The use of Incoterms in contracts for the supply of goods subject to further transformation after Brexit
18 February 2021
The use of the well-known rules developed by the International Chamber of Commerce (“ICC”) called International Commercial Terms or by their acronym Incoterms have been an important element in contracts for the supply of goods across the globe and also internally within the United Kingdom for decades. These rules set specific terms that cover transfer of title, transfer of risks, delivery of the goods, etc, and have been developed by the ICC to provide clarity to the parties involved in commercial activities, in particular to businesses moving goods.
These terms have been designed to be used for different types of transport, therefore, not all Incoterms are suitable for each type of transport, i.e. the Incoterm “FOB” (Free on board) should never be used for the carriage of goods by land without involving any transport by sea.
The correct way these terms should be incorporated into contracts is by referring to the specific applicable term, such as CIF, FOB, EXW… including the year of the rules governing the term that have been issued by the ICC, i.e. 2010 or 2020. It is common to find contracts in which the parties have only made reference to the applicable Incoterm and have not mentioned the year of the applicable rules, therefore in some occasions they ended up arguing with their supplier about particular provisions that they did not considered before and consequently damaging their relationship.
In order to avoid disputes, it is important to check whether the specific rules of the Incoterm suit the purpose of the agreement, as once they have been incorporated by reference to the contract and it has been executed, they become binding to the parties.
Brexit is currently presenting several challenges for traders and suppliers in relation transport, customs and rules of origin of goods, however, there are other very important contractual issues that have to be addressed by manufacturing businesses across Great Britain and Northern Ireland, to prevent that the use of the Incoterm “DDP” (Delivered Duty Paid), in which suppliers are responsible for the transport and clearing customs, causes further complications when the manufacturer moves finished goods after the transformation process has been completed in their factory.
DDP, being the opposite to EXW, it is normally used by small-medium businesses letting the supplier to take all the risks and to arrange for all transport and administrative formalities to be cleared before the goods are received at the buyer’s premises.
The use of DDP is currently causing important issues, as suppliers are clearing customs for the goods and also declaring the goods arriving to the place of transformation without knowing what would be the final place or destination of the goods following the manufacturing process. To avoid this to happen and also to prevent the goods being subject to additional customs paperwork or subject to the payment of further duties, the buyer-manufacturer should consider whether to include in the contract provisions that deal with this issue, or to close discuss with suppliers where goods are going to be moved to in order to assess whether the goods are “at risk” of being introduced in the EU following the transformation process, so they can submit the customs declarations with the correct and precise information. Another suitable alternative is to consider the use of a different Incoterm and assume more risks or to subcontract the intermediary steps to professional freight forwarders.
For further information, please contact Jose Lazaro from the Corporate team at MKB Law.