An importers and exporters guide to Incoterms

Resourceful South Africans are (and should be) focused on carving out avenues of income in an economy void of employment surety by looking for opportunities in global trade. SA Trade Statistics published by SARS in October 2019 shows a 5.1% grown in revenue from exports compared to 2018, including trade with Botswana, Eswatini, Lesotho and Namibia (BELN), as well as a R5.3 billion positive trade balance in comparison to the previous year’s R3.7 billion shortfall.

Although the bulk of these figures is made up by giants in agriculture, mining and tech, small businesses play an important part in maintaining South Africa’s economic health. To ensure continued growth in international trade, large and small importers and exporters alike need to focus on closing sales and maintaining smooth dealings in international commerce. Incoterms, short for International Commercial Terms, are designed for this exact purpose by acting as a global shorthand stipulating where international sellers hand over risk, responsibility and cost of fulfilling a shipment to their buyers.

To stay abreast of trends in commerce, Incoterms are revised every ten years, and the ICC recently published the 2020 version. Regardless of periodical modification to ensure that Incoterms continuously grease the wheels of international trade, importers and exporters often incur massive losses by failing to understand their underlying content, or how to site a term correctly in a sales contract.

Most common mistakes in using Incoterms are completely avoidable. Here are some examples:

Using a maritime term when transport is multimodal.

Rules such as FOB or CIF are traditionally intended for freight via sea and inland waterways only. Using these terms instead of the all-transport versions thereof, being FCA or CIP, exposes sellers to unnecessary risk. This is because legal terms included in maritime Incoterms such as ‘alongside the ship’, ‘on board the vessel’, ‘port of shipment/destination’, etc. make land-based deliveries easy to dispute.

Insufficient description of the port/place of delivery.

Using a city name or even an airport name as a place of delivery refers to a lot of locations within one area. E.g. Hong Kong International Airport Terminal 3 would be specific enough to avoid misinterpretation, whereas simply saying Hong Kong Airport is too broad.

Failing to accommodate both parties.

E.g. Using EXW requires the buyer to complete all export procedures and documentation. If they are unfamiliar with these processes, or limited in terms of language, this can become an intolerable task. Using DDP can also pose a major challenge if the seller is unable to undertake all the necessary procedures, like paying GST or VAT, in the buyer’s country.

Including inadequate insurance cover with CIP or CIF.

Incoterms 2020 CIP specifies insurance in line with Clause A of the Institute of Cargo Clauses, which is much more comprehensive than Clause C specified by Incoterms 2010 CIP. Failing to understand which version of this term is in effect or missing the opportunity to specify additional insurance required for speciality goods can leave buyers vulnerable to loss.

Incorrectly citing Incoterms in a sales contract.

The correct way to write an Incoterm is in the following format: Rule – Exact point of transfer - Incoterms of relevance
E.g. EXW at 20 Example Street, Cape Town, South Africa as per Incoterms 2020
Failing to specify the year edition of the Incoterm in use can lead to misunderstandings resulting in legal dispute and the loss of profitable trade relationships.

Failing to specify when title passed from seller to buyer.

Updates with Incoterms 2020 include clarification to avoid disputes regarding ownership. It is however still necessary to define transfer of title of goods separately in sales contracts.
Besides this, the new version of Incoterms includes a few noteworthy changes buyers and sellers should take note of.

The most important updates with Incoterms 2020

DAT is renamed to DPU

Incoterms 2010 specifies DAT (Delivered at Terminal) to mean the goods are delivered once it is unloaded at the named terminal. This does not allow for goods to be delivered at a private or business address. DPU (Delivered at Place Unloaded) is more general and applies to any point of delivery specified.

DPU is the only Incoterm which places the risk of unloading goods from the vessel of delivery onto the seller, which is by nature a great benefit to the buyer.

CIP requires better insurance

As mentioned, Incoterms 2010 CIP (Carriage and Insurance Paid) requires the seller to provide insurance in the name of the buyer that adheres to Clause C of the Institute of Cargo Clauses. This is a basic level of insurance generally suitable for bulk commodity cargoes that would more likely travel under CIF, which is CIP’s maritime equivalent. In the case of specialty or manufactured goods Clause C insurance often falls short and requires that additional policy conditions have to be written into the sales contract.

Incoterms 2020 defines CIP as inclusive of an insurance policy in line with Clause A of the Institute of Cargo Clauses, which is much more comprehensive. Insurance specified by both Incoterms 2010 and Incoterms 2020 CIF must comply with Clause C of the Institute of Cargo Clauses.
Click here to download a summary of insurance required by Incoterms 2020.

Transportation no longer has to be third party

Incoterms 2020 makes provision for transport being provided by the seller or buyer instead of a third party (e.g. the seller's own vehicle). E.g. According to Incoterms 2020 FCA stipulates the buyer must "contract or arrange at its own cost for the carriage of the goods from the named place of delivery".
Click here for helpful summary of all the 2020 Incoterms or download a printable Incoterms chart.

Do importers and exporters have to use Incoterms?

Incoterm become legally binding when they are written into a sales contract, but using them in the first place is not required. International sellers and buyers may choose to forego using Incoterms and still draw up a comprehensive agreement. Alternatively, an Incoterm can be used with any variation from its standard definition preferred by the buyer or seller noted in the terms of the contract. However, with an economy in dire need of growth, South African importers and exporters can’t afford to be out of the loop with any valuable resources of international trade.

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