6 Common Incoterms Mistakes and How to Avoid Them in International Ocean Freight

Introduction: The Crucial Role of Incoterms in International Trade

In the world of international ocean freight, Incoterms play a pivotal role in ensuring smooth transactions between buyers and sellers. Established by the International Chamber of Commerce (ICC), these standardized trade terms set clear guidelines for both parties involved in a transaction. However, despite their importance, many traders still make critical mistakes when using Incoterms. In this article, we'll explore the six most common Incoterms mistakes and provide insights on how to avoid them, ensuring more efficient and hassle-free international shipping experiences.

At FreightAmigo, we understand the complexities of international trade and the importance of using Incoterms correctly. Our Digital Logistics Platform is designed to support businesses in navigating these challenges, offering comprehensive solutions for freight forwarding, customs clearance, and more. As we delve into these common Incoterms mistakes, we'll also highlight how our digital solutions can help you avoid these pitfalls and streamline your international shipping processes.

1. Misusing FOB for Containerized Cargo

One of the most prevalent misconceptions in international shipping is the use of Free on Board (FOB) for containerized cargo. Contrary to popular belief, FOB should only be used for non-containerized ocean freight shipments. This error is so deeply ingrained that many importers and exporters continue to use it incorrectly.

The main risk associated with this mistake lies at the port of origin. Under FOB terms, the risk is officially transferred when the cargo is loaded on board the vessel. However, in practice, shippers often hand over the cargo to the carrier at the terminal, where it waits to be loaded onto the vessel. During this waiting period, any damage to the cargo is technically still the shipper's responsibility.

In case of disputes, shippers may argue that they have fulfilled their part of the agreement, leaving the consignee to potentially assume unexpected costs. To avoid such complications, it's crucial to use the appropriate Incoterms for containerized freight:

• Free Carrier (FCA)
• Carriage Paid To (CPT)
• Carriage and Insurance Paid To (CIP)

These terms are specifically designed for containerized freight, with risk transfer occurring at origin when the cargo is handed over to the carrier at the agreed-upon location.

At FreightAmigo, our Digital Logistics Platform helps you navigate these complexities by providing clear guidance on the appropriate Incoterms for your specific shipment type. Our system automatically suggests the correct terms based on your cargo and shipping method, minimizing the risk of misusing FOB or other inappropriate Incoterms for containerized freight.

2. Failing to Specify the Exact Location

Another common mistake is the failure to specify a precise location when using Incoterms. Many traders are unaware that Incoterms rules allow and even encourage the specification of exact locations. This oversight can lead to significant disputes and inconveniences for both parties involved.

For instance, using "FCA Miami" as a delivery point is too vague and leaves room for interpretation. The seller might choose any delivery point within the general Miami area that's most convenient for them, which may not align with the buyer's expectations or needs.

To avoid such ambiguities, we strongly recommend always listing an exact location, such as "Miami port" or "Miami CFS for LCL shipments," along with the postal code. This level of specificity ensures that both parties have a clear understanding of the delivery point, reducing the potential for misunderstandings and disputes.

FreightAmigo's Digital Logistics Platform includes features that prompt users to input specific location details when selecting Incoterms. Our system also integrates with global mapping and address verification tools to ensure the accuracy of location information, further minimizing the risk of location-related disputes in international shipments.

3. Sellers Committing to DDP or DAP Without Proper Preparation

Delivered Duty Paid (DDP) and Delivered at Place (DAP) are Incoterms that place significant responsibilities on the seller, particularly at the destination. Under these terms, the seller is responsible for paying all arrival expenditures at the destination. However, many sellers commit to these terms without fully understanding or preparing for the implications.

With DDP, sellers must pay local taxes and duties (such as GST or VAT) and handle customs clearance at the destination. This often requires registering as an overseas importer in the destination country, a process that can be complex and time-consuming depending on the country's regulations.

While DAP doesn't require prepayment of customs clearance fees, it still involves significant responsibilities for the seller at the destination. In most cases, it's more efficient for the consignee to handle local duties, taxes, and customs clearance. However, under DDP terms, the consignee is not legally obligated to do so, potentially leaving the seller in a difficult position.

To avoid these issues, sellers should:

• Thoroughly research the import requirements of the destination country before committing to DDP or DAP terms
• Ensure they are registered as foreign importers in the destination country if necessary
• Verify their ability to fulfill all responsibilities required at the destination

Buyers, on the other hand, should confirm that their suppliers are capable of meeting these obligations before agreeing to these terms.

At FreightAmigo, we offer comprehensive support for businesses navigating the complexities of DDP and DAP shipments. Our Digital Logistics Platform provides up-to-date information on import requirements for various countries, assists with registration processes, and offers customs clearance services to ensure smooth transactions under these Incoterms.

