Brexit and INCOTERMS – Contractual considerations
This article defines INCOTERMS and their importance in international trade. It seeks to explain the impact of Brexit on all existing contracts that continue to incorporate INCOTERMS post-Brexit. It also covers what contractual considerations you should bear in mind when amending already existing contracts or choosing the relevant INCOTERMS to incorporate in your future international contracts.
· Contractual Considerations
INCOTERMS (International Communication Terms) are standardised terms published by the International Chamber of Commerce (ICC) to be used in international contracts of sale and transit of goods. INCOTERMS define the seller and buyer’s responsibilities and risks for the goods from the time of purchase, through transit to the point of delivery.
The use of INCOTERMS is widely recognised in international trade and can readily be incorporated into various contracts. However, as the application of INCOTERMS may differ in different jurisdictions, you should refer to the exact INCOTERM and INCOTERM edition you intend to apply to your contract or expressly state the parties’ obligations in the contract. It is important to note that the INCOTERMS are not a complete contract of sale because they do not cover some aspects such as dispute resolution in case of any breaches or methods of payment. As such, INCOTERMS should be used in addition to other contract documents that elaborate all relevant aspects of the contract.
Due to the EU customs union and single market, some provisions of the INCOTERMS for example those covering customs and border clearance formalities barely had any relevance to the UK and EU trade before Brexit. Now that the UK is no longer part of the EU, the import and export formalities under the INCOTERMS are commercially significant.
Following Brexit, the export and import fees do not only include tariffs but also any costs associated with regulatory and border clearance procedures. Continuing to incorporate INCOTERMS in your contract post Brexit involves significant commercial risks that may not reflect the parties’ initial intentions on who should bear certain costs such as regulatory and border clearance fees. We recommend that you review your contracts to ensure that all incorporated provisions of the INCOTERMS are a true reflection of your intentions in regards to what party of the contract should incur particular costs and risks going forward.
Identify what INCOTERMS are relied upon in your contracts, assess what impact these have on your responsibilities and risks especially in light of Brexit and arrange to make the necessary changes. It is commercially viable to assess what changes Brexit has on your business and prepare to proactively make amendments to adapt your contracts to the changes as opposed to making reactive changes when disputes arise regarding your shipments or orders. We recommend that you should consider attaining professional legal advice before making any changes to your contracts.
To determine what changes to make to already existing contracts or which INCOTERMS to choose for any future contracts, you should consider the following aspects:
a) Country in which the designated place of delivery is located
b) The INCOTERMS’ allocation of costs and risks
a) Place of Delivery
For some INCOTERMS, the place of delivery has a large impact on what costs parties incur related to tariffs and customs clearance. For example, FCA (Free Carrier) dictates that the seller shall deliver the goods, cleared for export, to the buyer’s nominated carrier at a named place. Before Brexit, if the contract provided for the place of delivery as Birmingham, a seller from any country in the EU (e.g. Denmark) would only need to provide an export declaration to prove that the goods have legally left Denmark. The Danish seller would not need to incur any further costs such as tariff costs due to the EU regulations that provide for the free movement of goods within the EU.
However, post-Brexit, if the place of delivery is Birmingham, the Danish seller will be required to pay both export and import tariffs as the goods leave his country and cross the English border.
b) INCOTERMS allocation of costs and risks
The buyer and seller’s responsibilities from either end on the INCOTERMS’ spectrum ie from Ex Works (EXW) to Delivered Duty Paid (DDP) are clear. They range from seller-friendly to buyer-friendly terms. For example, under EXW, the buyer’s obligations commence when the seller places the goods at the buyer’s disposal at the seller’s premises or any other specified place. The seller is not responsible to place the goods on the collecting vehicle or pay any costs relating to their export from the seller’s country and import to the buyer’s country. Essentially, the buyer undertakes all costs and risks involved in the transportation of the goods from the seller’s factory or warehouse to the final destination. On contrary, where goods are supplied DDP, the seller bears all risks and costs including export and import fees up to the point of destination.
INCOTERMS are widely used as standardised terms of trade in international contracts of sale. They should not be relied on as standalone contracts but rather incorporated into sale of goods contracts. To improve the efficiency of INCOTERMS in your international contracts, you should ensure that the exact INCOTERMS you intend to rely on and the INCOTERM edition are expressly identified in your contracts.
Prior to Brexit, INCOTERM provisions related to payment of import and export border tariffs were irrelevant to international trade between the EU and UK because the EU customs union and single market regulations provide for the free movement of goods within the EU. As the UK is no longer part of the EU since 1 January 2021, previously ‘dormant’ INCOTERM provisions are now commercially significant in the trade of goods between the EU and UK.
To ensure that sellers and buyers continue to carry responsibilities and risks of goods as intended at the initial signing of the contract, we recommend that you should review all already existing contracts, identify what INCOTERMS your business relies on and how Brexit impacts your responsibilities. Whilst reviewing your contracts or choosing which INCOTERMS to rely on in your future international contracts, particular consideration should be given to the designated place of delivery and the responsibilities and risks placed on buyers and sellers under the individual INCOTERMS.
You can find a brief INCOTERMS guidance published by ICC here.
Alternatively, please contact a member of our team by clicking here to arrange a free 10-minute consultation on making relevant changes and the right choice of INCOTERMS for your international contracts.