INCOTERMS

International Sale of Goods

It is essential that there is a clear written contract between buyer and seller, specifying what has to be delivered and the terms of sale.  Supply contracts should set out where the goods are to be delivered.  It should specify who is responsible for every stage of the journey, including custom clearance and what insurance is required.  It should specify who is to pay for each cost.

To avoid confusion the internationally agreed “Incoterms” should be used to spell out exactly what is agreed.  This should cover matters such as who insures, who handles customs procedures, who arranges transport, who pays taxes and duties. The contract should cover payment.  Currency of payment, due date and place of payment are critical terms.

The INCOTERMs define the respective obligations of the parties. Certain obligations are associated with each term.  They may be varied by agreement or custom in the particular circumstances.

The INCOTERMS

The International Chamber of Commerce (ICC) commercial contract terms (INCOTERMs) are international standardised terms which are used in contracts for the sale and transit of goods. They define the basic responsibilities of the parties for the goods at each point during the transit process from the seller’s premises to the buyer’s premises.

The INCOTERMS provide standardisation and clarity in international trade. Their use is widely recognised. The terms are a series of standard definitions.  They can be readily incorporated into a contract.

Although the INCOTERMS are widely used across the world, there are some differences in practice between jurisdictions.   The better course is to define the obligations in the sale contract or to refer to the exact INCOTERM including the relevant INCOTERMs Edition.   The INCOTERMs 2010 is the latest edition.

 Ex-works (specified place) I

With “Ex-works” the seller minimises its risk and responsibilities. The buyer loads the goods, arranges and pays for the transport, customs clearance and insurance. The buyer collects the goods from the named place, usually the seller’s factory or warehouse. The buyer must arrange and pay for the transport, having taken delivery and is responsible for the goods from there on. The buyer carries all risk and the cost of movement.

The seller’s responsibility is limited to making the goods available at its premises or at the appointed place. The seller must place the goods at the buyer’s disposal at that place. It must pay the costs up to the point of making the goods available. Once they are made available, it has no further responsibility.

Ex-works (specified place) II

The seller is required to supply conforming goods, weighed, checked, measured (where necessary) ready for delivery, and to supply an invoice and any necessary documents confirming conformity. The seller must provide packaging at its own expense where applicable.  The seller must provide any assistance required by the buyer’s inspector in confirming compliance. It must provide documents required of it to facilitate export. The buyer must accept delivery and pay for conforming goods.

The buyer must obtain appropriate licences and authorisations for the export. It must complete and pay customs requirement in the country of export and import.

There are variants of the ex-works terms which are available from the International Chamber of Commerce website. For example, under “ex-works loaded” the seller is to load the goods at its premises.

D terms

D terms oblige the seller to deliver from a ship at a particular port of delivery. This is a contract for the sale of goods as such, in that the goods are to be delivered rather than the documents as such. They must be delivered at the named port. Accordingly, if they are lost, the buyer is not obliged to pay the price. He may be able to recover the price prepaid.

If a bill of lading is furnished and endorsed, it is not given with the intent that property pass unless specifically provided. The property is to pass on delivery at the agreed port of destination.

The goods are not at the buyer’s risk in carriage and accordingly the buyer is not obliged to pay for or finance insurance. The seller is obliged to insure. Where the goods are lost or damaged, the buyer has no right against the insurance company as he has no interest in the goods. In theory, the buyer may insure his expectant interest in the goods and for loss of profit. This must be expressly provided for if the seller is to do so as his agent.

The seller must give a bill of lading or delivery order. In this context, delivery ex ship refers to the place of delivery.

Delivered duty paid, delivered duty unpaid at the port are rarely found in practice. The goods are at the seller’s risk and cost until made available to the buyer at the named port.

Delivered at Frontier (DAF)

The Incoterms beginning with D, delivered at frontier (DAF), delivered ex-ship (DES) and delivered ex-works (DEX) means that the seller is responsible for bringing the goods to a specified place or destination. This includes responsibility for all risks and costs required to bring the goods to that place.

Under Delivered at Frontier (DAF), the seller must arrange and pay for transporting the goods to the specified port or place at the frontier. It must clear the goods for export but not for import. The seller is responsible for all risks and costs associated with the goods until they reach the frontier.

Delivered at frontier is used for delivery at the land frontier. The actual frontier and the place of delivery must be specified. The buyer does not have a contractual obligation to procure insurance for the benefit of the buyer or otherwise.

The buyer takes over the risk in the goods once they have been delivered at the frontier. Additional provisions in the agreement may be required to deal with unloading the goods at the frontier. DAF is usually used for rail and road transport.

Delivered Ex Ship & Ex Quay

DES sellers are responsible for delivering the goods to a named destination but not for clearing them for import. The goods are made available on board the ship, but the seller is not responsible for unloading. The buyer is responsible for the risks and costs associated with the goods from that point forward on board the ship.

Under DEQ the seller is responsible for delivering the goods at the quay, not yet cleared for import at a named destination. The seller must cover all costs and risks up to and including the discharge onto the quay. The buyer is responsible for clearing the goods for import, and for import taxes and duties.

Under delivery ex quay at the named port, the seller is responsible for import duties and the cost of unloading at the port of destination. The buyer becomes responsible and liable for the goods when they are unloaded at the quay. This is not commonly used other than in the unusual   circumstances where the buyer has an agent at the port of arrival.

Delivered Duty Unpaid

Under delivered duty paid (DDP) and delivered duty unpaid (DDU) the seller pays all costs involved in bringing the goods to the named place. The seller is responsible for delivering the goods to the buyer at the named place.

DDU and DDP cover all modes of transport. However, if the goods are delivered on board ship or on a quay, then the delivered ex-ship DES and delivered ex-quay DEQ INCOTERMs must be used.

Under DDU, the seller does not unload the goods. The buyer has to clear the goods for import and takes the risk and costs as soon as they are accessible at their named destination.

The buyer is obliged to pay the costs of importation including import licences. The goods themselves must be delivered. It may be agreed that the seller is responsible for some import duties. In this case, it needs to be specifically written into the contract as a variation of the standard term.

Delivered Duty Paid

Under deliver duty paid (DDP) the seller must deliver the goods, unload and clear them for import. The seller has responsibility for all costs and risks in bringing the goods to the main destination and must pay all taxes duties and charges in the country of import.

Under delivered duty paid, the seller is obliged to pay all import duties and carriage to the specified point.

Some taxes such as VAT can be excluded from the seller’s obligations and transferred to the buyer. This variation should be written into the sale contract.

VAT

VAT is not covered as a part of any of the cost under the INCOTERMs. It is payable on many international trade transactions.  Generally, VAT must be paid on the importation of goods into the EU.

Import procedures from EU and non-EU states differ.  When goods are exported outside the E.U., the supply is usually zero-rated. To qualify the goods must leave the EU at a set time and records must be kept.

Trade between traders within the EU is zero rated in the state of export, but the importer must self-account for VAT in its state.