Commercial Law: Are you using the correct incoterm for your trade deal?

It is generally not practical or economically efficient for trade partners to expressly address each and every eventuality inherent in an international contract of sale in their agreement. As such, trade partners often incorporate Incoterms® into their agreement to address certain important aspects of their trade deal.

The Incoterms® are a codification of widely used trade terms, produced by the International Chamber of Commerce (ICC), which provide a uniform meaning to the trade terms codified therein. The codification of trade terms reduces uncertainty (and thereby decreases transaction costs) regarding the meaning of such trade terms, as uncertainty often arises where uncodified trade terms are used. As meanings stated in the Incoterms® will only apply if incorporated by agreement, it is important to specify whether the meaning of the trade term used will be as specified in the Incoterms® (e.g. FOB (Incoterms® 2020)).

Incoterms® (inter alia) regulate matters such as – (i) the point at which risk in loss, damage and/or destruction of the goods transfers from the seller to the buyer, (ii) identifying the party which will bear the costs of the transport of the goods, import duties and the other costs incidental to the delivery of the goods and (iii) the point of delivery of the goods.

Although parties may be familiar with common Incoterms®, they do not always understand what the undertakings in such Incoterms® actually entail. It is vitally important for parties to understand what they are agreeing to when they apply an Incoterm® to their agreement, as the matters regulated by Incoterms® are often points of contention.

The use of some Incoterms® may also, in certain situations, not be appropriate, given the nature and mode of transport of the goods. As it is most beneficial for a seller to only relinquish control over the goods once the risk of loss, damage and/or destruction of the goods has passed to the buyer (and generally at which point the buyer’s obligation to make payment to the seller arises), it would be advisable for a seller to agree to an Incoterm® which achieves this result.

A common mistake is where parties agree to an FOB Incoterm® where they will be shipping the goods by container. In terms of the FOB Incoterm®, risk in the goods only passes to the buyer once the goods have been loaded on the nominated ship. This is problematic, as the goods are first stationed at the dock’s container terminal before they are placed in a container and loaded onto the ship. Thus, should the goods be lost, damaged or destroyed after they have been unloaded at the container terminal, but before they are loaded on the ship, not only will the loss be borne by the seller, but the seller will likely also be in breach of the agreement and therefore not be entitled to payment and may furthermore be exposed to a potential claim for damages, as the seller will have failed to deliver the goods in accordance with the agreement.

A more suitable Incoterm® to be used for containerised goods (should you be the seller) would be FCA (Free Carrier). In terms of this Incoterm®, delivery takes place and, consequently, the risk in the goods transfers, once the goods have arrived at the container terminal and are ready for unloading. As such, the responsibility and costs of unloading the goods from the vehicle transporting the goods to the container terminal, and all other matters relating to the transport of the goods from this point onwards, are borne by the buyer. The seller therefore maintains control over the goods until the moment that risk passes and delivery takes place. Should the goods be lost, damaged or destroyed after this point, then such loss will have to be borne by the buyer and the seller will be entitled to full payment for the goods, notwithstanding that the goods never reach the buyer.

It is furthermore important for parties to understand the interaction between Incoterms®, contracts of carriage and laws and conventions governing international trade, in particular, the Convention for the International Sale of Goods (CISG).

For the reasons stated above, it is important for you to know how you wish to conclude an agreement for the international sale and purchase of goods and to be fully aware of the consequent risks, costs and eventualities inherent in the deal that you make.

DKVG is here to help you navigate the waters of international trade deals in order to bring you (and your goods) to safe harbour.

Should we be able to assist you, please contact Luke da Silva at ldasilva@dkvg.co.za or Jacques Odendaal, the head of our Corporate and Commercial department at jodendaal@dkvg.co.za.

This article is for general information purposes and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us At DKVG Attorneys for specific and detailed advice.