. If Incoterms® aren't used correctly, bad things can happen, like the wrong way costs are split between parties, insurance claims being denied or not being covered enough, and responsibilities like insurance, export/import customs clearance, or haulage arrangements falling through the cracks. All of these things can lead to expensive and long-lasting disputes and a break in the relationship between the seller and buyer. Incoterms® are useful because they spell out exactly what the buyer and seller must pay for, what their responsibilities are, when the goods are legally delivered, and when the risk of loss or damage in transit passes from the seller to the buyer. If incoterms® are not used or are changed, all of these basic elements must be written out in great detail on each transactional contract document. Also, both the sales contract and the purchase order must be checked forensically to make sure that all the important details are the same. Changing the terms can be just as much of a problem as using the wrong term. For example, if the responsibility under a term like "EXW Loaded" is changed, is there also a plan to change how the costs are split and where the risk is transferred? If the cargo was damaged when it was being loaded, it could lead to a very complicated dispute. Many traders only look at their contracting and Incoterms® policy when something goes wrong, which is usually too late.

More problems can arise when there is a direct link between an Incoterm and the recognition of revenue or the transfer of title from seller to buyer. These milestones may be related to the Incoterm being used, but they are not and should not be built into the terms.

Cross-border trade deals are complicated because that's how they work. There are a lot of people who have an interest in this, and the main contracting parties are in different countries and may speak different languages and be governed by different laws. Incoterms® were made to set a set of international standards that can be used as the basis for an overarching contract that everyone can understand and agree on. By using the terms the way they were meant to be used, a lot of the confusion that could come from language or location can be avoided. Most disagreements in international trade are about how the costs should be split. The solution is in the Incoterms® publication, which makes it clear what the seller has to pay and what the buyer has to pay for.

Incoterms®, as written, won't work for every contract or good. This is something that needs to be taken into account. But they are fine for the vast majority of trade deals around the world. Some people say that the problem with the misuse of Incoterms® is that it is reviewed too often, usually every ten years. But this could be seen as one of the protocol's strengths, since the rules are based on current practises in trading, logistics, insurance, regulatory control, and banking, all of which are dynamic and change over time. The review cycle is a good way to keep up with what is happening on the ground and make sure that what is being said is relevant.

In the end, what is the best way to stop people from misusing Incoterms® so much?

  • The official version of the rules is easy to find.

  • Training, both at the start and on a regular basis

  • Adding to the procedures and conditions of importers and exporters

  • Management support for the right way to adapt the terms

  • Some countries' ICC national committees are getting more involved and spreading the word.

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