By Derrick Kaufmann

When companies conclude agreements to buy and sell goods across borders, there are certain minimum prescribed terms that need to be included in these agreements in order to ensure that the parties properly understand their respective rights and obligations.

Given the international acceptance by courts and other authorities globally, International Commercial Terms (Incoterms) rules constitute a fundamental part of global trade today. One should, therefore, have a reasonable understanding of how they work.

When buying and selling goods it is important that not only are the goods identified in the agreement, but it is just as important that one stipulates clearly where the obligations of each party begin and end, and in particular, insofar as it relates to the delivery of those goods.

There is often a significant time period that may pass between the time when goods leave the seller’s premises and when they arrive at the purchaser’s premises. It is this crucial period of the transaction that needs clear definition relating to the parties respective rights and obligations and when risk and ownership in and to those goods passes. It is in this context where the proper use and benefit of the Incoterms can be seen.

The Incoterms was the brainchild of the International Chamber of Commerce in Paris that first published a set of abbreviations in 1936 which, when used in transactions, would determine who pays the cost of each transportation segment, who is responsible for the loading and unloading of goods and who bears the risk of loss of those goods at any point during their the transportation and delivery. These Incoterms are updated every ten years by the International Chamber of Commerce. The latest set of Incoterms was published in 2010 and is referred to as ‘Incoterms 2010’.

It is imperative that one makes reference to which edition of the Incoterms one is referring to when choosing to use the Incoterms (for example, Incoterms 2010). The reason for this is simply because from one edition to the next, amendments are made, terms changed or redefined and in some cases, terms are removed altogether.

Incoterms rules are divided into four groups as below (See www.iccwbo.org, accessed14-5-2014).

Group E Incoterms (Incoterms beginning with the letter E): These generally require the buyer to take delivery of the goods at the seller’s premises. Examples of group E Incoterms are EXW (ex-works). In this scenario, the seller makes the goods available to the buyer at the seller’s premises. Accordingly, the buyer is responsible for all transportation costs, duties and insurance, and accepts risk of loss of the goods immediately once the goods are purchased and placed outside the factory door by the seller. Please note that ex-works does not include loading goods onto a truck or vessel.

Group F Incoterms (Incoterms beginning with the letter F): They require the seller to deliver the goods to a carrier at the cost and expense of the seller and that the costs of the main carrier are carried by the buyer. Examples of group F Incoterms include FAS (free alongside ship), FCA (free carrier) and FOB (free on board).

Group C Incoterms (Incoterms beginning with the letter C): These require the seller to arrange and pay for carriage of the goods, but the seller does not assume the risk for loss or damage once the goods are delivered to the carrier. In this situation, the seller places the goods on the carrier at its own cost and expense, and pays for the cost of the carrier, whereas the buyer takes the risk while it is being transported. Examples of Group C Incoterms include CFR (cost and freight), CIF (cost, insurance and freight), CPT (carriage paid to) and CIP (carriage and insurance paid to).

Group D Incoterms (Incoterms beginning with the letter D): Require the seller to bear all the costs and risks of bringing the goods to the buyer’s country. Examples of group D Incoterms include DAF (delivered at frontier), DES (delivered ex-ship), DEQ (delivered ex-quay), DDU (delivered duty unpaid) and DDP (delivered duty paid).

Some of the Incoterms are suitable for use in connection with only certain modes of transport. For example, FAS, FOB, FCR and CIF are customarily used in connection with sea inland waterway transport only.

Incoterms helps ameliorate the confusion and misunderstandings that can sometimes occur between customer and supplier when it comes to identifying their respective rights and obligations in terms of a contract seeking to regulate the transportation of goods.

Derrick Kaufmann BCom (Wits) LLB (Stell) is an attorney at Kampel Kaufmann Attorneys in Johannesburg.

This article was first published in De Rebus in 2014 (June) DR 48.