Managing Incoterms 2010 risks: tension with trade and banking practices

Incoterms 2010, issued by the International Chamber of Commerce and effective from 1 January 2011, is a set of rules for the delivery of product between sellers and buyers that is routinely incorporated into international contracts of sale. Incoterms 2010, outline, on a mutually exclusive basis, the rights, duties, obligations and responsibilities of sellers and buyers in the discharge of their respective contractual obligations. Properly used, Incoterms 2010 are an effective risk management tool. However, old trading practices create tension with modern transport practices and Incoterms 2010, potentially increasing risks for traders. For example, the term free on board (FOB) is not recommended for maritime containers, because of transport risk transfer considerations, yet it is known that a significant proportion of traders still use FOB in their international contracts. Banking practices also appear to be lagging behind, and in the case of letter of credit FOB transactions, documentary demands are placed on sellers that are at times contrary to the Incoterms 2010 recommendations. This paper considers the impact of outdated trade and banking practices and their likely impact on traders, concluding that an enterprise risk management approach is required, incorporating specific staff training, to modernise trade practices and reduce organisational risk.