Simplifying export contracts for traders

Rules: ‘Incoterms’ are a good guide

The current Brexit discussions has drawn considerable attention to the rules and processes relating to the export of goods from the UK.

This unlikely subject has generated many newspaper articles, TV stories and debates in Parliament and has demonstrated the complexity of modern exporting.

Fortunately, when negotiating contracts for the import or export of goods, there is a set of rules you can use to simplify matters, the International Chamber of Commerce International Commercial Terms (Incoterms).

What the Incoterms do:

The current version of the Incoterms – Incoterms 2010 – sets out 11 abbreviations which represent an agreed position as to the risks and responsibilities each party takes in relation to the carriage of the goods. These are:

• The carriage of the goods from

the seller to the buyer;

• The insuring of the goods in

transit, and who bears the risk on this;

• The export, import and

security-related clearances, including any tariffs payable.

What the Incoterms do not do:

Incoterms do not and are not intended to form the whole contract of sale, but merely set out the responsibilities for the transporting of the goods.

They do not deal with:

• Any provisions relating to the

quality of the goods to be supplied, or what happens if there is a contractual dispute between the parties

• Any issues relating to payment

• Any issues relating to when ownership in the goods will pass to the purchaser.

The last of these issues can prove particularly complex, as there will usually be provisions in a sale contract under which ownership in the goods remains with the seller until payment is made, whilst if the buyer is using trade finance to fund the purchase of the goods then the lender’s finance may contain conditions as to the lender taking legal possession of the goods in transit.

How to use Incoterms:

When producing a price list or a general quote, it is difficult to give an “all in” price without knowing the specifics of where the buyer wishes the goods to be sold, and what the import tariffs or procedures are in that country.

It is therefore useful to state in price lists or standard conditions of sale that prices are quoted on an ‘ex works’ basis unless specifically agreed otherwise.

Of all the Incoterms, ex works involves the least effort and expense on the part of the seller – the obligation is simply to make the goods available for collection at the premises of the seller, and the buyer must take responsibility for transport, insurance and export/import clearances.

When negotiating a particular arrangement with a buyer, rather than trying to agree each element of the transport arrangements, it would make sense to refer instead to the Incoterms.

If the parties can agree on an Incoterm that can be applied to the arrangement, then this would remove any doubt as to what the parties have agreed.

One area which should be looked at carefully is insurance.

A number of the Incoterms do

not place an absolute obligation on either party to insure the goods, and basic level insurance offered by carriers is often inadequate for higher value goods.