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Incoterms and purchasing goods abroad

13 August 2017
– 6 Minute Read


E-commerce and online shopping are growing rapidly in South Africa with a number of well-known online South Africa retailers and international retailers.  Estimates indicate that approximately ZAR 37 billion were spend online in the previous financial year by South African consumers with the US being the most popular cross border destination.  These online retailers offers a host of products including books, electronics, furniture and appliances.  In addition, some of the traditional supermarkets allows you to shop online and have your groceries delivered to your doorstep without you having to face the crowds and ques at shopping centres.  Online shopping does not only entail business-to-consumer transactions but also includes business-to-business transactions and even consumer-to-consumer transactions.

The benefits of online shopping includes the convenience of having goods delivered directly to your designated address, the time that you save in avoiding crowds and ques at shops and that the special savings that shops offer on goods for a limited period only are easily accessible.  The drawbacks of online shopping are that the there is a considerable waiting period for the goods to be delivered and secondly the costs associated with delivery, otherwise known as the shipping costs. The ZAR 100 that you save on a product by buying online locally can easily be offset by the shipping costs.

When buying online internationally the shipping costs are even higher, goods that appeared to be a bargain suddenly becomes expensive but exactly what expenses should the shipping costs cover in international sales, and how are the shipping costs allocated between buyer and seller in international sales? 

Shipping costs include those costs related to the packaging of the goods at the seller’s warehouse, clearing the purchased goods for export to South Africa, freight via either ship or air, importing the goods into South Africa and paying import duty, if any, and onward delivery to the customer’s specified address.

In order to reduce or remove altogether uncertainties arising from different interpretation in different countries of the terms of an international contract of sale, certain trade terms have developed over time and they govern the place, time and manner of delivery and allocate certain costs and risks between buyer and seller and these trade terms have gained widespread acceptance.  The trade terms in widespread international use is that sponsored by the International Chamber of Commerce (the “ICC”) and called Incoterms.   The ICC derived the word Incoterm from INternational COmmercial TERMS.  These trade terms or incoterms that define the method of delivery and the allocation of costs and risks have evolved from and been developed by international commercial custom.  The incoterms have also been further standardised by having been taken up in and explained in published format.  

Parties to international sales incorporate the incoterms, and their interpretation, by way of express or tacit reference to them in their contracts of sale.  Parties to an international sale of goods are of course not obliged to incorporate them in their contract and can vary the incoterms or agree on their own terms.  The certainty that an Incoterm provides however makes it an attractive option to include in the international sales contract.

For example, in certain to-door deliveries that we find in online shopping, the parties may agree on the incoterm called DDP (Delivery, Duty Paid) which is most onerous for the seller, as the seller need to fulfill his obligation to deliver the product at the named place in the country of importation.  The seller has to bear the risks and costs, including import duty, freight and other charges of delivering to product to place of destination.  The seller therefore accepts responsibility for the shipping costs.  Sellers may include these costs in the final sale price of the goods and then market their product as including shipping costs or “free shipping”.  Alternatively, they may add it just prior to funds being deducted in the online transaction.  In the online shopping environment this is an effective marketing strategy as it is unlikely that the prospective buyer will decide not to cover the costs of shipping at such a late stage and opt out of the transaction altogether.  The opposite of the incoterm DPP is the incoterm EXW (Ex Works) as this incoterm is most onerous for the buyer.  If the parties agree in their international sale contract that the incoterm EXW should govern delivery, risk and transportation then the only obligation on the seller is to make the product available for collection by the buyer.  It is then up to the buyer to arrange for importation to his chosen destination.

 There is in total eleven incoterms that the buyer and seller can agree to.  Well-known other incoterms are FOB (Free on Board) and CIF (Carriage, Insurance, Freight).  If the parties agree on incoterm FOB then it is the seller’s responsibility to get the product on board a ship ready for transportation and obtaining an export license.  The buyer in turn bears the responsibility and expense of conveyance of the goods, arrange importation and pay import duties.  The risk also passes to the buyer as soon as the product is loaded and as a result it is the buyer that needs to arrange insurance if he so desires.  If a product is sold CIF then the seller has to arrange for insurance and the freight to the buyer’s country.  CIF is therefore more onerous for the seller than FOB.

In many cases, the online seller will stipulate its own bespoke terms of delivery and the costs of the shipping will be predetermined.  However, certain online sites, especially those where goods are sold business-to-business or customer-to-customer incorporate specified incoterms in the international contract of sale.  One should always be aware when the risk passes to the buyer and which party is liable for insurance at any given stage as it is not always the seller’s responsibility up to final delivery.  Understanding the consequences of the chosen incoterm can be of great benefit to any buyer in mitigating the risks of having any goods delivered to its chosen destination.

This article first appeared in the Sunday Tribune.