Seller’s advantage, buyer’s control: Incoterms® and spot shipping with Maersk (+ FAQs)

What are Incoterms®?

Incoterms® stands for International Commercial Terms. It’s like a rulebook to help importers and exporters understand their responsibilities (tasks, costs, and risks) when transporting freight. These rules help define essential functions like:

• Who pays for shipping?
• Who’s responsible if something gets damaged?
• Who handles paperwork at the border?, etc.

The latest version of Incoterms® 2020 states 11 standardized rules or terms for shipping. They are divided into two categories based on the mode of transport:

Simplifying Incoterms®

Can be used in any mode of transport (sea, air, rail, or road):
1. EXW (Ex Works)
2. FCA (Free Carrier)
3. CPT (Carriage Paid To)
4. CIP (Carriage and Insurance Paid To)
5. DAP (Delivered at Place)
6. DPU (Delivered at Place Unloaded)
7. DDP (Delivery Duty Paid)
Can be used only for ocean and inland waterway transport:
8. FAS (Free Alongside Ship)
9. FOB (Free on Board)
10. CFR (Cost and Freight)
11. CIF (Cost, Insurance, and Freight)

Download our free 1-pager Incoterms guide.

Note: Visit the International Chamber of Commerce (ICC) website for a complete overview and insights into Incoterms®.

Why are Incoterms® important in spot shipping?

By using these rules when  spot shipping, both parties can benefit from:

• Streamlined communication: These terms are a common language for trade, ensuring all parties are on the same page regarding their roles and expectations.
• Reduced uncertainty: Incoterms® states which party (buyer or seller) is accountable and obligated during the shipment. A transparent allocation of risks and costs minimizes potential disagreements.
• Faster transactions: By clearly outlining each party’s functions, it helps prevent misunderstandings and expedite the process by providing a predefined structure.

How can Incoterms® help a business in shipping?

Incoterms® help define:

• Who pays for what: This includes costs like transportation, insurance, loading/unloading, customs duties, and insurance.
• When the risk transfers: This clarifies who is responsible for damage or loss of goods at different points in the journey.
• Who handles what paperwork:  This includes documents like commercial invoices and certificates of origin.

By using Incoterms®, businesses can avoid misunderstandings and disputes that can arise during trade. They create a framework for clear communication, risk management, and cost optimization throughout the entire process.

Due to its very nature, the most common Incoterms® in spot shipping tend to be those that place most of the responsibility on the buyer (i.e., consignee or receiver).

This is because spot transactions are fast-paced deals. Choosing buyer-specific Incoterms® is faster for sellers, who can just load the goods in the container and get them on board. This also offers the buyers flexibility to choose their own carrier and potentially save on operational and shipping costs. Additionally, it allows them to handle the import processes at the destination port at their own pace (including freetime days and D&D charges).

So, which Incoterms® are most commonly used in spot shipping? Let’s explore them briefly:

1. FOB (Free on Board)

This is one of the most popular, go-to choices for spot shipments. Under FOB:

For sellers: Their responsibility ends once the goods have crossed the ship’s railing at the designated load port (origin port). They carry out delivery and loading at the named port of shipment, as well as export customs clearance.

For buyers: They take care of all costs and risks from that point onwards, including freight carriage costs, insurance, unloading, and import customs clearance.

FOB is a favorite because it clearly defines the point where risk and responsibility shift to the buyer after loading onto the vessel. This minimizes the seller’s involvement after a certain point, which aligns well with the fast and sporadic nature of spot shipments.

2. CFR (Cost and Freight)

It is another common term in international trade contracts, especially spot ocean freight.

For sellers: Similar to FOB, the seller covers the costs of transporting the goods to the destination port and exports customs clearance. Unlike FOB, CFR includes the main carriage cost (i.e., ocean freight transportation) in the price quoted by the seller.

For buyers: They are still responsible for processes at the destination port, including insurance, unloading, import customs clearance, and any additional charges.

