Many are the legal and financial risks that may be derived from a commercial relationship of purchase and sale of goods, both at a national and an international level. Taking into account that on occasions multiple parties may intervene (seller, buyer, carrier, consignee, customs agent, etc…) and the potential risks that are inherent to any commercial purchase and sale relationship (accidents during transport, loss and/or expiry of goods due to inappropriate storage conditions, maintenance, transport, loss of documentation relative to the goods, etc…), a correct choice made in advance for the attribution of the risks and the costs to the seller or buyer shall be decisive should a conflict arise.
On 1st January 2020 the Incoterms 2020 entered into force, following the adaptation of the previous regulations, Incoterms 2010, carried out by the International Chamber of Commerce. The 1980 Vienna Convention on the International Sale of Goods is not applicable when the parties have chosen one of these special regulations for the attribution of costs and risks, given their greater degree of specification and concreteness.
We must point out that Incoterms 2020 constitute specific business rules which reflect the practices followed by companies within the framework of the relationship for the purchase and sale of goods and which may be used both at national and international level.
The importance of these rules consist of describing some of the obligations for which the parties are responsible (transport, insurance, shipment documents, import or export licences), distributing costs (transport, packaging, loading and unloading) and, above all, establishing the moment when the risk is transferred from the vendor to the purchaser (basically in terms of where and when the delivery of the goods is carried out).
It is important to point out that said rules do not constitute neither a contract nor a means of payment and do not regulate the essential aspects of a commercial purchase and sale relationship such as the transfer of ownership and/or possession of the goods, the details thereof, the form of payment, force majeure or the excessive burden of performance, the dispute resolution system and/or competent jurisdiction and/or applicable law. Therefore, it is always recommendable to reflect in a contract the conditions agreed to between the parties in their entirety, since the Incoterms do not substitute, but do however, complement the stipulations of a contract.
The Incoterms 2020 are divided into two categories, being: (i) Regulations for any mode or modes of transport (EXW, FCA, CPT, CIP, DAP, DPU, DDP) and (ii) Regulations for maritime transport and inland waterways (FAS, FOB, CFR, CIF).
The first group contains terms which vary from the most beneficial to the most detrimental rule for the vendor.
Thus, the EXW term, Ex Works, implies minimum obligations for the vendor company, and the delivery is made by making the goods available to the purchaser at the vendor’s own premises, or at another agreed location, with no obligation for the vendor to take care of loading or to contract insurance, which is particularly suitable for national business (as the vendor is not required to organise export clearance). On the other hand, the DDP regulation, Delivery Duty Paid, implies the maximum accumulation of obligations for the vendor company, as the delivery is made when the latter makes the goods available to the buyer at the location designated, and the vendor bears the costs of unloading, transport, export and import clearance, and even the payment of VAT or any other tax payable on importation, unless an agreement to the contrary exists in the contract of purchase and sale.
The obligations also vary within the second group, for example following the FAS, Free Alongside Ship rules, the delivery is carried out when the goods are placed alongside the vessel, at the port designated by the purchaser company, or in the port of embarkation designated, and from this moment the risk and costs are borne by the purchaser. The vendor clears the goods for export although it has no obligation to bear the cost and risk of transport, nor to contract insurance. Whereas regarding the CIF term, Cost Insurance and Freight, the vendor must make the goods available to the purchaser on board the vessel at the port of loading, it must also contract transport to the location of destination at its own cost, and it must obtain minimum cover insurance at its expense and take care of export clearance.
In conclusion, in order to avoid costs and risks derived from the commercial relationships corresponding to the purchase and sale of goods, it is highly recommendable to draft and sign a contract of purchase and sale, with all necessary clauses and, at the moment of both choosing and modifying the applicable Incoterms, one should in the first instance correctly choose the most appropriate rule for each specific case, and secondly, reflect said choice correctly, that is, specifying both the exact chosen Incoterm (DDP, CIF, etc…), as well as the specific locations for delivery and/or destination, and likewise the nature of the Incoterms chosen by the parties (for example, Incoterms 2020).
Mireia Bosch
Vilá Abogados
For more information
6th November 2020
