Ship shape - Incoterms!

We explore the use of Incoterms® in the delivery of goods in commercial contracts.

Incoterms® are rules published by the International Chamber of Commerce and can be used to define the responsibilities of both seller and buyer in importing and exporting goods under a contract. The rationale is to facilitate international trade by removing uncertainties that might arise from differing interpretations of trade terms.

The current Incoterm® rules were published in 2010 and there are 11 in total.

This article focuses on the Incoterms® - Ex Works (“EXW”), Delivered Duty Paid (“DDP”) and Free on Board” (“FOB”).

EXW

Under EXW the seller agrees to:

• Prepare the goods for the buyer, suitably packed and ready for collection and loading by the buyer or carrier and;
• delivers goods when it places them at the disposal of the buyer at the seller’s premises or at another named place.

The seller is not responsible for loading or unloading the goods. They are not responsible for the export clearance but they are required, at the buyer’s request and cost to provide assistance to obtain an export licence.

Under EXW the buyer agrees to bear the full costs and risks of carriage to the ultimate destination. They are also responsible for both the import and export clearance.

DDP

DDP is effectively the opposite of EXW with the seller assuming almost all the responsibility.

The seller:

• arranges the costs of carriage and bears all costs involved in bringing goods to their named destination;
• delivers the goods when they are placed at the disposal of the buyer, makes sure that they are cleared for import on the arriving means of transport ready for unloading at the named destination;
• is responsible for import and export clearance. In particular, they are responsible for any import duties and customs handling formalities.

FOB

Under FOB the seller agrees to:

• bear the cost of carriage to the port or shipment;
• deliver the good on board the nominated ship or procures the goods already so delivered;
• bears all costs, risk of loss and damage to the goods until they are delivered by being placed on board the ship at which point the buyer bears the risk;
• bears the port handling costs at the port of shipment; and
• is responsible for the export clearance.

Under FOB, the buyer also has obligations:

• to be responsible for the contract of carriage and the cost of this from the port of shipment;
• to arrange carriage from the port of destination to the ultimate destination; and
• for the import clearance.

FOB is more likely to be applicable where goods are being shipped in a container which will be transported to a port and loaded onto a ship. Where goods are being transported by truck and ferry, it is likely to be simpler for one party to agree to pay for the costs from factory to buyer. If the buyer is to pay then it would be on an EXW basis. If the seller is to pay then it will be on a DDP basis. If the seller is paying then they should also make sure that they have in place appropriate goods in transit insurance as the goods will be at the seller’s risk until they are delivered to the buyer.

It has always been important that Incoterms® are negotiated in a way that prevents a business from incurring any unnecessary risks and costs.

It is now also necessary for businesses to consider the impact of Brexit on their use of Incoterms® in commercial contracts. For example, under FOB the buyer is responsible for the import clearance and import duty and the seller is responsible for the export clearance of goods. Post Brexit, the paperwork required for importing and exporting goods is likely to become more time consuming and expensive than at present and import duty will also be chargeable.

While the UK is part of the EU, the term FOB for export or import from the EU only apportions the cost of transport to the port or point of choice. In practice, most goods are transported by truck and there is no loading or offloading of containers at a port. As the EU is currently a customs union, there are no import or export charges. As a result, most businesses would agree to sell goods on an EXW or DDP basis where one party agrees to pay for all of the costs of delivering from the factory to the buyer.

In anticipation of Brexit, if the UK may no longer be part of a customs union, buyers and sellers should review their terms and conditions and consider who should be liable for the costs of export and import. We would recommend that you speak to your freight forwarder or logistics company to get an understanding of what their costs will be for processing the import and export clearance of transporting goods into the EU. If you will be responsible for those costs then you will need to factor them into the price in addition to any import duty payable.

If you have any questions, require general advice or would like us to assist with the negotiation, re-negotiation and drafting of your commercial contracts please contact our Corporate and Commercial Team on 01242 574244 or e-mail Head of Department, Jon Rathbone.