CFR puts the burden of import duties, insurance beyond minimum coverage, and inland transportation on the buyer. It offers a good balance for sellers who want control over the initial transportation leg, and the buyer prefers to handle the rest, including the insurance policy.

Important Note: Compared to CFR, CIF (Cost, Insurance, and Freight) adds insurance and doesn’t fundamentally change the risk transfer point (port of destination) in the seller’s liability. However, it isn’t as attractive in spot shipping because the seller chooses insurance coverage against the buyer’s risk of loss or damage during the transit—thus, increasing the risks involved for the buyer (consignee).

3. FCA (Free Carrier)

While less common than the former two, FCA can be used in spot shipping involving integrated transport modes (e.g., inland and ocean).

For sellers: They are responsible for all necessary export procedures (documents, licenses, export clearance). They deliver the goods at a specific inland location (such as the seller’s warehouse or a designated terminal), called the “named place (origin/export)” in the contract.

For buyers: After your freight passes this designated location, the risks and responsibilities transfer to the buyer. They then handle costs for loading, onward transportation (trucking, ocean freight, insurance, and further inland charges), and import customs clearance.

When both the seller and buyer want to manage specific legs of the transportation journey, FCA creates a clear division of tasks. It’s particularly suitable when the buyer wants control over the inland transportation from the point of origin.

Note: * Usually, the buyer is responsible for associated charges. However, depending on the contract of sale or carriage, the seller may be responsible for these formalities and costs.

Which Incoterms® are not recommended when spot shipping?

By extension, terms that allocate most obligations to the seller aren’t preferred with spot freight shipments. For example, DDP (Delivered Duty Paid)—where the seller delivers to the named place of destination, including paying all import duties and taxes — is less common. That’s because they place major responsibility on the seller in a situation with potentially volatile costs and limited control. However, it can be attractive to the buyer who gets a single landed cost.

Here’s a flowchart to help you select the correct Incoterms®

1. I’m a seller in India shipping electronics to a buyer in Dubai via spot shipment. I want to ensure I get paid before the goods leave India. Which Incoterm® is the best?

CFR (Cost and Freight) could be suitable for you. You will arrange and pay for ocean freight to Dubai, but the buyer will be responsible for payment before the goods are shipped.

2. The spot shipment involves multiple legs of transportation (trucking and shipping). Does the Incoterm® apply to the entire journey or just specific parts?

Depending on the Incoterm®, the risks and responsibilities are distributed across specific portions of the journey outlined in its definition. For example, under FOB, the seller covers costs only up to the loading port. Conversely, FCA covers costs and processes until the “named place” of origin. Be clear in your contract about responsibility for onward transportation.

3. How do Incoterms® handle the responsibility for unexpected delays at the port during spot shipping?

Depending on the Incoterms® used, the responsibility for delays may lie with the seller or buyer. For instance, under FOB (Free on Board), once the goods are loaded onto the vessel, the risk transfers to the buyer. So, any delay at the port after loading would be the buyer’s responsibility.

4. Who is responsible for customs clearance in spot shipping as per the Incoterms®?

It depends on the term used. Under FCA, the buyer is responsible for customs clearance until the goods reach the “named place” of origin.

5. What happens if there is incomplete documentation during spot shipping?

Incoterms® specifies who provides which documents. For example, under FOB, the seller is responsible for the export documentation. Incomplete documentation would be the seller’s obligation and could delay shipment if not promptly corrected.

6. How do Incoterms® address changes in the transportation route in spot shipping?

Incoterms® helps determine risks and cost responsibilities. For example, under CFR (Cost and Freight), the seller bears costs until the destination port, so any route change before then would be their responsibility.

7. A seller in China is quoting a price for widgets to a buyer in the US for a spot shipment. The seller prefers FOB to minimize their risk and involvement. The buyer wants some risk protection for the ocean leg. What to do in this situation?

