INCOTERMS 2000

5. Hints On Using Incoterms 2000

5.1 Buyers wishing to use these rules must, in the initial negotiations with their suppliers, state that the pricing and subsequent contract must be in terms of INCOTERMS 2000 The selected term must be agreed before placing orders and setting up letters of credit.

5.2 Since the trade terms must be possible to use in differing trades and regions it is impossible to cover all obligations with precision. It is important then for the buyer to be very specific as to his requirements and add to the Incoterms to clarify any doubt. For example Ex works (cleared for export). Incoterms are not 'cast in concrete' and can be tailored to suit a particular circumstance

5.3 Wherever possible buyers must avoid the use of 'D' terms as these create problems, which are not readily resolvable in SA. In addition these terms put the cargo totally out of the control of the buyer and totally at the mercy of the seller. The Seller dictates movement and costs. Under certain circumstances where the seller is supplying Free of Charge, or warranty parts at their expense it may warrant 'D' Terms. Sometimes also described as 'Free Domicile'. Even in these cases confusion reigns as to who should pay for what and should be clearly spelt out e.g. DDU (customs cleared, wharfage paid) or DDP (Vat unpaid)

5.4 The key to efficient and cost effective purchasing is to take all factors into account and deciding which Incoterm to use before the indent is placed. The indent should be clearly made out showing all relevant instructions to the seller, which must be confirmed as accepted by the seller. The supplier must be requested to show the Incoterm being used on his invoice.

5.5 In some cases, it may not be possible to stipulate the exact point, or even the place where the goods should be delivered, at the time the contract of sale is entered into. At this stage reference may just be made to a 'range' (e.g. FOB UK Port or CFR SA Port). When this is the case, the buyer must stipulate in the contract or indent that the buyer reserves the right to stipulate at a later date. The buyer is then obligated to do so in a reasonable time before shipment takes place, or must bear the consequences of risk and cost for failing to do so. Failure to stipulate any conditions or requirements gives the seller the right to do so at the buyer's expense and risk.

5.6 In practice, it is advisable that customs clearance is arranged by the party domiciled in the country where clearance is required. However, depending on the trade terms, the buyer may undertake to clear the goods from the exporting country (i.e. EXW, FAS), and the seller may undertake he clearance in the buyer's country (DEQ, DDP). Whatever is decided and agreed must be specified.

5.7 In most cases both parties know what packaging is required for the safe carriage however the required packing should be specified in the contract e.g. EXW (Packed for sea Transport, cleared for export). Many insurance claims are repudiated due to 'insufficient packing'. In such cases, the absence of instruction to the seller renders the buyer liable.

5.8 The Incoterm selected must be appropriate to the mode and method of transport. Incoterms have been formulated to transfer risk at a critical point at which the buyer may physically inspect the goods, normally at his cost. A container loaded on board a vessel at Tilbury cannot possibly be opened and inspected. Therefore FOB Tilbury has no practical value. A critical point before or after discharge would be more appropriate. (EXW, FCA, CPT, CIP)

5.9 As previously discussed the FCA term is very versatile where the seller fulfills his obligation when he delivers the goods to the carrier (or forwarding agent). In today's trade goods are collected at a delivery point before loading onto the vessel. FCL's are 'stacked' at the terminal before the ship arrives or consolidated before shipped. This term is appropriate in these cases.

5.10 Under C-Terms, the seller is also responsible to contract for the main carriage and under CIF/CIP must also insure the goods. The contract must stipulate the point up to which the carriage is paid and clarity must also be obtained as to which point insurance cover ceases.

5.11 Under normal circumstances, main carriage will include discharge costs at named place however there are cases where these are additional. E.g. heavy lifts, special handling etc.

5.12 It must be stressed that Incoterms are trade terms only and do not apply to contracts of carriage, although the latter may be similar.

5.13 Cognizance must be taken of how the goods are to be paid for. If a letter of credit is to be used this is not only a payment instrument but also a means for the buyer to impose his requirements on the seller and visa versa. Where all parties are in agreement goods can now be shipped, cleared and delivered without the need of a negotiable document. In such cases Bills of Lading can be replaced by 'sea waybills, liner waybills, Express waybills etc. The transport document must evidence not only the delivery of the cargo to the carrier but also that the goods, as far as could be ascertained by the carrier, were received in good order and condition e.g. 'clean on board' In most organizations the accounts department pay for the goods and the buying or shipping department arrange shipments. Alas very often the left hand does not know what the right hand is doing. This results in wrong document flow, delays in shipping and customs clearing, amendments to L/C's, loss of control, payments of extra costs e.g. storage, demurrage, overstay etc. Accounts and shipping must talk to each other.

5.14 When deciding on which Incoterm to use, the buyer needs to establish what obligations and risks he wishes to take relative to the degree of say or control he wishes to have over the shipment. Remember the greater the risk a buyer takes is compensated by having control over his costs and delivery times. In today's trade climate, forwarders are carrying major freight volumes which means that excellent rates can be achieved for the buyers, with the advantage that rates can be agreed before shipment takes place. These rates should be compared before deciding to ship FOB, CFR or CIF etc.