Delivery conditions and their implications in sales contracts

Delivery conditions are undoubtedly a crucial component of a sales contract for investment goods. They should regulate the responsibilities of the buyer and seller, respectively. In particular, there must be clarity about the location and time of transfer of risk between both parties and how logistics cost is shared. National and international law may provide regulation for all such details and may be implemented and negotiated in individual contracts. However, in international trade both parties would have to agree to either the buyer’s or seller’s governing material law, any third-country material law or the international law, governed by the Convention on the International Sales of Goods. The latter is usually excluded from contracts, according to my personal experience.

Standardized delivery condition rules issued by international bodies offer an attractive way to deal with this issue. However, it’s far more than adding some letters to a contract. You need to know the details of the rules and their implications on the contract to make good negotiations and wise decisions. Asking an expert will benefit your business and save you money. A widely accepted set of standardized delivery rules are the so-called Incoterms?* (see note below) developed and issued by the International Chamber of Commerce (ICC).

What are Incoterms??

The International Chamber of Commerce (ICC) developed the concept of standardized delivery conditions, Incoterms?. They are widely internationally accepted and can be used in national or international contracts. If effectively integrated into the contract, both parties shall have a common understanding of the agreed delivery conditions. However, this requires a thorough understanding of the agreed delivery conditions and their implications on mode of transportation, required documents, letter of credits, warranties and other aspects.

It’s also important to know what is not governed by Incoterms?. For example, transfer of title is not part of Incoterms? regulation. This must be agreed upon separately in the contract. However, the chosen delivery condition has an impact on other parts of the contract, for example on the transfer of title. Another interesting topic is the relation of transfer of risk and revenue recognition which can be quite complicated. Please see the respective accounting standards for more details, e.g. IFRS 15.

How to integrate Incoterms? into a contract?

Incoterms? condense various responsibilities and rights of buyer and seller into three specific letters in combination with a detailed description of the named place (which should be described as detailed as possible) followed by the desired Incoterms rule (11 rules in total) to avoid misunderstandings, for example:

• FCA (named place of delivery) Incoterms? 2010

If no further modification to the delivery conditions are made in the contract (which is of course possible, although not recommended) than there should be no room for discrepancies between both parties. Any modification to the standard terms increases the chance for discrepancies and the advantage of the standardization is lost.

Pitfalls when using Incoterms?

Before using standardized delivery conditions, one needs to dig deeper into the details of the rules or seek expert advice. Not every rule may be useful for the specific transaction under consideration. Let’s have a look at one popular rule in more detail, namely “Ex Works” (EXW):

In my personal experience, many selling companies are in strong favor of Ex Works Incoterms? 2010 clause. At first glance, it comes with minimal obligations and fastest revenue recognition (see accounting standards for further details). However, going a bit more in detail, the advantages for the selling company reduce if applied to international sales.

Pitfall 1: According to EXW rule, the seller has no obligation to load the goods. Hence, the buyer must load the goods at the seller’s premises without assistance (lifting equipment, staff) of the seller. This is not practical in most cases. In reality, the goods are usually loaded onto the truck with assistance by the seller which may lead to insurance discussions in case of damage. A better clause could be Free Carrier (FCA) which transfers the obligation to load goods to the seller.

Pitfall 2: Export declaration and any customs formalities are in the responsibility of the buyer. In practice, this can lead to the odd situation in which the buyer is either unable (non-EU countries) or unwilling to provide such papers. According to the European Customs Code, it the seller may be considered as the exporter of the goods. Then the seller must provide the export declaration on its own cost, regardless of the Incoterms? regulation. A better clause would again be Free Carrier (FCA) which transfers the obligation to supply transport papers to the seller.

Both examples display that it needs detailed understanding and it can get complex. Seeking expert advice can save a lot of money and frustration.

In summary, great care must be taken when negotiating the delivery conditions in order to avoid misunderstandings, unclear responsibilities and additional cost during project execution. This requires a thorough understanding of the regulations and their impact on the sales contract and overall negotiation.

Note on Incoterms?:

*Incoterms? and the Incoterms? 2010 logo are trademarks of ICC. Use of these trademarks does not imply association with, approval of or sponsorship by ICC unless specifically stated above. The Incoterms? Rules are protected by copyright owned by ICC. Further information on the Incoterm? Rules may be obtained from the ICC website iccwbo.org. The Incoterms? Rules are protected by copyright owned by ICC. Further information on the Incoterm? Rules may be obtained from the ICC website iccwbo.org. Incoterms? and the Incoterms? 2010 logo are trademarks of ICC. Use of these trademarks does not imply association with, approval of or sponsorship by ICC unless specifically stated above.

Incoterms rules may be obtained from ICC, click here: https://2go.iccwbo.org/explore-our-products/books/incoterms.html

Disclaimer:

The information provided in this article are for informational purposes only and not for the purpose of providing legal advice. Please seek assistance of your attorney with respect to any specific issue regarding the topic. The article solely represents the author’s opinion and experience with the topic during his professional career.