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Unpacking the Misunderstandings: Why Incoterms® are Frequently Misused by Companies Worldwide

Unravelling the confusion: The common misuses of Incoterms® in global trade are causing misunderstandings. Find out why in our latest blog post.


Even though Incoterms® is reviewed every ten years, there is still a huge issue 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 critical that the parties understand how the terms affect risk, delivery, responsibility, and cost.


What are Incoterms®?

Incoterms® are a set of internationally recognized rules that define the responsibilities of buyers and sellers in international trade. They provide clarity and certainty in terms of the delivery of goods, allocation of costs, and transfer of risk between parties. Understanding and using Incoterms® correctly is crucial for businesses engaged in global trade as it helps avoid misunderstandings, disputes, and costly mistakes. By adhering to these rules, businesses can ensure smooth and efficient international transactions and maintain positive relationships with their trading partners.


How are Incoterms® misused?

Usually, these words are used wrongly in one or more of the following ways:


  1. Using terms that don't fit the mode of transportation, like using FOB, CFR, and CIF for multimodal containerized shipping.

  2. Changing or introducing changes to terms, like "Ex Works Loaded, DDP Lite or DDP (VAT unpaid)"

  3. Using a term that is out of date but quotes the latest version, like DAT Incoterms® 2020.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 lives.


Why are Incoterms® misused?


Mostly it comes down to a lack of knowledge and understanding. The key problematic areas are:


Insufficient training and education on Incoterms®

One of the main reasons for the lack of knowledge and understanding surrounding Incoterms® is the insufficient training and education provided to businesses. Many companies may not be aware of the importance of understanding and correctly applying Incoterms® in their international trade transactions. Without proper training, businesses may make costly mistakes or misunderstandings that can lead to disputes and damaged relationships with their trading partners. It is essential for companies to invest in training programs and resources that provide comprehensive education on Incoterms® to ensure smooth and successful global trade operations.


Incoterms® Training Course: Incoterms® Various Dates - Virtual Training Event
This course develops the competencies that professionals need to deal with all aspects of customs Incoterms®, including how to handle circumstances and activities in Incoterms®, including how to identify the correct term and apply it in the business context https://www.customsmanager.org/events

Misinterpretation of Incoterms® rules

Misinterpretation of the obligations outlined in the Incoterms® rules can result in financial losses, delays in shipments, and even legal disputes. For example, if a seller misinterprets the delivery terms and assumes they are responsible for arranging transportation to the buyer's location, they may incur unexpected transportation expenses that were meant to be borne by the buyer. This can impact the seller's profitability and strain the relationship between the two parties. Additionally, misinterpretation of the transfer of risk and insurance provisions in the Incoterms® rules can leave


Failure to update knowledge with the latest revisions of Incoterms®

 This can leave parties at risk of making costly mistakes. The International Chamber of Commerce regularly updates the Incoterms® rules to reflect changes in global trade practices and ensure clarity in international transactions. Failure to stay updated with the latest revisions can result in outdated knowledge and a lack of understanding of the current terms and conditions. This can lead to misunderstandings, disputes, and financial losses for both the buyer and the seller. Therefore, it is crucial for businesses to regularly educate themselves on the latest Incoterms® rules to mitigate risks and maintain smooth trade relationships.


The challenge of language and communication barriers


Miscommunication due to different languages and cultural norms


When parties involved in a transaction speak different languages, it becomes more difficult to accurately convey important information, negotiate terms, and resolve disputes. Cultural norms and practices can also vary greatly, leading to misunderstandings or unintended offences and this can lead to differences in understanding who should do what in the supply chain. This is why the correct use of Incoterms® can be so powerful,


Inaccurate translation or interpretation of Incoterms® rules

It is crucial for businesses to ensure that these Incoterms® rules are accurately translated and interpreted to avoid any confusion or miscommunication.


