Chapter 4: Incorrect Shipping Term Selected

Chapter 4: Incorrect Shipping Term Selected

In what would clearly qualify as a SNAFU situation, a shipment can be delayed at the border due to a failure by the shipper and carrier to determine responsibility for the customs process.  As a result, a carrier may arrive at the border believing it has no role in the import process, while the U.S. seller assumes the carrier does indeed have full responsibility.

This confusion stems from a failure to properly identify the correct terms of shipping – known as Incoterms – before the goods leave the United States.

What are Incoterms?

Incoterms are “the rules of the road” for international commerce and ensure that businesses all over the world abide by the same definitions and processes.  Incoterms carefully delineate responsibilities to buyers and sellers and dictate each party’s obligations throughout the shipping process.  

Because of Incoterms, buyers and sellers have a clear understanding of what constitutes “delivery” for example, and which party is responsible for unloading a vehicle, and who is liable for certain payments.  This avoids costly mistakes and misunderstandings.

Incoterms is shorthand for “International Commerce Terms,” and are developed and maintained by the International Chamber of Commerce (ICC), located in Paris, France.  

As much as Incoterms clarify, and simplify the shipping process, choosing the correct term is critically important.  Each Incoterm carries specific implications for duty liability, risk, cost, as well as for a particular shipment’s compliance route.  Failure to assign the correct code could result in significant clearance delays and poor customer service.

The List – Incoterms 2010

The ICC periodically updates its list of Incoterms, generally to ensure that its standards are consistent with current industry practices.  The Incoterms list was last updated in 2010, and will be revisited again in 2020.

The most current list of terms is referred to as “Incoterms 2010.”  The current list includes 11 specific Incoterms, which are divided into two categories, based on mode of transport:

Group One:  Incoterms that apply to any mode of transport:

• EXW Ex Works

Means that the seller delivers when goods are placed at the disposal of the buyer at seller’s premises or another named place (i.e. works, factory, warehouse, etc.) not cleared for export and not loaded on any collecting vehicle.

• FCA Free Carrier

Means that the seller delivers the goods, cleared for export, to the carrier nominated by the buyer at the named place.  It should be noted that the chosen place of delivery has an impact on the obligations of loading and unloading the goods at that place.  If delivery occurs at the seller’s premises, the seller is responsible for loading. If delivery occurs at any other place, the seller is not responsible for unloading.

• CPT Carriage Paid To

Means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.  

• CIP Carriage and Insurance Paid To

Means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such placed is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.  The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage.  

• DAT Delivered at Terminal*

Means that the seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named terminal at the named port or place of destination.  “Terminal” includes a place, whether covered or not, such as a quay, warehouse, container yard or road, rail or cargo terminal. The seller bears all risks involved in bringing the goods to and unloading them at the terminal at the named port or place of destination.

• DAP Delivered at Place*

Means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination.  The seller bears all risks involved in bringing the goods to the named place.

• DDP Delivered Duty Paid

Means that the seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport, ready for unloading at the named place of destination.  The seller bears all the costs and risks involved in bringing the goods to the place of destination and has an obligation to clear the goods not only for export but also for import, to pay any duty for both export and important and to carry out all customs formalities.

Group Two:  Incoterms that apply to sea and inland waterway transport only:

• FAS Free Alongside Ship

Means that the seller delivers when the goods are placed alongside the vessel (e.g., on a quay or a barge) nominated by the buyer at the named port of shipment.  The risk of loss or damage to the goods passes when the goods are alongside the ship, and the buyer bears all costs from that moment onwards.

• FOB Free on Board

Means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered.  The risk of loss or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that point onwards.

• CFR Cost and Freight

Means that the seller delivers the goods on board the vessel or procures the goods already so delivered.  The risk of loss or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.

• CIF Cost, Insurance, and Freight

Means that the seller delivers the goods on board the vessel or procures the goods already so delivered.  The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.

The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage.  

Ground Shipments to Canada – Your Best Incoterms Options

For purposes of ground shipments traveling between the United States and Canada, Incoterms choices are generally limited to three terms including the Delivered at Terminal (DAT), Delivered at Place (DAP) and the Delivered Duty Paid (DDP) options.

The primary difference between these three terms of service, is that a DDP transaction places almost-full responsibility on the seller, including responsibility for the customs process, and payment of all duties, taxes and brokerage fees.  DAT and DAP shipments place responsibility for customs-related fees and taxes on the importer/buyer.

The choice then, really comes down to “duty paid or duty unpaid?”  Does it make more sense for a U.S. business to pre-pay its customers’ customs fees and transaction costs at time of purchase, or is it preferable to have the customer pay those costs at time of delivery?  Also, under what circumstances is it preferable to have a Canadian customer oversee the importation process, as opposed to having the U.S. business bear responsibility?

A business will need to consult with its logistics provider or carrier and determine the shipping term that best meets its needs.  Whatever Incoterm is agreed upon, each party must have full understanding of its role in the shipping process, including responsibility for the customs clearance process and payment of duties, taxes, and associated fees.