Why Incoterms Matter: Stop Leaving Your Profits in Others' Pockets
They're not legal terminology, so why should you care about using Incoterms?
Minimize misunderstandings and liabilities
Incoterms give international sellers and buyers a commerce-focused, commonly understood vocabulary. They were originally developed by the International Chamber of Commerce (ICC) to assist in minimizing liabilities for buyers and sellers involved in the international sale of goods. Unfortunately, many companies simply don't use them.
There are many pitfalls awaiting buyers and sellers involved in the international sale of goods, and Incoterms can reduce liabilities and misunderstandings for all concerned.
Save on costs
Extended supply chains result in exponentially higher freight costs. By including Incoterms in the sales process, buyers and sellers can improve their assessment of total landed costs, and avoid embarrassing misconceptions regarding who's paying for what part of the transaction.
The discussion that buyers like to buy on "C" terms and sellers like to sell on "F" terms should be part of the pre-sales process, so buyers and sellers understand, and agree, on the impact Incoterms selection has on selling price, and when it may be in one party's best interests to pay for freight costs.
Main transportation charges (i.e. the ocean or air freight expense) are usually the largest component of freight costs, but there are many other ancillary charges related to international shipping that buyers and sellers may underestimate, or simply be unaware of. By selecting the proper Incoterms, you can reduce your organization’s exposure to these unforeseen costs.
Clearly define the point of transfer of risk
Incoterms don't cover the transfer of ownership in the international sale of goods, but they do deal with the transfer of risk of ownership. The point of risk-transfer is a critical point in every international sale of goods and buyers and sellers should understand the role cargo insurance plays in reducing their liability.
By leaving out Incoterms, you're leaving your business in the other company's hands and your profits in someone else's pocket.
The international sale of goods requires a comprehensive approach to risk management, including strategies to reduce liability. An effective strategy should include strategic use of:
Contracts of Sale
- Buyers and sellers can benefit by implementing contracts of sale to address issues not covered by Incoterms, and issues not adequately provided for in buyer/seller purchase order terms and conditions.
- Contracts of sale improve the transparency of the international sale of goods, strengthening trading relationships by ensuring buyers and sellers fully understand which costs they are responsible for, and their individual responsibilities and liabilities.
- Select Incoterms that adequately match the choice of transportation options for the international sale of goods.
- Improve trading relationships by agreeing on Incoterm selection and developing a better understanding of the relationship between shipping costs and total landed costs.
- Cargo insurance is a relatively inexpensive way of minimizing liability related to any factors that buyers and sellers overlook in their trading negotiations.
- Two Incoterms make provision for insurance if required by the buyer, but most importantly, buyers must be aware these policies do not cover every eventuality for loss, and they may benefit from additional coverage.
- Cargo insurance is the only effective method of mitigating liability for buyers and sellers that do not select the correct Incoterm, or misunderstand their liability related to various Incoterms.
Contracts for the International Sale of Goods (CISG)
- Many buyers and sellers don't compare the terms and conditions on purchase orders and purchase order acknowledgments related to jurisdiction and venue for the international sale of goods.
- The United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980) (CISG) provides an effective mechanism for avoiding costly litigation when buyers and sellers are domiciled in countries with different legal systems.
Buyers and sellers can strengthen trading relationships and minimize liability related to the international sale of goods by communicating openly with each other, and developing an effective risk management strategy. This should encompass contracts of sale, including appropriate, mutually understood Incoterms, and the contracts should address issues related to the transfer of ownership in the goods as well as jurisdiction and venue.
Our experienced professionals are here to help you understand how Incoterms can help remove the worries from your international sales process. For more information on this, or if you have any questions relating to Incoterms...
Information provided by: NAFTA & Free Trade Dept. - Cole International