International trade and Incoterms

Introduction

In domestic (New Zealand) trading arrangements, ownership and risk in property will often pass from the seller to the buyer at the same point in time – for example when the buyer either collects the goods from the purchaser or when the seller has delivered the goods to the buyer’s business premises.  This is particularly the case when the goods are paid for in advance, rather than on credit.

The approach with international shipping can be very different.  In arrangements for the carriage of goods overseas, it is common for the transfer of ownership and risk to be treated separately and for these to occur at different points.

International carriage of goods

In most cases, the starting point for establishing the rules around ownership and risk is the terms of the contract for the sale and international carriage of goods – often the seller’s standard terms of trade.  In most cases the terms of trade will naturally favour the seller.  These terms of trade are often incorporated into normal business procedures such as an online sales purchase process or an account application form.

Where the goods are particularly valuable it would be prudent for a prospective buyer to review the terms of trade carefully.  In particular, the buyer should satisfy itself that it is comfortable with the arrangements for the transfer of risk and ownership.  The buyer should pay close attention to any provisions relating to insurance of the goods;  if the buyer is to take the risk in the goods then it should ensure that adequate insurance is in place.  Your insurance broker may be able to advise on the appropriate insurance arrangements.  Ideally such discussions should take place before you contract for the goods.

The buyer should also review the terms of trade from a practical perspective, for example to ensure that the delivery/collection arrangements are workable.

Having considered these issues, in some circumstances it may be necessary for the buyer to negotiate some amendments to the terms of trade – although a seller may take the opportunity to seek a change in price to reflect the altered risk allocation.

Incoterms 2010 rules

As an alternative to individual terms of trade, contracting parties (particularly those involved in international transactions) might consider the International Commercial Terms (commonly referred to as “Incoterms”).  Incoterms are a set of commercial terms published by the International Chamber of Commerce.  The Incoterms govern how costs and risks are to be allocated between the parties to a contract for sale of goods.  They came about as a means of providing clarity for businesses engaged in complex transactions, where the meanings of certain terms can often vary across different industries.  They govern the costs, risks and practical arrangements for the sale of goods.

Incoterms are commonly used amongst shipping and logistics industries and are recognised worldwide.  Incoterms specify: which party has the obligation to make carriage or insurance arrangements;  when the seller is to deliver the goods to the buyer;  the allocation of costs between each party (including transportation, insurance, taxes and duties); and when the risk of loss or damage transfers from the seller to the buyer.

The agreed Incoterms may be incorporated into the contract negotiated between seller and buyer.  The Incoterms do not regulate issues such as payment, ownership transfer, consequences for breach of contract, the mechanisms for settling disputes and governing law – these matters should still be addressed separately in the contract.

Incoterm rules are expressed by three-letter acronyms, and are grouped into four categories – denoted by the first letter of the acronym.  In order for Incoterms to apply to an agreement, the chosen rule should be explicitly stated in the contract (it is also crucial to indicate which edition of the Incoterms rules apply – the current rules were issued in 2010).  A summary of each category is as follows:  

• E term (EXW):  where the seller only makes the goods available to a buyer at the seller’s premises.  Risk transfers to the buyer when the goods are made available to them, and they must also arrange for carriage of goods.
• F Term (FCA, FAS and FOB):  where the seller delivers the goods to a buyer-appointed carrier, from which point the buyer takes on all risk and costs.
• C Term (CFR, CIF, CPT and CIP):  where the seller has to contract for carriage, but does not assume risk of damage or loss to goods after shipment or dispatch.  Risk is transferred to the buyer after export clearance.
• D Term (DAT, DAP, and DDP):  where the seller bears all costs and risks necessary to bring the goods to the place of destination.     

Each category brings with it its own merits.  A buyer should bear in mind that Incoterms which involve the seller paying freight and insurance costs will likely result in an inflated contract price.  Guidance notes are published for each rule, to assist with selecting the most appropriate arrangements.

Conclusion

Whether parties are contracting for goods domestically or internationally, it pays to review the ownership and risk provisions carefully.  Whilst these provisions are often glossed over by parties as just “boilerplate” provisions, in the event of loss or damage to goods they may have significant implications.

If you would like further information please contact Laura Monahan on 07 958 7479.