Incoterms and Shipping Terms

Chloe: Welcome to the London School of Business and Administration podcast—where breakthrough ideas meet real-world impact. I'm Chloe, and today we're diving into Incoterms and Shipping Terms—the one concept that quietly shapes everything from boardroom decisions to your daily workflow.

Rohan: That is a perfect introduction, Chloe. It’s fascinating how something as technical as a three-letter code can determine who pays for the coffee when a container gets stuck in customs, or worse, who loses thousands of pounds when goods are damaged in transit.

Imani: Exactly. And it’s not just about money; it’s about risk. I remember a situation last quarter where my team assumed the supplier was handling the insurance because we’d always done it that way with a different vendor. We used EXW, Ex Works, but didn’t clarify the handover point clearly. The goods were damaged on the truck before they even left the supplier’s warehouse. We had no claim. It was a costly lesson in assuming rather than specifying.

Chloe: That sounds incredibly stressful, Imani. So, for someone listening who might be new to this, why is this so critical? Why can’t we just say “you ship it, I receive it”?

Rohan: Because “you ship it, I receive it” is legally ambiguous. Incoterms, or International Commercial Terms, were published by the International Chamber of Commerce to standardize this. They define exactly where the responsibility, cost, and risk transfer from seller to buyer. Without them, you’re operating in a gray area that leads to disputes. Historically, these terms evolved to reduce friction in global trade, but many companies still treat them as an afterthought rather than a core part of their contract strategy.

Imani: And that’s where the danger lies. I once saw a contract where the term was FCA, Free Carrier, but the seller assumed it meant they had to load the goods onto the truck. Under FCA, if the seller’s premises are the named place, they do load it. But if the named place is a terminal, they don’t. That tiny distinction cost us three days of delay because the truck arrived, the seller refused to load, and the truck driver refused to stay unpaid.

Chloe: Wow. So it’s not just about the letters; it’s about the specific location and the physical action tied to it. That’s a crucial detail. So, how do we avoid these pitfalls? What should someone look for when drafting or reviewing a shipping term?

Rohan: Start with the destination and the mode of transport. If you’re shipping by sea, you might use FOB, Free On Board, or CIF, Cost Insurance and Freight. But if you’re using air or multimodal transport, FOB is incorrect. You should use FCA or CPT. Using the wrong term for the mode of transport can create legal loopholes that insurers will exploit to deny claims.

Imani: I always tell my clients to map out the journey. Where does the seller’s job end? Is it at their dock? At the port? At the buyer’s warehouse? Once you answer that, the right Incoterm usually becomes obvious. And then, double-check the insurance. Does the term require the seller to insure the goods? CIF does, but only to a minimum level. If you’re shipping high-value electronics, CIF might not be enough. You might need CIP, Carriage and Insurance Paid To, which allows for higher insurance coverage.

That tiny distinction cost us three days of delay because the truck arrived, the seller refused to load, and the truck driver refused to stay unpaid.

Chloe: That’s a great point about insurance. It’s easy to think that if the seller is paying for shipping, they’re also covering all risks. But as Imani mentioned, the coverage levels can vary significantly. So, if I’m a buyer, and I want to minimize my risk, what’s the safest term to use?

Rohan: From a buyer’s perspective, DDP, Delivered Duty Paid, is the safest. The seller bears all costs and risks involved in bringing the goods to the place of destination, including import duties and taxes. However, it’s also the most expensive for the seller, so they might price it higher. It’s a trade-off between convenience and cost.

Imani: And be careful with DDP if you’re the seller. You’re responsible for import clearance in the buyer’s country. If you don’t have a local agent or partner there, you could get stuck paying duties you didn’t anticipate. I learned this the hard way when we shipped to a country with sudden tariff changes. We hadn’t accounted for the new rates, and we ended up absorbing the cost because we had agreed to DDP.

Chloe: So, communication is key. Even if the contract says DDP, you need to stay updated on local regulations. That’s a valuable takeaway. As we wrap up, what’s one thing you’d want our listeners to remember about Incoterms?

Rohan: Don’t treat Incoterms as a static checkbox. They are dynamic tools that reflect your negotiation power and risk appetite. Review them for every major shipment, especially when markets are volatile.

Imani: And verify, verify, verify. Make sure your logistics partners understand the term as well as you do. A miscommunication with a freight forwarder can undo all the careful planning you’ve done.

Chloe: Excellent advice. Thank you both for sharing your insights and real-world experiences. If this resonated, share it with one person who needs to hear it—and hit subscribe so you never miss an episode that moves you forward.