4. Buyers Using EXW Without Considering Export Procedures

Ex Works (EXW) is an Incoterm that places minimal responsibilities on the seller, with the buyer taking over most of the shipping process. However, many buyers agree to EXW terms without fully understanding the implications, particularly regarding export procedures.

Under EXW, the seller's responsibilities end with the proper packaging of the merchandise. From that point on, the buyer is responsible for everything else, including export procedures from the origin country and any required communication with export authorities. This can be challenging for buyers, especially if they're unfamiliar with the export processes of the origin country.

For example, under EXW terms, the shipper is not required to load the cargo onto the truck during pickup. The buyer often has to hire someone at the origin to handle this task. However, this can lead to complications if the shipper doesn't allow non-authorized personnel to perform loading on their premises due to liability concerns.

To avoid these issues, buyers should:

• Thoroughly understand the export procedures of the origin country before agreeing to EXW terms
• Consider alternative Incoterms, such as Free Carrier (FCA), which place more responsibility on the seller for export procedures
• Discuss loading arrangements with the seller in advance to avoid complications during pickup

FreightAmigo's Digital Logistics Platform offers comprehensive support for buyers dealing with EXW shipments. Our system provides detailed information on export procedures for various countries, connects you with trusted partners for loading and handling at origin, and offers guidance on selecting the most appropriate Incoterms for your specific situation.

5. Inadequate Insurance Coverage Under CIP or CIF

Carriage and Insurance Paid To (CIP) and Cost, Insurance, and Freight (CIF) are Incoterms that require the seller to provide insurance coverage for the merchandise. However, a common mistake is failing to ensure that the insurance coverage is sufficient and matches the requirements of the commercial contract.

According to Incoterms rules, only minimum coverage (110% of the contract value) is required under CIP and CIF. This may be insufficient for certain types of merchandise or fail to meet the conditions specified in the sales contract.

To avoid this mistake:

• Carefully review the insurance requirements specified in the commercial contract
• Ensure that the insurance coverage meets or exceeds these requirements
• Consider additional insurance coverage for high-value or sensitive cargo
• Communicate clearly with the other party about insurance expectations and requirements

At FreightAmigo, we understand the importance of adequate insurance coverage in international shipping. Our Digital Logistics Platform offers integrated cargo insurance solutions that can be tailored to meet specific contractual requirements and cargo values. We provide clear guidance on insurance options and help ensure that your shipments are adequately protected under CIP or CIF terms.

6. Misalignment Between Incoterms and Bank's Security Requirements for Payment

The final common mistake involves not aligning the chosen Incoterm with the bank's security requirements for payment, particularly when using methods like Letters of Credit (LC). This oversight can lead to complications in the payment process and potential disputes between buyers and sellers.

Letters of Credit are often used in international trade when there isn't complete trust between the buyer and seller. Payment can only be made after specific documents are submitted to the bank, proving that the conditions of the transaction have been met.

C-Incoterms (CFR, CIF, CPT, CIP) are generally better suited for payments with Letters of Credit. Under these terms, the seller controls two of the most critical documents required for payment: the Bill of Lading and the commercial invoice.

On the other hand, F-Incoterms (FCA, FAS, FOB) give the buyer responsibility for transportation, which can potentially interfere with the issuance of the Bill of Lading and prevent the seller from getting paid.

To avoid this mistake:

• Carefully consider the payment method when selecting Incoterms
• Ensure that the chosen Incoterm aligns with the documentation requirements of the Letter of Credit
• Communicate clearly with both the bank and the other party about payment and documentation expectations

FreightAmigo's Digital Logistics Platform includes features to help align Incoterms with payment methods. Our system provides guidance on selecting appropriate Incoterms based on your chosen payment method, and our document management tools ensure that all necessary paperwork is properly prepared and submitted to facilitate smooth transactions.

Conclusion: Navigating Incoterms with Confidence

Understanding and correctly applying Incoterms is crucial for successful international trade. By avoiding these six common mistakes, businesses can significantly reduce the risk of disputes, delays, and unexpected costs in their global shipping operations.

At FreightAmigo, we're committed to helping businesses navigate the complexities of international logistics. Our Digital Logistics Platform offers comprehensive solutions to address these common Incoterms mistakes and streamline your shipping processes. From suggesting appropriate Incoterms for your specific shipment to providing integrated insurance solutions and document management tools, we're here to support your global trade operations every step of the way.

Remember, proper use of Incoterms is not just about following rules – it's about creating a foundation for smooth, efficient, and mutually beneficial international transactions. By staying informed and leveraging digital solutions like FreightAmigo, you can confidently engage in global trade, knowing that you're well-equipped to handle the intricacies of Incoterms and international shipping.

Don't let Incoterms mistakes hold your business back. Explore how FreightAmigo's Digital Logistics Platform can help you optimize your international shipping processes and avoid common pitfalls in global trade. Contact us today to learn more about our comprehensive logistics solutions and how we can support your business's growth in the international market.