International sale of goods – Legal issues.

International sales of goods are distance sales, i.e., sales are carried out by transporting goods from seller to buyer by various modes of transport. By the time certain goods reach from point A to point B, the cargo is exposed to a number of risks, such as damage, theft, deterioration of goods due to their natural properties and similar. The question of which contractual party bears those risks logically arises. 

Given that the term distance sale refers to a type of sale that typically crosses the borders of several countries, the next thing that may come to your mind is the question of which contractual party bears the costs of transportation and associated costs, such as insurance of goods in transport, customs clearance, control of quantity and quality, sanitary control and other. 

The longstanding principle of Roman law res perit domino states that the risk for accidental ruin, damage or loss of things is borne by that contractual party that owns the goods. For example, if the goods are damaged and still owned by the seller, then the seller will be responsible. When dealing with res perit domino, it is vital to establish the moment when the transfer of ownership occurs. In practice this principle adds up to certain issues because not all legal systems regulate this matter equally. Namely, some legal systems recognize that ownership is acquired at the moment of handing over the goods from one party to another, while particular jurisdictions state the ownership is acquired at the moment of concluding the sales contract. 

Now you are already aware that these issues may be complex. The practice of international trade takes on from the fact that the issue of transferring the risk of accidental failure, damage or loss of goods is treated differently from the issue of the transfer of goods. The transfer of ownership shall be determined by the applicable national law, yet the issue of risk transfer should be regulated by the initial contract itself. 

What are Incoterms? 

Incoterms (International Commercial Terms) refer to rules, adopted by the International Chamber of Commerce (ICC) based in Paris, to facilitate the contracting of international sales of goods. The ICC first introduced the Incoterm rules in 1936 with the aim to create a uniform system of generally accepted definitions and norms relating to the supply of goods between business entities. 

At the launch of Incoterms 2020, ICC Secretary-General John W. H. Denton AO noted that Incoterms 2020 allows everyone to operate so effectively by facilitating annual global trade in trillions of dollars. Incoterms help businesses around the world understand their responsibility and avoid misunderstandings. 

At the launch of Incoterms 2020, ICC Secretary-General John W. H. Denton AO noted that the new version of Incoterms makes business work for everyone by facilitating trillions of dollars in global trade annually.  

To sum it up, Incoterms determine the moment when and where the risk of delivery of goods passes from one contractual party to another in the aspect of international trade. Being determined by abbreviations, Incoterms used in divergent modes of transport.

If the parties determine the application of a certain Incoterms clause, it shall be legally binding. The same conclusion can be found in Serbian case law. For example, the Commercial Court of Appeal held in the case Pž No. 3488/2014 that Incoterms become binding when the parties include them in their contract.  

Incoterms’ common features.

Each ‘Incoterm’ defines the following responsibilities and obligations:  

1. Point of delivery – the notion of where the goods will be transferred from one party to another. 
2. The responsible party for transportation costs – Incoterms answer the question of which party will cover the freight costs.  
3. Export and import requirements – Each term defines whether the seller or buyer is responsible for covering the costs and facilitating the export and import of the cargo in question. 
4. The responsible party of freight insurance – Particular term state that freight insurance is a requirement. Each Incoterm defines who must pay for freight insurance. 

Incoterms are divided into 4 main categories – E, F, C and D.

Category E lays down minimal obligations for the seller, requiring the seller only to make the goods available to the buyer. Conditions under category F require the seller to deliver goods for carriage as directed by the buyer. Further, category C requires the seller to contract and pay for transportation, while category D sets out the maximum burden for the seller. 

Incoterms used for any mode of transport.

EXW – Ex-Works or Ex-Warehouse – The seller is responsible for packing the goods and making them available. The seller completes the delivery of goods to the buyer by making them available at the seller’s facility or in another specified place (i.e., factory, warehouse). The cargo is transferred to the buyer while the freight is still at the seller’s site. The buyer is responsible for exporting, shipping and importing the cargo to the final destination. 

FCA – Free Carrier- This term means that the seller is responsible for transporting the cargo to a defined place in one of two possible ways: 

1. When the seller’s place is specified, the goods are deemed to have been delivered when, loaded into a means of transport organized by the buyer. 
2. When another place is designated, the goods shall be deemed to have been delivered when, loaded onto the seller’s means of transport, arrive at another specified place, and are ready for unloading, along with being made available to the carrier appointed by the buyer. 

Depending on the named place, the cargo is either exported by the seller or the buyer. 

 CPT – Carriage Paid To – The seller is responsible for arranging and paying for the transportation of the goods to the agreed-upon destination. The seller needs to obtain any necessary export licenses and providing the buyer with the required documentation. Once the goods are delivered to the specified location, the buyer assumes responsibility for any further costs and risks associated with the transportation of goods.  

CIP – Carriage & Insurance Paid – The seller is responsible for arranging and paying for transportation of the goods to the named destination. The seller is also responsible for obtaining insurance against the risk of loss or damage to the goods during transit. The cargo transfers to the buyer after it is delivered to a defined terminal. The buyer is responsible for obtaining any necessary import permits and for paying charges associated with the importation of goods. 

DAP – Delivered At Place – The seller delivers the goods to a named final destination, and the buyer is obliged to unload the goods and clearing the through customs. The seller bears all the risks associated with the carriage of goods to the specified destination including transportation costs, export clearance, and other associated fees and charges.  

 DPU – Delivered At Place Unloaded – The seller delivers the goods and the risk transfers to the buyer when the goods are unloaded and made available at the final destination. The buyer is obliged to cover all costs, risks and custom clearances associated with further transportation of goods once they have been unloaded. This is the only Incoterm that requires the seller to unload the goods at the final destination. 

DDP – Delivered Duty Paid – Under the DDP Incoterm, the seller has finished with the delivery when the cargo arrives at the named destination. This is the moment when the risk passes to the buyer who is responsible for unloading the goods and for all costs that may apply after the goods have been delivered. The seller bears all the risks and costs of delivering the goods to the named destination, including transportation costs, export and import clearance, and any other fees and charges. This is the only Incoterm that requires the seller to pay all the costs associated with the delivery of goods. 

Incoterms for Sea & Inland Waterway Transport.

FAS – Free Alongside Ship – The seller is responsible for all costs and risks associated with delivering the goods to the named port of shipment, such as inland transportation costs and export clearance. The seller completes the delivery when the cargo is placed alongside the vessel requested by the buyer, for example, along the port dock. The buyer is obliged to bear all costs from that moment onwards. 

FOB – Free on Board – The seller is responsible for all costs and risks associated with delivering the goods to the named port of shipment and loading the goods onto the shipping vessel. Hence, the seller has to compete the entire process of delivery and loading of goods. From the moment the goods are loaded, all future risks and costs pass to the buyer. 

CFR – Cost & Freight –The seller completes the delivery of the goods when they are in the shipping vessel and ready for export. The seller is responsible for arranging and paying for the freight to transport the goods to the named port. The buyer is obliged to pay for all costs and bear all risks associated with further transportation, including the costs of unloading the goods and any additional transportation costs. 

CIF – Cost, Insurance & Freight – The seller is responsible for all costs and risks associated with securing and delivering the goods to the port appointed by the buyer. Therefore, the seller needs to arrange and pay for the freight to transport the goods to the named port, as well as obtaining insurance coverage for the goods during transit. The buyer is responsible all costs and risks associated with further transportation, including unloading the goods from the shipping vessel. This Incoterm requires the seller to pay for insurance.