Feb 08 | 2022
Precise Terms Require Named Place, Incoterms Year of Publication
This is the second in a continuing series by John Vogt, former Halliburton vice president of global logistics. You’ll gain the critical information needed to reduce shipping risks to your company whether you’re the buyer or shipper. Look for John's new installments in the first issue of BreakbulkONE each month.
The previous article established Incoterms rules that define the obligations, risks and costs for the movement of the goods between the seller and buyer. They are applicable for domestic and international trade agreements globally. With all this being in place, there are three more issues we must deal with before diving into the details of the various terms:
The named place must be the location where a transfer occurs between buyer and seller. That sounds simple, just add the location and all is solved. Think about that a bit. In a small harbor there may be only one terminal. Compare that to the Port of Houston which is 52 miles in length. If you specify the Port of Houston, then anywhere in the port can be deemed to be the transfer. It is silly, but imagine the problems if your transporter chose a point in the harbor 50 miles from where you wanted the goods? The location must be precise, not a general area!
The year of publications of the Incoterms rules is important, as it defines the definition of the rules published on that date. Let us use the example of FOB, which has seen some changes in the last few publications. Initially the risk transferred once the goods were lifted from the quay; then the risk transferred “across the rail;” and in the 2020 version, the risk is transferred when stowed on the vessel. For precision, it is important that the year is specified otherwise this sort of nuance can lead to risks that you were not aware of. The correct form for the FOB article would be FOB (Terminal 23, Port of Houston, USA) Incoterms 2020. Anything else introduces unnecessary risks of interpretation, which only benefits lawyers when something goes wrong.
These are not laid out in the sequence of flow of goods, so some searching is required to see the full work to be done. But they do give all the needed actions required of the buyer and seller. There are some areas where the wording is, to be generous, broad in its description, and this an area which leaves some understanding and interpretation for the user.
For example, for the C and D Incoterms rules, the seller must “assist” the seller with the appropriate information to clear customs for export. Equally the buyer must “assist” the seller with any documents and/or information. It does impose an obligation, without specifying what the information must be, unfortunately. In this digital age this is not as precise as one would expect. Transfer documents and a few other areas are dealt with in an equally vague manner.
In addition to the Incoterms rule chosen for the transaction, the trade agreement must also cover, beyond the identification or specification and quantity of goods, the following:
At this point we know that Incoterms rules are the de facto global method to define the obligations, risks and costs in a trade agreement, and with title transfer and the payment terms give clear roles and responsibilities for the buyer and seller. The named place must be precise, and the year of the Incoterms published must be added to the Incoterms rule for a precise trade term.
The next article will look at Ex Works (EXW), which many believe is a simple and no-risk term for the seller. And many would be surprised that this is often not the case!
See Part 1: Why Everyone Needs a Better Understanding of Incoterms
Do you have an Incoterms® experience to share that you'd like John to comment on that could be included in a future article? Submit to Breakbulk's Leslie Meredith at [email protected] and include description, locations (origin and delivery), Incoterm used and lesson learned if applicable.
About the Author
John has his own consulting company and, at the end of his 42 years in industry around the world, was the Vice President of Global Logistics for Halliburton. Thereafter he spent five years as a Professor of Record for the University of Houston-Downtown MBA for International and Supply Chain courses. He has experience as a Board Director and has traveled the world to improve trade.
In his career, he has driven the correct use of Incoterms as part of the trade improvements he has implemented to drive efficiency and effectiveness. In his role as a professor of record, he taught multiple courses on the use of Incoterms and trade-related agreements. Alongside his colleague Dr. Jonathan Davis (Associate Professor, Supply Chain Management Chair GMSC Department, Marilyn Davies College of Business, University of Houston-Downtown), he has published three formal research papers on Incoterms with two more in consideration, making him the most published Incoterms researcher. He has also published numerous articles, presented papers at multiple international conferences around the world on logistics, trade and compliance including Incoterms. He has served as track chair for multiple conferences as well.
John has a Ph.D. (Logistics), an MBA, and a B.Sc. (Engineering), holds the title of European Engineer (Eur. Ing), is a Chartered Engineer (UK) and has been elected as a Fellow of the Institute of Engineering and Technology (UK). You can reach John at [email protected].
The previous article established Incoterms rules that define the obligations, risks and costs for the movement of the goods between the seller and buyer. They are applicable for domestic and international trade agreements globally. With all this being in place, there are three more issues we must deal with before diving into the details of the various terms:
- How to specify an Incoterms rule in an agreement.
- What exactly is covered in the Incoterms rule.
- What must be in the agreement to support the Incoterms rule chosen.
The named place must be the location where a transfer occurs between buyer and seller. That sounds simple, just add the location and all is solved. Think about that a bit. In a small harbor there may be only one terminal. Compare that to the Port of Houston which is 52 miles in length. If you specify the Port of Houston, then anywhere in the port can be deemed to be the transfer. It is silly, but imagine the problems if your transporter chose a point in the harbor 50 miles from where you wanted the goods? The location must be precise, not a general area!
