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Supply of Goods Agreements with Incoterms

Many supply of goods agreements contain delivery terms. Well-drafted supply agreements may have International Commercial Terms, commonly known as ‘Incoterms’. Incoterms are a set of 11 rules defining who’s responsible for what during international transactions.

If your business trades internationally, it’s important to know about incoterms. They help countries understand each other’s terms and agreements. 

In this article, our supply agreement lawyer will explain incoterms further. They will discuss what to watch for in agreements. Additionally, they’ll highlight the importance of incoterms in both domestic and international supply agreements.

Key Takeaways

  • You should clearly outline each party’s responsibilities in supply agreements.

 

  • Incoterms establish clear points of risk transfer from the seller to the buyer. Helping both parties manage and mitigate risks associated with the delivery of goods.

  • Determine who bears various costs, such as shipping, insurance, and customs duties, preventing unexpected expenses and facilitating accurate financial planning.

  • By providing standardised terms, the rules reduce the potential for disputes in supply agreements, fostering smoother international transactions.

  • Including Incoterms in your contracts ensures that you clearly outline all aspects of the delivery process. This contributes to more precise and enforceable agreements.

Understanding Incoterms

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. Covering various aspects, including the delivery of goods, the allocation of risks, and the distribution of costs.

You can find a further overview of Incoterms here.

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Incoterms in Australian Supply Agreements

These rules go hand in hand with supply contracts. A supplier of goods will price their goods based on what they are responsible for, such as the 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.

In this way, Incoterms can impact the cost of the supply of goods. Because of this, we highly recommend using them in your Australian supply of goods agreements. However, you must understand what each rule means before adding them to your international supply agreements.

Let’s look at the different Incoterms

Incoterms rules typically appear as 3-letter acronyms. The latest version of the rules are the Incoterms 2020. The ICC continually update the rules to reflect global trade practices.

FCA Incoterm (Free Carrier)

Under the FCA rules, the seller must clear the goods for export and deliver goods to the carrier at a specific location.

The supply agreement can specify when the seller will clear the goods and which carrier to use.

DAP Incoterm (Delivered At Place)

Under the DAP rules, the seller must deliver the goods, ready for unloading, at the named place of destination.

The supply agreement should state that the seller assumes all risks involved up to unloading. Additionally, unloading the goods is at the buyer’s risk and cost.

EXW Incoterm (Ex Works)

In an EXW arrangement, the seller must have the goods ready at their location. The buyer is responsible for 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, businesses often use EXW when the buyer has not included delivery costs in the price of goods.

FOB Incoterm (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 Incoterm (Cost, Insurance, Freight)

CIF arrangements mean the seller pays for goods, transportation, and insurance until they reach the agreed destination port.

This rule benefits the buyer because the seller is responsible for the goods and costs until they reach the port.

DDP Incoterm (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.

In an older version of rules, people often referred to this as Free Into Store (FIS). Some supply contracts still use previous Incoterms such as FIS.

Considerations for Supply Agreements

Pricing of Goods

Suppliers and customers need to think about how delivery affects the price of goods. When the parties agree on who will deliver, they must clearly state it in the contract.

Make sure you select an Incoterm that aligns with your agreed-upon cost-sharing strategy.

If the contract specifies the agreed Incoterm, ensure that there are no other inconsistent delivery obligations in the agreement. If a contract specifies different delivery obligations, it can cause confusion and disputes over the supply of goods.

Negotiate Incoterms

Parties can negotiate Incoterms and delivery obligations like any other contract term. 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’. 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. Our experienced supply agreement lawyers will be able to ensure that the contract aligns with the chosen Incoterm.

For instance, if the supplier is in charge of providing the goods at their location, it is called Ex Works (EXW). In this case, the supplier should not be responsible for the cost of transportation. They should also not be responsible for insuring the goods during transit. The contract should reflect this.

Mode of Transportation

With various modes of transportation available, Incoterms cater to different transportation methods. For example, companies can transport goods by sea, air, road, or a combination of these methods. The chosen term should align with the selected mode of transport.

If you’re sending goods within Australia and not internationally, don’t use a rule meant for international shipping.

Specifying locations

In our experience, a supplier may agree to deliver goods to the buyer’s location at no extra cost. However, the supplier only intended to be responsible for delivery to a specific place. In these instances, we amend the contract to specify exactly where the supplier will pay for delivery.

If the supplier won’t pay for delivery costs to any location, they need to clearly describe the location. The supplier could find themselves delivering to any location specified by the buyer. Incurring significant transport costs if all they do is state FIS or DDP in the contract.

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Frequently Asked Questions

1. How do these rules 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 a rule should align with the agreed-upon cost-sharing preferences of the parties.

Once you select an Incoterm, you can tailor the supply agreement to reflect it.

Yes, parties can modify Incoterms to suit their specific needs. However, the supply agreement should document any modifications.

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.

The use of Incoterms is entirely voluntary. However, Incoterms are legally binding when they form part of a supply agreement.

Proper drafting and clear communication is essential to avoid ambiguities and disputes. A supply agreement lawyer can help to ensure that the contract (and the Incoterms) are legally enforceable.

Incoterms allocate risk at various stages of the transportation process. Understanding these nuances is critical to effectively mitigate potential disputes and losses.

About the Author

Farrah Motley
Director of Prosper Law. Farrah founded Prosper online law firm in 2021. She wanted to create a better way of doing legal work and a better experience for customers of legal services.

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