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Understanding Incoterms 2010

February 9, 2019

Incoterms 2010 has become an essential part of the daily language of the trade, but are importers and exporters really confident about incorporating an Incoterm in their contract for the sale of goods worldwide? Just a few, I would say.

In my experience, I have seen many trade operators using an inappropriate trade term just because of their lack of understanding of the Incoterms 2010 rules, hence underestimating risks and responsibilities arising out of their favourite term.

What I typically see is an exporter willing to sell under the Ex Works (EXW) Incoterms 2010 just because it seems to require the least obligations or responsibilities for the seller. You would allege, there is nothing easier than saying to the buyer “the goods will be placed at my front door, come and get them”. However, it is not properly like it looks like.

To better understand what I mean, let’s focus on the following examples, from which pitfalls may always arise.

Loading

According to Ex Works, the buyer will be the one supporting the risks for loss and damage to the goods during loading, for which no helps, unless otherwise expressly stated in the contract, should be given by the seller, whose only duty is to make available the merchandising at its own premise.

In reality, however, this does not really happen as it is the seller who generally loads the merchandise and undersigns the shipment letter as well as assuming risks and responsibilities connected therewith.

In this scenario, who should be responsible if goods are damaged during loading?

To avoid doubts and/or misunderstanding, the parties should either opt for a different incoterm, such as a FCA (Free Carrier), which already lays down the loading as a seller’s duty, or clearly state in the contract that the seller undertakes to load the merchandising by acting on the seller’s behalf only.

Export controls and custom clearance

Under Ex Works, another potential pitfall for the seller might arise from export controls and customs clearance, for which the buyer is responsible. Again, you would say:“what is the problem for the seller”?

Well, many times the seller deals with an overseas buyer unable to duly understand how to comply with domestic export laws and regulations, with the consequence that a failure in compliance is highly probable in such scenario. What happens next is that any penalties due to a buyer’s infringement will be solely faced by the seller, whose details appear under the name exporter on the last export-form filled by the buyer. Only the seller will be deemed liable at this point.

Payment

Pursuant to Ex Works, the exporter neither has a say regarding how a bill of lading is prepared nor can oversee the export process.

What are the main consequences?

If selling using a letter of credit, and there is a mistake on the bill of lading, whose preparation is made by the forwarder employed by the buyer, then there are serious risks for the seller of not being paid at all. To be paid, indeed, the seller will need to have a correct bill of lading to be presented to the bank, but the buyer’s forwarder is under no obligation to make corrections on the seller’s behalf.

FOB

As the last example, I have noticed the Free on Board (FOB) Incoterm 2010 is often used in a totally inappropriate way. Indeed, such term should never be used as to land shipments: Incoterms 2010 clearly restricts the use of FOB to ocean shipments only.

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