The year of publications of the Incoterms rules is important, as it defines the definition of the rules published on that date. Let us use the example of FOB, which has seen some changes in the last few publications. Initially the risk transferred once the goods were lifted from the quay; then the risk transferred “across the rail;” and in the 2020 version, the risk is transferred when stowed on the vessel. For precision, it is important that the year is specified otherwise this sort of nuance can lead to risks that you were not aware of. The correct form for the FOB article would be FOB (Terminal 23, Port of Houston, USA) Incoterms 2020. Anything else introduces unnecessary risks of interpretation, which only benefits lawyers when something goes wrong.
Buyers and Sellers
What is contained and covered by each Incoterms rule is covered in 10 sections for each rule. Within these 10 sections, called articles and numbered A for seller and B for buyer, the actions, risks and costs are more fully defined. The nice part about these is they are laid out with the buyer and seller obligations on opposing pages in the International Chamber of Commerce booklet on Incoterms, so you can see both buyer and seller obligations, risks and costs for each article. The articles cover broadly the following:| Article | Topic covered |
| A1 / B1 | General Obligations |
| A2 / B2 | Delivery and Receiving Delivery |
| A3 / B3 | Transfer of risks |
| A4 / B4 | Carriage and movement requirements responsibilities |
| A5 / B5 | Insurance requirements |
| A6 / B6 | Delivery and transport documents |
| A7 / B7 | Export and / or Import Customs Clearance |
| A8 / B8 | Checking of goods, packing and marking before dispatch |
| A9 / B9 | Allocation of costs |
| A10 / B10 | Notices during transaction |
These are not laid out in the sequence of flow of goods, so some searching is required to see the full work to be done. But they do give all the needed actions required of the buyer and seller. There are some areas where the wording is, to be generous, broad in its description, and this an area which leaves some understanding and interpretation for the user.
For example, for the C and D Incoterms rules, the seller must “assist” the seller with the appropriate information to clear customs for export. Equally the buyer must “assist” the seller with any documents and/or information. It does impose an obligation, without specifying what the information must be, unfortunately. In this digital age this is not as precise as one would expect. Transfer documents and a few other areas are dealt with in an equally vague manner.
In addition to the Incoterms rule chosen for the transaction, the trade agreement must also cover, beyond the identification or specification and quantity of goods, the following:
- Where title transfers for the goods.
- What the payment terms are.
US Trade Wrinkle
Let us detour to trades within the U.S. and the terms FOB Origin and FOB Delivered. These are not Incoterms, and were conceived in the 1950s in the Uniform Commercial Code (UCC) of the USA. This code, with variations, was adopted by each state (bar Louisiana with its Napoleonic Code), and these terms are only valid in the U.S. They are obsolete as the 11 Incoterms rules are internationally recognized, have been updated regularly and give far more clarity to the movement obligations, risks and costs.At this point we know that Incoterms rules are the de facto global method to define the obligations, risks and costs in a trade agreement, and with title transfer and the payment terms give clear roles and responsibilities for the buyer and seller. The named place must be precise, and the year of the Incoterms published must be added to the Incoterms rule for a precise trade term.
The next article will look at Ex Works (EXW), which many believe is a simple and no-risk term for the seller. And many would be surprised that this is often not the case!
See Part 1: Why Everyone Needs a Better Understanding of Incoterms
Do you have an Incoterms® experience to share that you'd like John to comment on that could be included in a future article? Submit to Breakbulk's Leslie Meredith at [email protected] and include description, locations (origin and delivery), Incoterm used and lesson learned if applicable.
About the AuthorJohn has his own consulting company and, at the end of his 42 years in industry around the world, was the Vice President of Global Logistics for Halliburton. Thereafter he spent five years as a Professor of Record for the University of Houston-Downtown MBA for International and Supply Chain courses. He has experience as a Board Director and has traveled the world to improve trade.
In his career, he has driven the correct use of Incoterms as part of the trade improvements he has implemented to drive efficiency and effectiveness. In his role as a professor of record, he taught multiple courses on the use of Incoterms and trade-related agreements. Alongside his colleague Dr. Jonathan Davis (Associate Professor, Supply Chain Management Chair GMSC Department, Marilyn Davies College of Business, University of Houston-Downtown), he has published three formal research papers on Incoterms with two more in consideration, making him the most published Incoterms researcher. He has also published numerous articles, presented papers at multiple international conferences around the world on logistics, trade and compliance including Incoterms. He has served as track chair for multiple conferences as well.
John has a Ph.D. (Logistics), an MBA, and a B.Sc. (Engineering), holds the title of European Engineer (Eur. Ing), is a Chartered Engineer (UK) and has been elected as a Fellow of the Institute of Engineering and Technology (UK). You can reach John at [email protected].
