TT Talk - Assessing a risk context for Incoterms® 2020
Incorporation of Incoterms into a sale contract will not bind any third party, or govern any other contract. It remains for the seller or buyer to ensure that the agreed Incoterm correctly reflects the reality for finance, carriage and insurance. Start with the end in mind!
Whilst in many instances stakeholders in the supply chain have no influence over the sale terms used, the Incoterm can influence how goods are prepared for carriage, declared and how they are entered into the global supply chain. Where possible therefore it is generally recommended that stakeholders in the supply chain understand the Incoterm used and perform a risk assessment accordingly.
“Incoterms® can influence how goods are prepared for carriage, declared and how they are entered into the global supply chain”
TT Club, in collaboration with BIFA, CILT, CIPS and HFW, has developed an infographic which provides an illustration as to where risk transfers under each of the terms, whilst at the same time highlighting a number of key areas of risk that underline the importance of undertaking due diligence with trading and supply partners.
This article explores a selection of areas where the choices made by sellers and buyers can indirectly influence risk throughout the supply chain for other stakeholders.
Poor packing and securing of goods in cargo transport units (CTU) remains responsible for an alarmingly high percentage of incidents throughout the supply chain, leading to damage, loss, injuries and fatalities. TT Club’s own claims experience shows that 65% of incidents involving damage to cargo can be attributed to poor or improper packing and securing.
The Incoterm selected under the sales contract can provide an insight as to how the goods are likely to be entered into the supply chain. If goods are being sold as Ex-works, for example, stakeholders involved in the transport of the consignment might want to seek greater assurance concerning how the goods are packaged, labelled packed and secured within the CTU prior to carriage. The seller is only required to present the goods in suitable packaging for collection by the buyer. In practice, the seller/shipper is likely to be involved in packing the cargo into the CTU for the entire transit. Unitised trade moved internationally almost inevitably involves multiple modes of transport; this requires understanding of differing physical dynamics and regulatory requirements. Diligence in such aspects will lead to additional cost
TT Club has a global initiative, in collaboration with CINS, GSF, ICHCA and WSC under the banner of ‘Cargo Integrity’ or #Fit4Freight, which aims to raise awareness of these challenges. Read more here.
Goods in transit are at risk from a range of ’perils’, including theft, mishap during carriage and general average. Carriers’ liabilities are in many cases limited under the contract of carriage; from the perspective of those with an interest in the cargo, it is prudent to ensure that goods are covered with an appropriate cargo policy from departure to arrival. In certain maritime trades it is understood that as much as 40% of goods travel without cargo insurance.
Where goods are not shipped under CIF or CIP, it is advisable for freight forwarders or carriers to promote the value of cargo insurance – and perhaps be cautious where a shipper is adamant that they do not wish to purchase adequate cover. This is especially true where the value of the consignment is known to be low, which may give rise to issues at destination where cargoes are either not permitted for import or simply abandoned. See further information on TT Club’s cargo product.
Container demurrage and detention
Where cargoes do experience difficulties at destination costs build quickly. Demurrage is the daily charge applied by the shipping line for laden containers that have arrived at the destination port, but have not been collected within the prescribed free time period. Detention is the daily charge applied by the shipping line where containers that have been emptied of the carried cargo are not returned within the prescribed free time period.
Due diligence in relation to the nature of the supply chain and a knowledge of the sales terms can provide an early red flag to stakeholders that may mitigate such risks.
“Due diligence in relation to the nature of the supply chain and a knowledge of the sales terms can provide an early red flag to stakeholders that may mitigate such risks”
Performing adequate due diligence on your contractual partners is a fundamental risk management tool for your business. Inevitably freight forwarders, haulage companies and other stakeholders in the supply chain by the very nature of their businesses, contract with parties on a global scale in the provision of their valuable services.
Given the global nature of the modern supply chain, stakeholders offering their services face a number of key risk factors which should be considered. The Incoterm incorporated into the sales contract may be indicative of the behaviour of the buyer and seller and how the goods are entered into the supply chain.
Due diligence often is considered in the context of the party seeking a supplier relationship; today’s risk exposures require those offering a service to carry out similar validation of the presenting entity and details – and seek assurance that other stakeholders in the supply chain on whom there will be reliance implement similar checks.
The global freight supply chain is a complex beast, with numerous direct and indirect stakeholders. Incoterms represent a valuable and valid framework to bring clarity and standardisation in trading internationally. The consequences of decisions made in the context of that sale relationship, as with other international trade related requirements (such as those involved in customs, crime prevention or security), need also to be assessed through a lens that may be primarily safety-focused.
The Incoterms® Rules are protected by copyright owned by ICC. Further information on the Incoterm® Rules may be obtained from the ICC website iccwbo.org. Incoterms® and the Incoterms® 2020 logo are trademarks of ICC. Use of these trademarks does not imply association with, approval of or sponsorship by ICC unless specifically stated above.
We hope that you have found the above interesting. If you would like further information, or have any comments, please email us, or take this opportunity to forward to any colleagues who you may feel would be interested.
We look forward to hearing from you.
Risk Management Director, TT Club