Choosing an effective Incoterm for your routed order

Maersk ocean freight shipping cargo on cloudy day
Maersk vessel | Image Credit: Pixabay

Incoterms are an extremely useful tool used globally on a daily basis in just about every transaction where international transportation is involved. The International Chamber of Commerce in Paris, France developed Incoterms to clearly delineate the responsibilities of each party involved in the transaction and outline where the transfer of responsibility occurs.

So: why write about something clearly so valuable and widely used and has been around for many years?

Well, in my experience, I have seen where certain Incoterms have caused confusion and problems. Specifically, with Incoterms EXW (Ex Works) and FCA (Free Carrier).

These terms are most often used in routed transactions. Though they may seem straightforward, they can sometimes be problematic for the seller of the goods.

Take Ex works, for example: the seller makes the freight available at a designated location (or at a named carrier location in the case of FCA), the buyer comes to pick up merchandise and the seller gets paid - easy transaction!

Well hold on a minute: under the incoterm Ex Works, the buyer is responsible for the export clearance as well as the transportation arrangements. Let’s review that in greater detail: Export clearance means the foreign buyer (or his/her designated agent) will make the necessary export filing with US census and US customs, based on the information from the seller. You, the seller, provide the correct information because, under US regulations, the seller (or in “government speak” the US Principal Party in Interest (USPPI) ) is responsible for the correct filing of this information. But how can you make sure the correct information is filed by the buyer or the designated agent if you have no control the export clearance process?  
Let’s take this one step further: certain merchandise may require an export license, and this is also a component of the export clearance process. 

containers on loading pier

The buyer is now responsible for determining if a license is required, and if one is needed the buyer/designated agent is required to obtain this license.

How can you, the seller, be sure that this is done  - and done correctly - if you are not involved in the process?

The possibility for errors, omissions, or downright illegal actions, is very real. And to add to these worries, I have seen many instances where the designated agent of the buyer will ask for a Power of Attorney to file the export declaration, stating that that is a requirement under US regulations. But they are wrong: The designated agent must get the Power of Attorney from the buyer in a routed transaction - all you must provide are 12 data elements as outlined in 15 CFR, 30.3 (e)(1).

And just to make it a little more uncomfortable, what about the transportation portion of hazardous material shipments, where you are not involved either? Who is now responsible for creating and signing the Dangerous Goods declaration?

Under US law, you are not “the offeror” of this shipment who is required to provide this document; that responsibility is with the buyer. But I have seen situations where the buyer and/or the designated agent will insist that the seller must provide a Dangerous Goods declaration.

The incoterms only say that the seller must render assistance to the buyer in obtaining these documents - what specifically this “assistance” looks like, must be discussed between you and the buyer prior to shipment.

My personal view is: you are not the offeror and you do not control the transportation, so I would not issue the Dangerous Goods declaration.

sign document agreement

One of my biggest concerns for the exporter in routed transactions, where you have no control of the transportation, is how can you ensure that the merchandise will really go to the party that you sold it to? There is the possibility that this freight may be redirected to an unwanted country or destination. Maybe you already have an extensive distribution network in place in those areas, and a third-party bringing in your material may disrupt prices or possibly the brand's reputation. Or - going back to export clearance - what if your freight is shipped to a country that is being boycotted, or to an entity that is on a denials list? Again, you have no control over this and there is not much you can do to prevent these outcomes in routed transactions.

Now, I am not against routed orders - after all, these are an important part of our business. But I am advocating the correct use of the Incoterms, and that if you are trying to sell to a buyer who looks for a routed transaction, make sure to use Incoterms that will reduce your risk as much as possible.

To do so, I would suggest choosing terms such as FOB or FAS, where you are responsible for the export clearance and have more visibility of the export transportation. This can give you better chances of spotting something not in-line with the sales contract. If someone wants to deceive you, they may, but you want to place yourself in the best position to defend yourself against such an attempt.