By Jim Trubits
Many international buyers and sellers fail to recognize the positive financial outcomes that can be gained from a well thought out Incoterms strategy.
Your methodology need not be complicated. It can be as simple as having a solid understanding of the role that risk plays in each Incoterms rule. Before expanding of how this strategy works, let’s clarify what “risk” means in the context of Incoterms. Risk refers to who is responsible for paying for damage to the goods that occurs while the shipment is in transit. This responsibility shifts from the seller to the buyer at different points in the transit process, depending on the Incoterms rule that is used.
For example, FOB, CFR, and CIF all assign this responsibility (i.e., risk) to the seller from the time the containerized goods are at the seller’s premises, until the container is placed on board a vessel. Should lightning strike and damage the goods at any time between these two points, the seller is obligated to reimburse the buyer for the damaged goods. Once placed on board the vessel, that responsibility falls solely on the buyer, up to and including when delivery occurs at the final destination.
International sellers can use this understanding of risk to their advantage when discussing Incoterms during sales contract negotiations.
If a seller wanted to minimize their liability for paying for damages (i.e., minimize their risk), they may choose FCA, CPT, or CIP. These three Incoterms rules transfer risk from seller to buyer when the goods are tendered to the first carrier, usually a trucking carrier. This shortens the seller’s exposure to risk, as it normally occurs far earlier in the transit process than when the goods are place on board a vessel.
Jim Trubits is Vice President for Mohawk Global Trade Advisors. Click here to read more about Jim.