Many supply of goods agreements contain delivery terms. Well-drafted supply agreements may have Incoterms as they specify which parts of delivery each party is responsible for. They also clearly define who is responsible for delivery costs.
One important aspect of supply of goods contracts is the integration of International Commercial Terms, commonly known as Incoterms.
In this article, our supply agreement lawyer will step you through:
1. what Incoterms are
2. things to look out for in your supply of goods agreement
3. the relevance of Incoterms to both domestic and international supply agreements
Incoterms simplify international commerce by providing a standard framework for interpreting key terms in supply contracts. The International Chamber of Commerce (ICC) established these terms. They explain the rights and obligations of buyers and sellers in the delivery of goods. They cover various aspects, including the delivery of goods, the allocation of risks, and the distribution of costs.
You can find an overview of Incoterms here.
The Relevance of Incoterms in Australian Supply Agreements
Incoterms go hand in hand with supply contracts. A supplier of goods will price their goods based on what delivery costs they must pay. Customers should try to transfer the delivery responsibility and cost to the supplier for their benefit. This is a particularly important commercial aspect of the supply of goods in the face of high freight and transport costs.
As you can see, Incoterms can impact the cost of the supply of goods. Because of this, we highly recommend using Incoterms in your Australian supply of goods agreements. However, you must understand what each Incoterm means before adding this to your contract.
Considerations for Drafting or Reviewing a Supply Agreement
Pricing of Goods
Suppliers and customers need to think about how delivery affects the price of goods. When the parties agree on who is responsible for the delivery, it must be written down correctly in the contract.
Make sure you select an Incoterm that aligns with your agreed-upon cost-sharing strategy.
If the agreed Incoterm is specified in the contract, be careful that there are no other inconsistent delivery obligations. A supply of goods agreement will be uncertain if there are multiple, conflicting delivery obligations in a contract.
Like any other contract term, Incoterms and delivery obligations can be negotiated. If the supply of goods agreement does not reflect the parties’ understanding, seek to negotiate the correct Incoterm.
Be careful if you are working with a ‘standard form contract’ (refer to this article on unfair contract terms). If the unfair contract terms law applies, both parties need to engage in genuine and meaningful negotiations. A ‘take it or leave it’ approach to standard form contracts may lead to unenforceable contract terms and even penalties from the ACCC.
Allocating and Avoiding Risk
Different Incoterms allocate risk at different stages of the transportation process. Supply agreement lawyers will be able to ensure that the different requirements of the supply contract align with the chosen Incoterm.
For example, suppose the supplier is responsible for making the goods available to the customer at the supplier’s premises (EXW). In that case, the supplier should not be responsible for the cost of transportation. They should also not be responsible for insuring the goods during transit.
Mode of Transportation
With various modes of transportation available, Incoterms cater to different transportation methods. For example, goods may be transported by sea, air, road, or a combination of these. The chosen term should align with the selected mode of transport. If goods are being supplied within Australia and no international transport is needed, don’t use an Incoterm meant for international supply.
We have seen situations where a supplier agrees to deliver goods to the buyer’s premises at the supplier’s cost. However, the supplier only intended to be responsible for delivery to a specific place. We had to amend the contract to ensure that the place where the supplier was paying for the goods to be delivered was specified.
For example, if the supplier does not intend to pay for the costs of delivery to any location, the location must be clearly described. The supplier could find themselves delivering to any location specified by the buyer and incur significant transport costs if all they do is state FIS or DDP.
Let’s look at the different Incoterms
EXW (Ex Works)
In an EXW arrangement, the seller makes the goods available at their premises, and the buyer bears all transportation costs and risks.
Supply agreement lawyers often consider EXW suitable for experienced and well-established parties where the buyer can handle logistics. Alternatively, EXW is often used where the buyer has not allowed for delivery costs in the price of goods.
FOB (Free On Board)
FOB places the responsibility on the seller to deliver the goods to the named port of shipment.
People commonly use this term in maritime transactions. With FOB, the buyer assumes responsibility and costs once the goods are on board the vessel.
CIF (Cost, Insurance, Freight)
CIF obliges the seller to cover the cost of goods, transportation, and insurance until the goods reach the named port of destination.
This term is advantageous for the buyer, as the seller assumes responsibility and costs until the goods arrive at the destination port.
DDP (Delivered Duty Paid)
DDP requires the seller to deliver the goods to the buyer’s location, covering all costs and duties.
This term offers convenience to the buyer, who takes possession upon delivery without incurring additional costs. Under an older version of Incoterms, this was often referred to as Free Into Store (FIS). Supply contracts still often use previous Incoterms such as FIS.
DAT (Delivered at Terminal)
DAT involves the seller delivering the goods to a named terminal at the destination.
From the terminal onward, the buyer assumes responsibility and costs.
It is important to seek the assistance of an experienced supply agreement lawyer. They know how Incoterms connect to your supply agreement and make sure the contract terms match the suggested delivery method.
Frequently Asked Questions
How do Incoterms impact the cost of goods in Australian supply agreements?
Incoterms play a role in cost distribution. They influence who bears the expenses related to transportation, insurance, and customs duties. The selection of an Incoterm should align with the agreed-upon cost-sharing preferences of the parties.
Can Incoterms be modified to suit specific requirements?
Yes, parties can modify Incoterms to suit their specific needs. However, the supply agreement should document any modifications. Read the whole contract to make sure there are no other delivery obligations that don’t match the agreed-upon Incoterms.
Are Incoterms legally binding?
How do supply agreement lawyers ensure that the selected Incoterm aligns with the client's objectives?
Conducting a comprehensive assessment of the client’s needs is essential. Transportation, risk tolerance, and cost-sharing preferences determine the Incoterm chosen to match the client’s goals. We can then draft the terms and conditions to match the client’s needs.
What role do Incoterms play in risk allocation?
Incoterms allocate risk at various stages of the transportation process. Understanding these nuances is critical to effectively mitigate potential disputes and losses.