Failure to clarify responsibilities and obligations in different languages

It is crucial for businesses to recognize that failure to clarify responsibilities and obligations in different languages can lead to costly mistakes and legal complications. Therefore, investing in professional translation and interpretation services is essential for effective communication and compliance with Incoterms® rules.


Inadequate risk assessment and management


Failure to understand the risks associated with different Incoterms®

This can result in financial losses and damage to business reputation. For example, if a company fails to comprehend the liability for transportation and insurance costs under a specific Incoterm®, they may end up incurring unexpected expenses or losing valuable goods during transit. By properly assessing and managing these risks, businesses can ensure smooth operations and protect themselves from potential disputes or financial setbacks.


Inadequate insurance coverage or failure to arrange insurance as per Incoterms® rules


This also can leave businesses vulnerable to significant financial losses. If goods are damaged or lost during transit and there is no insurance coverage in place, the company may have to bear the entire cost of replacing or repairing the goods. This can be a significant setback for businesses, especially if they are not prepared for such unexpected expenses. Additionally, failure to arrange insurance as per Incoterms® rules can also lead to disputes with customers or suppliers, damaging the company's reputation and potentially resulting in legal battles. Therefore, it is crucial for businesses to carefully assess their insurance needs and ensure they have adequate coverage in place to mitigate any potential risks.


Lack of understanding of liability and responsibility allocation in different Incoterms®

This can also cause businesses to face unexpected costs. Each Incoterm® specifies the responsibilities and liabilities of the buyer and seller in terms of transportation, insurance, and customs duties. Failure to understand these allocations can lead to misunderstandings and disputes, potentially resulting in financial losses for the company. Therefore, it is essential for businesses to familiarize themselves with the specific Incoterms® they are using and seek professional advice if needed to avoid any costly mistakes.


Commercial pressures and conflicting interests


Pressure to secure a deal without considering the implications of Incoterms®

This can be a common mistake made by businesses and make them get the Incoterms® wrong. In the eagerness to close a deal, companies may overlook the importance of understanding the implications of the chosen Incoterms®. This can lead to unfavorable outcomes such as unexpected costs or disputes with the other party involved. Therefore, it is crucial for businesses to take the time to thoroughly analyze and consider the implications of the chosen Incoterms® before finalizing any agreements.


Conflicting Interests

 Incoterms® can also create conflicts between the parties involved if there is a lack of clarity or misunderstandings regarding the responsibilities and obligations assigned to each party. This can result in delays in the delivery of goods, damaged relationships, and potential legal disputes. Therefore, it is essential for businesses to ensure that all parties have a clear understanding of the chosen Incoterms® and communicate effectively to avoid any conflicts or misunderstandings.


Top Tips 5 to stop people from misusing Incoterms®?


  1. Read the Rules. It is basic to locate the official version of the rules. Please kindly contact our team to obtain a copy.

  2. Get Training, which includes initial training at the beginning and ongoing regular training sessions. Book it here: www.customsmanager.org/events

  3. make sure all your trading partners know what Incoterms® mean, and provide them with comprehensive management support that guides them in effectively adapting to the terms and requirements so that everyone is on the same page.

  4. Explore our detailed collection of guidance, support, opinions, cases and more on all matters Incoterms® https://www.customsmanager.info/all-news/categories/incoterms-2020

  5. Get advice from your Customs Manager Ltd Professional. Book a free call today.


More Information and Links


Understanding the Basics of Incoterms® in International Trade

Discover the fundamentals of Incoterms® in international trade and how they impact businesses. Gain clarity and consistency in global trade operations.


 

4-In-1 Support Services: How to get more support

1. Customs & Global Trade Updates (Fee Subscription): www.customsmanager.info

2. Customs & Global Trade Consultancy & Advice (Free First Call): https://www.customsmanager.org/consultancy

3. Customs & Global Trade Training & Education: https://www.customsmanager.org/education-training

4. Compliant & efficient UK Customs Clearance: https://www.customsmanager.org/customs-agent

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