Q197: What is the best Incoterm when exporting? (Part One)

A197: I need to address this question in two parts, this being Part 1 and the next Q&A will be Part 2 (as you can see, I’m using quite a sophisticated numbering system, so do try to keep up.)

The current Incoterms Rules (if you wish to work with them) comprise of 11 apparent options.

I say apparent because several of the terms cannot be applied for one or another reason, and the average exporter’s choices normally come down to two Rules.

This limitation is ultimately beneficial in that the fewer choices you have the less likely you are to make a mistake.

(Conversely, a buyer would have three choices, not that I would encourage buyers to work with Incoterms but sometimes they may need to, despite it being a seller-driven system. I have a Q&A on this topic lined up too.)

The 11 Rules may be seen as ready-made suits. The first limitation is that they cannot all fit you. Often the physical conditions required to make a Rule work are simply not available, or they are impossible to achieve.

For example, you could not apply FOB – a traditional seafreight term – if you were exporting by air, as the execution of the FOB Rule requires the seller to interface with a ship.

But further, even in seafreight, FOB requires that the seller has open access to the buyer’s vessel and as a general proposition this isn’t possible (with the narrowest of exceptions) in a modern port, being an operation structured around the concept of the restricted area.

On this basis, FOB, FAS, CFR and CIF would not be possible to or from South Africa. Ignorance being as common as hydrogen, you will see these terms used, but the fact that they are popular will not change the fact that they are at best inappropriate and at worst dangerous to use.

That leaves the average exporter with a choice of 7 Rules.

However, in the introduction to the 2020 Rules, the head of the drafting committee makes a very strong point that two of the Rules should be avoided for international contracts. These are the two Rules at the extreme ends of the ready-made rack: EXW and DDP.

EXW is generally limited because of the physical and administrative challenges it poses, whereas DDP is generally limited due to legislative challenges. In both cases, then, we can take these suits off the rack too.

Again, you may see both in use; there’s an awful lot of hydrogen, everywhere.

Then there were 5.

As you will be aware (right?), it is illegal to sell on an FCA basis from South Africa or any F-prefixed contract such the FAS or FOB Rules. This has been the case since 2014 in certain export models and since 2017 for all export models.

Notwithstanding any physical limitations a legal limitation is absolute; so, the FCA Rule is not an option either (*see footnote).

Your election, then, is from four Rules. CPT (Carriage Paid To), CIP (Carriage and Insurance Paid to), DAP (Delivered At Place), and DPU (Delivered At Place Unloaded).

CPT and CIP are identical apart from the insurance component, and of the two I think CIP Is the better option wherever you are in a position to impose insurance on your buyer.

DAP and DPU are identical, apart from DPU obligating the Seller to discharge the cargo from the delivering vehicle at the destination named place. This is a cumbersome risk. It has merits in certain models, but the commoner of the two is DAP.

And there you have your export options: CIP and DAP. If you are working with Incoterms Rules (and remember that you are not bound to work with the Rules, you have the choice not to) then generally you could only safely work in exports with CIP and DAP.

Choosing one over the other depends on several factors – the most important of which is your risk appetite, broadly expressed in how you are being paid, and it is this and a few other related issues that I will address further in the next Q&A, being Part Two of this answer.

*FOOTNOTE. You may be aware that many South African exporters use FOB, FAS and FCA illegally, generally from ignorance. But then you may also be aware that many South Africans of all shapes and sizes break the speed limit. The acceptance that so many people do it does not stop the limit being the limit, and the law.

If you hit a speed trap the fact that you’ve always gone that fast without a problem is not going to save you. The only thing you have going for you is the reality that there are very few speed traps.

The same is true when you export on F-prefixed terms. SARS should be pulling you up, but they are not. There are very few speed traps…today. That does not mean to say they will not pull you up tomorrow, and tomorrow and tomorrow.

You cannot sell on an F-prefixed term from South Africa. Finish and Klaar. Unlike the speed trap, if you get hauled up by SARS at any point they will go back on your history and the fact that you’ve been speeding for years will become apparent.

Here endeth the lesson – you budget for training or you budget for ignorance: it is your call. Make it while you are still at liberty to do so.

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