Do you know your Incoterms? It may sound an arcane question – something which is the responsibility of “sales”. But at a time of Brexit uncertainty the need to know and understand Incoterms could rise up the to do list rapidly and impact many distributorship agreements.
The reason is linked to the time at which responsibility for the goods being sold passes. Given that underlying every distributorship agreement is the sale and purchase of goods, it is vital that account is taken of the Incoterm applicable to the contract for the sale of goods.
Brexit could see the imposition of custom duties on goods passing between the UK and the EU (let alone intra UK between Great Britain and Northern Ireland if the current EU – UK Withdraw Agreement is approved by Act of Parliament). Brexit could also see a change in customs duties if Brexit occurs without a transactional period with the result that the UK is no longer covered by a trade agreement which the EU has with country X.
But whether contracts made between supplier and distributor or the distributorship agreement itself either:
- do not address custom duties in the case of an intra-EU agreement; or
- provide for custom duties to be borne by either supplier or distributor in the case of a distributorship agreement where one party is in the UK and the other outside the EU,
it is likely that one party will incur a cost (custom duties) which was not considered at the time that the parties entered into the contract!
Take 2 extremes
Whilst a new set of Incoterms will come in force 2020, most existing contracts which refer to incoterms will refer to the Incoterms 2010.
Under these Incoterms:
- EXW – Ex Works
“Ex Works” means that the supplier delivers when it places the goods at the disposal of the distributor at the supplier’s premises or at another named place (for example, its factory).The supplier does not need to load the goods on any collecting vehicle, nor does it need to clear the goods for export (emphasis added), where such clearance is applicable.
- DDP – Delivered Duty Paid
“Delivered Duty Paid” means that the supplier delivers the goods when goods are placed at the disposal of the distributor, cleared for import on the arriving means of transport ready for unloading at the named place of destination.The supplier bears all the costs for risks involved in bringing the goods to the place of destination and has an obligation to clear the goods not only for export but also for import, to pay any duty to both export and import and to carry out all customs formalities (emphasis added).
What’s to be done?
The starting point is to take a view as to the likelihood of Brexit occurring – and then a further view as to it occurring without a transitional period.
Depending on the view taken, the desirability of identifying:
- the distributorship agreements which will be affected; or
- the contracts for the sale and purchase of goods under such agreements which will be affected,
Following such relevant agreements and contracts being identified, thought will need to be given as to the impact of Brexit and as to whether contractual changes should quickly be sought – clicking here may provide some assistance!