April 2012: Incoterms in the Real World

We’ve got the book with the new set of  Incoterms ® Rules in it, we’ve been on a day long Incoterms Training course given by a professional trainer, we’ve even got a fancy wallchart showing the 11 terms in glowing colours. We are a modern logistics department, we don’t have a problem with Incoterms,so what are we bleating about? The answer is simple – we are bleating about the attitude of the rest of the company, they just don’t want to know about Incoterms. Try to educate them and they get quite aggressive, “That’s your job” they rap “we don’t ask you to learn about modern procurement techniques (say!)  so why are you going on about your blessed Incoterms!”.

I’ve been in this job for a long time, “too long!” some would say, and I have pondered how to get the right attitude from the different sections of the company but without achieving any real success. Then I had this thought that I would write the script for a horror story that would show a ‘worst case scenario’ for all the users of Incoterms within the company. These users would include the main users like Sales & Marketing and Purchasing but would look behind doors for Commercial, Financial, and Insurance users and of course Senior Managers. I would then have to make them read it with a serious eye rather than treating it as a joke. Join me in this journey and we’ll see if I can frighten you.

 

Act 1 Scene 1

Our top Sales Executive pulls off a great deal with a company in India, he likes the price and when the order comes through for a 40ft container of our exclusive table wear he pushes the order through the system seeing the Incoterm CIF Mumbai and noting that we can choose the carrier and pay the freight costs to the destination country he congratulates himself and moves on to other enquiries.

Act 1 Scene 2

Tragedy strikes when the report comes back from India that the container containing our exquisite tableware has been dropped by a faulty straddle carrier and the contents smashed to smithereens. The bad news turns even worse when our Sales Exec. is informed that under the CIF (Cost Insurance & Freight) term the seller of the goods is obliged to take out insurance in the name of the buyer and that the risk of loss or damage passes from seller to buyer in the country of departure. Additionally the official Incoterms 2010® rules require the freight not to be containerised. With this list of non compliances the Buyer of the goods is refusing to pay and we will have lost £235,000

 

Act 2 Scene 1

Our Commercial section performs the role of the Company Secretary and the Legal Manager and we in the Logistics section don’t often have contact with them except on those occasions when they drop by with some important legal documents at about 4-30 on a Friday afternoon and ask if we can get them to our Australian Office by the following morning. They didn’t stop by when the CAPEX committee considered the detail of a major piece of capital equipment being purchased from the USA which they instructed our Procurement Exec.to contract for with the term FCA (Free Carrier) Sellers premises Boston USA. This turned very bad indeed.

Act 2 Scene 2

The U.S. supplier of this machinery may have been cute when quoting FCA or maybe they just didn’t understand. Our Capex people thought that as the supplier had completed his responsibilities when notifying us that the equipment was available at his Boston site, packed suitable for export, we could then take charge of the consignment. In their innocence they failed to realize that we were responsible for the export declaration to U.S Customs but had no U.S. customs broker as required by U.S. export regulations. This meant we had to go in search of someone who we could give Power of Attorney to so they could act on our behalf. PPI – never heard of it ?– Principal Party of Interest – Oh!! Is that who we are? There occurred a serious delay while we sorted this out. The only consolation was that the U.S. supplier also had little understanding of Incoterms and thought that when we took charge of the freight that title or ownership passed and they could invoice. They didn’t seem to know a lot about the Sarbannes Oxley accounting rules. Pull your Sox up! should have been the cry.

 

Act 3 Scene 1

A consignment of bearings arrived in from Japan, they go in to Inspection and are rejected as being out of tolerance, the Inspector sends them into Despatch with the brief message ‘Send ‘them back!’.  Despatch did as they were told, using our normal preferred freight forwarder. Life goes on!  what’s wrong with that? Read on.

Act 3 Scene 2

What’s wrong? Surely that is an everyday event, rejected goods? return them to the supplier – end of story. What is wrong is that in the case referred to nobody seemed to think about the Incoterm. If the goods had been purchased from Japan on an Ex Works or FCA basis then the supplier is not responsible for the carriage costs. If we send them back as not in accordance with contract we do not want to pay the freight cost to Japan nor do we want to pay the freight cost when the replacements are shipped to us. Why should we incur these costs which are incurred as a result of a non compliance created by the supplier. What the Inspector should have done is refer it to the Logistics team who would look at the Incoterm on the Purchase Order, seeing that we had been charged for the freight, send them back ‘Freight Collect’ advising the supplier of this and instruct them to ship the replacement ‘Freight prepaid’. Failing to do this could mean that we had paid the freight costs 3 times.

It is also worth noting that any Duty and VAT paid in the Importation procedure can be reclaimed from HM Revenue & Customs in the case of ‘Goods not in accordance with Contract’. The full procedure is set out in ‘Customs notice 266 –Rejected Imports: repayment or remission of duty and VAT’

 

Act 4 Scene 1

The company procedure in passing supplier invoices for payment is to compare the unit price on the invoice with the unit price on the Purchase Order and if they match, the invoice will be paid. Charges ‘below the line’ so to speak, incidentals such as carriage costs, handling charges etc. are bundled into a cost collection code and paid automatically. Finance say they haven’t the time or resource to check all incidental charges.

Act 4  Scene 2

Home trade or ‘domestic’ consignments may, generally speaking, not be subject to major incidental charges above and beyond the Purchase Order value but Imports from countries outside the EC/EU are subject to Customs entry and Clearance costs which can add considerably to the unit cost. Apart from Customs Duty and VAT there can be appreciable amounts for freight and handling. To pay these invoices without assessing their justification under the Incoterm agreed under the contract between seller and buyer is flirting with disaster. Finance Directors take note.

 

Act 5 Scene 1

Do your Terms & Conditions of Sale or Purchase carry a reference to Incoterms? If not why not?. A simple phrase such as: “International Sales and International Purchases will be subject to the Incoterm agreed in the Acknowledgement of Order or the Purchase Order confirming the contract of supply. The official Incoterms® 2010 rules published by the International Chamber of Commerce ICC Publication No. 715E apply.”

Don’t fall into the trap which a local company fell into, they had traded for over a hundred years but nobody seemed to read their T’s & C’s and it was only when a shipping consultant noticed the term “Free Mill Station” in them, that the question was asked “where has this term come from and what does it mean?”

Act 5 Scene 2

“Albert will know” came the answer and soon an elderly chap was brought up from the depths of the factory “Albert what does ‘Free Mill station’ mean, you’ve been here many years so we expect you know”

Albert, blinking against the light, explained that the term came about because they supplied paper mills and delivery was always made to the Railway station closest to the customer’s mill. The terms was inserted into their T’s & C’s a long, long time ago and over the years it had been forgotten about.

If Commercial are alerted to the protection that proper use of Incoterms can provide they will surely act to protect the company from dispute.

 

Further Reading:  The Trials & Tribulations of Implementing Incoterms 2010 , The Incoterms Rules, FAQ Incoterms 2010 and Top Errors in Using Incoterms 2010

 

Back to Articles

 

Written on 22nd April by Brian Herd MIEx, Partner Strong & Herd LLP, Chairman NorthWest Branch of the Institute of Export & International Trade (IoE)

Relevant Public Training Courses:

Incoterms Rules Explained

Export Essentials

Import Essentials

 

Additional Links

Incoterms Wallcharts and Incoterms Books

 

 

Contact Strong & Herd
to discuss your requirements
Telephone
0161 499 7000
Fax
0161 499 7100
Strong & Herd LLP, Manchester International Office Centre
Styal Road, Manchester, M22 5WB