Incoterms® are the international terms which determine business-to-business practice in the transport and delivery of goods published by the International Chamber of Commerce (ICC). They set out the important fundamentals of the Incoterms® rules, and the contracts surrounding a typical contract of sale for export/import.
The Incoterms® 2020 rules explain a set of the eleven most commonly used three-letter trade terms, e.g. cost, insurance, freight (CIF), delivered at place (DAP). The precise place of delivery should always accompany them.
Incoterms® case study
“I’m confused––why is this being billed to me?” an importer may enquire, presenting an arrival notice.
I regularly encounter clients approaching me to enquire why the cargo broker has sent them an arrival note requesting a release fee, usually in circumstances under the carriage and insurance paid to (CIP) or cost and freight (CFR) Incoterms®.
“But I thought that we paid you for customs clearance and the port charges were included in that price?”
The prior question is followed by an explanation that the cargo broker is a separate entity to the customs broker (although frequently the cargo broker will also customs clear the goods for a premium).
Despite the bill of lading (BL) clearly displaying CIF, freight prepaid, the client faces combined charges of around £1700 for cargo release and customs clearance––prior to any HM Revenue and Customs (HMRC) levies.
Upon review of a long list of surcharges against a less-than-container load (LCL) shipment with an invoice value of $1630 USD:
When the freight prepaid shipment arrives at the deep seaport, they will receive an arrival note from the cargo broker stating the release fees, demurrage fees for full container load (FCL), and storage for LCL, if the balance is not transferred within five days.
This would typically be supplemented by a footer stating: “It should be noted that once unpacked, the warehouse applies 5 days of free time (from and including the date of unpacking) before storage charges will apply. Storage charges for this shipment will be charged at a rate of £378.25 per day.”
Having had no previous interaction with the company holding the cargo, it can be alarming for traders new to importing.
To avoid this scenario, it may be advisable for the importing party to request a Free on Board (FOB), DAP/DPU, and a CIF/CFR price from the seller, prior to confirmation of the transaction.
DAP Incoterms®, identifying delivery to the trader’s premises, would reduce responsibility for the importer. Instead of arranging customs clearance, release, and terminal handling charges, importers only need to manage customs clearance and unloading from their premises.
Alternatively, buyers may wish to research the market to find the most cost-effective deal that covers freight charges from the exporting shipping port to the trader’s warehouse on FOB terms.
Mitigating unexpected costs and administrations through misinterpreted Incoterms®
It would be advisable for both parties to conduct a cost-benefit analysis prior to confirmation of the transaction to determine the delivery charges, port charges, release fee, terminal handling charges, availability of trade quotas, licenses and certificates.
This should be discussed in addition to customs duty, excise, and import VAT liability, identifying the use of the Postponed VAT Accounting (PVA) method if the importing company is UK VAT registered.
Many traders may participate in purchasing overseas goods which appear to be reasonably priced, only to encounter charges that, in certain cases, are as extensive as the goods purchased.
Lloyds Practical Shipping Guides: Introduction to Marine Cargo Management (Rowbotham, Mark, 2015) handbook identifies that shipping costs are on average 33% of the value of the commercial invoice accompanying the consignment.
Free on Board
This relates to sea shipments only and is the most misused Incoterm.
Technically, it should not be used for air freight, and it should only be applied to non-containerised cargo. However, industry practice means that it is frequently issued in container or air cargo circumstances, representing marginally less risk for the buyer.
Under FOB the risk is officially transferred once the cargo is loaded on board the ship; however, with containerised cargo, the shipper is likely to hand over the cargo to the carrier at the vessel, where it will wait to be loaded.
Therefore free carrier (FCA), carriage paid to (CPT), or carriage and insurance paid to (CIP) presents less risk for the shipper.
FCA, CPT, or CIP
“Free Carrier”, “Carriage Paid To” and “Carriage and Insurance Paid to” are popular Incoterms® for container movements. FCA is likely to identify the shipper’s port terminal in the exporting country. If CPT or CIF identifies delivery to the container terminal in the destination country, rather than the warehouse location of the buyer, the buyer should be aware that the release fee, unloading of the container and charges for the subsequent transfer of the cargo to the freight forwarder’s vehicle will be their responsibility. The release fee will be determined by the shipping company, and the port charges will be determined by the port.
The question from the customs broker or freight forwarder, when the importer is issued with an arrival notice from the cargo broker once the container has landed at the port will be, what are the Incoterms®?
It is advisable to be aware that all Incoterms® other than “Delivered at Place” (providing the place is external to the destination port) “Delivered at Place Unloaded”, and “Delivered Duty Paid” – DAP, DPU and DDP are likely to place the responsibility for terminal handling charges with the importer.
Delivered at Terminal (DAT) Incoterms® 2010 may also present an area for dispute concerning terminal handling charges. Under this Incoterms® rule, delivery takes place when the goods have been unloaded from the arriving vessel.
Therefore, costs arising from the unloading operation will be payable by the seller, but if there are further charges such as the transfer to the truck, or warehousing, these may be payable by the buyer.
In addition to liaising with the seller, importers should also liaise with the cargo broker to ensure transparency. It would be advisable to request the disclosure of the carrier’s charges in respect of terminal operations and agree on a precise point of delivery in advance of arrival.
Where the carrier’s terms and conditions do not reflect the Incoterms® rule, the buyer and seller should negotiate a commercial agreement to allocate these costs.