FOB transfers all the responsibility to the buyer at the loading port in China but offers more control over the spot shipment, including choosing the preferred carrier. CFR would have the seller pay for ocean freight, offering the buyer more protection during transportation. Both parties can negotiate the Incoterms® that best suits their needs in the spot market.

8. I’m a regular importer (buyer) using spot shipping. Is there a single ‘best’ Incoterms® for my situation?

There isn’t a single best option. It depends on factors like risk tolerance, negotiation power, and the type of goods being shipped. FOB (Free on Board) is common for spot shipments due to its simplicity and control, but you can also consider alternatives:

• FCA (Free Carrier): Shifts some responsibility to the buyer earlier in the shipping process (arranging carrier collection) but can be attractive for bulky goods.
• CFR (Cost and Freight): Seller pays for carriage but not insurance, potentially reducing costs for the buyer, who can then choose their own insurance coverage.

9. I’m using digital freight platforms for spot shipments. How can Incoterms® be integrated with these platforms?

Digital spot freight booking platforms can integrate Incoterms® in a few ways. Some offer dynamically-adjusted spot rates based on the chosen terms, where you can define ‘price owners’. You can also automatically generate essential shipping documents like commercial invoices (CIs) and bills of lading (B/Ls) and send them to the involved stakeholders online.

As a shipper, if you are using an Incoterm® in your sale and purchase contract, you need to set and agree upon them before booking your transportation on Maerx Spot.

Note: Maerx is not a mediator for sales contracts between buyer and seller. If you’re uncertain which Incoterms® to use for a particular transaction, we recommend seeking independent legal advice. Consult the ICC website for the latest updates on Incoterms® and the obligations you’d need to comply with for each set of terms.

With freight shipment on Maerx Spot, we don’t offer a feature to mention Incoterms® explicitly during the booking journey. However, you can allocate “Price Owner” at the time of booking. Here’s how you can do it:

1. Follow the usual steps to book your spot shipment on Maerx.
2. After confirming your shipment details and adding any value-added services, click the “Book” button. This will redirect you to the ‘Booking Journey’ page.
3. Here, you will see the complete booking information for your Maerx Spot shipment. Double-check and verify the associated details.
4. At this stage, select the correct ‘Price Owner’ from the given two options:
   1. ‘I am the price owner’ (if you are responsible for the freight carriage).
   2. ‘Select a price owner’ (if you’ve to assign carriage costs to another party).
5. If you select the first option (i.e., buyer = price owner), you don’t have any additional steps and can proceed with the booking.
   If you select the second option (i.e., buyer ≠ price owner), input the details of the price owner or their associated agent/NVOCC. In this case, you must give a letter of authority (LOA) with the Price Owner’s company letterhead within 48 hours of submitting your spot booking. Otherwise, your booking might be canceled.
6. Further, you can add “Booked by contact” details on this page. Your Maerx Spot booking confirmation will be sent to this contact.
7. After reviewing everything, click “Continue” and proceed with the next steps.

1. Are Incoterms® mandatory for Maerx Spot bookings?

No, they’re not mandatory. However, using Incoterms® is highly recommended for clarity and avoiding any potential disputes during shipping. In case you don’t use Incoterms®, local laws or customs practices would apply, which could lead to confusion or disagreements.

2. Are Incoterms® applicable to domestic spot shipments?

While not as common, Incoterms® can technically be used for domestic spot shipments. However, local laws and regulations might be sufficient for these transactions.

3. Who chooses the Incoterms® in a spot shipment?

Incoterms® are typically negotiated between buyer and seller before booking the spot freight transportation. Note that Maerx is not liable or responsible for mediating sales contracts between buyers and sellers.

4. Can Incoterms® replace a spot shipping contract?

No, Incoterms® are separate from the shipping contract. But, you can reference a specific rule within the contract to clarify associated responsibilities and costs.

5. What documents are required for different Incoterms® for Maerx Spot shipments?

The specific Incoterms® will determine which documents each party is responsible for obtaining. Essential documents include the commercial invoice, packing list, and bill of lading (B/L).