In part 1 and 2 we looked at ‘risk’ as it is described in the Incoterms® rules, and we have spent time analysing the management of that risk.

Remember, there is nothing to stop you from relying entirely on the WCO Customs Valuation Symbol to define the transaction value of the goods. Similarly, there is nothing to prevent the Buyer and the Seller from adopting any set of commercial terms of their choice as long as there is a mutual understanding and agreement on the interpretation of those terms. But what we do need to ask ourselves is, “Does the valuation symbol alone (or any other chosen commercial term) define where the risk transfers from Seller to Buyer?” As Phil Doran of Freight Training often says, “The contract is for the divorce, not for the marriage.” In other words, reliance on a good, pre-existing relationship between Buyer and Seller, or relying on ‘what we have always done’, is fine while things are going well, but what about when things have gone wrong and there’s a dispute?

Let’s look at where the Seller’s responsibility for costs ends, and the Buyer’s responsibility for costs commences. Once again, our starting point for this discussion is the introduction to the Incoterms® rules.

“I. What the Incoterms® Do

4.         The Incoterms® rules explain a set of 11 of the most commonly used three-letter trade terms e.g. CIF, DAP etc. reflecting business-to-business practice in contracts for the sale and purchase of goods.

5.         The Incoterms® rules describe:

• Obligations: who does what as between the Seller and the Buyer, e.g. who organises carriage, or insurance of the goods or who obtains shipping documents and export or import licenses.
• Risk: where and when the Seller “delivers” the goods, in other words where risk transfers from Seller to Buyer; and
• Costs: Which party is responsible for which costs, for example transport, packaging, loading, or unloading costs, and checking or security related costs.

The Incoterms® rules cover these areas in a set of ten articles numbered A1/B1 etc., the A articles representing the seller’s obligations and the B articles representing the buyer’s obligations.”

The transfer of costs is covered in article A9 (Seller’s responsibility) / B9 (Buyer’s responsibility) for each of the Incoterms® rules. For this blog, we will look at two of the most popular, but commonly misused and misunderstood Incoterms® rules and what they say about costs. To this end, we will start with our Importer of 10 containers of generators. Remember, he has asked for and believes he has an FOB contract.

Incoterms® FOB

“A9      Allocation of Costs

            The seller must pay:

1. All costs relating to the goods until they have been delivered in accordance with A2, other than those payable by the buyer under B9
2. The costs of providing the usual proof to the buyer under A6 that the goods have been delivered
3. Where applicable, duties, taxes and any other costs related to export clearance under A7(a) and
4. The buyer for all costs and charges related to providing assistance in obtaining documents and information in accordance with B7(a).”

“B9       Allocation of Costs

The buyer must pay:

1. All costs relating to the goods from the time they have been delivered under A2, other than those payable by the seller under A9…”

This is similar to what you’d expect to be covered under a WCO Customs valuation symbol f.o.b. The area of caution however comes under B9 a) “all costs from the time they have been delivered…” Considering that there may be some uncertainty over when the goods have been delivered, there may be potential for a dispute over charges incurred between handover to the carrier, and goods actually being loaded on board. Aside from that potential uncertainty, the Seller would rely on the usual proof that the goods have been ‘delivered’, suggesting all would be well (more on this in a future blog).

Incoterms® EXW

“A9      Allocation of Costs

The seller must pay all costs relating to the goods until they have been delivered in accordance with A2, other than those payable by the buyer under B9”. (A2 Delivery is very clear: “the seller must deliver the goods by placing them at the disposal of the buyer at the agreed point, if any, at the named place of delivery, not loaded on any collecting vehicle…”)

“B9       Allocation of Costs

            The buyer must:

1. Pay all costs relating to the goods from the time they have been delivered under A2;
2. Reimburse all costs incurred by the seller in providing assistance or information under A4, A5 or A7;
3. Pay, where applicable, all duties, taxes, and other charges, as well as the costs of carrying out Customs formalities payable upon export; and
4. Pay any additional costs incurred by failing to either take delivery of the goods when they have been placed at its disposal or to give appropriate notice in accordance with B10, provided that the goods have been clearly identified as the contract goods.”

In short, under an EXW contract, the Seller has delivered when he makes the goods available for pickup, not loaded on the collecting vehicle and not cleared for export; unlike for the ex-works Customs Valuation symbol which requires the goods to be loaded on the collecting means of transport, customs cleared. This conflict in interpretation can provide significant challenges to the Buyer. Note too, an EXW price may not be the same as ex works value.

To illustrate the above, two real examples that come to mind.

1. EXW contract where goods arrived in South Africa with no EUR1 certificate. The Seller said that it wasn’t its concern under an EXW contract, the Buyer ended up having to pay the higher rate of duty until between them, they had resolved the issue.
2. EXW contract requiring MSDS Certificate (Material Safety Data Sheet). The Seller refused to provide the MSDS saying it was its concern, and cargo missed a sailing while the problem was resolved.

What We Have Learned So Far

When dealing with a Seller in a foreign country, local law, conventions, norms, and practice may have an impact on the Seller’s understanding of a sale agreement versus the Buyer’s understanding of the agreement. The International Commercial Terms (Incoterms®) as published by the International Chamber of Commerce are designed to assist Buyers and Sellers in removing ambiguity from the sales contract by dealing in detail with the obligations of the Seller, respectively Buyer; the transfer of risk and which party is responsible for which costs.

While the WCO symbols f.o.b., ex works, c & F etc. provide an important definition of the transaction value (the price paid or payable) they do not cover the Seller’s obligations relative to the Buyer’s obligations. They may adequately cover cost, but they do not cover risk transfer. These symbols in themselves, cannot be relied upon to aid the Seller and Buyer in creating an unambiguous agreement.

In the next two blogs we will look the transport document, and payment. In this, it is the intention of Bidvest International Logistics to highlight pros and cons, but the onus is clearly and unconditionally on the Seller and Buyer to seek appropriate financial and legal advice before making any changes to their contracts and payment mechanisms.