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Import-Export Manual – Shipping and delivery of goods

Manual ABC of Import Export

Import-Export Manual – Shipping and delivery of goods

4. THE DELIVERY AND THE QUALITY OF GOODS

In order for a commercial transaction to be successful, it is important for Italian businesses selling abroad to pay attention to their obligations concerning the delivery and the quality of the goods as described in the contract.

If he does not do so, the Italian seller may increase their risk of having to deal with complaints concerning the shipment. Such complaints may be more or less valid, sometimes even specious. However, they often jeopardise the payment of the agreed price and cause dangerous liabilities for damage.
Italian businesses purchasing from abroad must carefully draft the contractual aspects concerning the delivery and the quality of goods. If they do not do so, they run the risk of receiving nonconforming goods or goods that have been damaged during transport, and will not be able to bring a claim for sustained damage against the supplier, or obtain that the agreed sum is returned, or, if the payment has not been made yet, free themselves from the obligation to pay. Therefore, it is essential for both importers and exporters to be very careful when deciding the aspects concerning the delivery and the quality of goods. With respect to payment, this element is also related to the debt collection phase.

THE DELIVERY OF GOODS

International selling sometimes requires goods to be transported on long and sometimes complex routes with different means of transport involving several subjects. It is therefore a complex procedure which entails a high level of risk both for the goods and for the manufacturing/commercial divisions. Goods may be damaged or stolen, or may be delivered late thus causing problems to the buyer who needs the goods to use them their manufacturing process or as a product for sale.
Which of the parties bears transportation risk? Can Italian businesses ignore these issues and demand payment of the agreed price, when selling, or claim compensation from the foreign seller, when buying? In order to minimise the risks, it is important to define contractually the most important aspects concerning the transportation of goods, according to the two variables of space and time, i.e.:
• the place of delivery;
• the time of delivery.

It is useful to mention two parties, who do not enter into the contract of sale, but who establish contractual relations with either the seller or the buyer. These parties are the carrier and the shipper and they both play a very important role in the delivery. For the delivery of goods abroad, Italian businesses may conclude:
• a contract of carriage (carrier)
• a shipping contract (shipper).

Under the Italian law (Art. 1678 and the following of the Italian Civil Code), the contract of carriage establishes that the carrier agrees to carry the goods to the destination using their own or third parties’ means of transport, accepting liability for damage caused by breach of contractual obligations (late delivery in breach of the agreed delivery terms, loss or damage of goods), except when such breach of obligations are not attributable to the carrier (e.g. the goods are damaged due to unforeseeable circumstances or defective packaging).

Alternatively, under the Italian law (Art. 1737 and the following of the Italian Civil Code), in the case of the contract of shipping, the shipper has the only obligation to conclude with third parties (in his name and on behalf of the business that appointed them) the contract of carriage and carry out the ancillary operations (e.g. the payment of customs duties).

THE PLACE OF DELIVERY OF GOODS

In the case of an international supply, the place of delivery is often chosen based on transport costs which, in turn, affect the selling price. Given the complexity of the operations connected to the delivery of the goods, there are important aspects to be taken into account.
First of all the risk of losing the goods either due to theft or to circumstances that cause the goods to be destroyed or damaged. Which of the parties bears this risk connected with international sale?
Furthermore, with reference to the burdens connected with the delivery in an international sale: which of the parties, either the seller or the buyer, is responsible for all the necessary activities such as the negotiation, the signing of the contracts (contract of carriage or of shipping, contract of insurance) or the completion of customs formalities?

THE INCOTERMS

A viable solution to the issue of regulating the complex aspects of responsibility and risks in international trade is provided by the delivery terms which have been collected under a code by the International Chamber of Commerce based in Paris. These terms are known as INCOTERMS and are widely used all over the world. The latest version of the INCOTERMS was released in 2010.

INCOTERMS are therefore used to determine the place of delivery, to precisely split/share the most relevant aspects concerning the delivery of goods among the parties, by an international contract of sale. These aspects are:
• responsibilities (who must do what, who must enter into contracts, who must complete formalities);
• costs (who must pay the price of the contracts, and customs duties);
• risks (who bears the burden of responsibility for the consequences of loss or damage of goods);

In very complex contracts, it is possible to modify the clauses of the INCOTERM chosen by the parties, should some changes be necessary. It is important, however, not to introduce radical changes to the chosen INCOTERM in order not to lose the advantages of certainty and predictability that the INCOTERMS provide.

The obligations of the parties arising from the chosen INCOTERM have a significant impact on some aspects of the contract, notably on the methods of payment.

In the EU, the choice of the delivery term and of the place of delivery may affect another aspect of the international contract of sale: the choice of the court having jurisdiction for the resolution of disputes arising from the contract.
The EC Regulation No. 44/2001 on jurisdiction and the recognition and enforcement of judgements in civil and commercial matters establishes that, unless otherwise agreed, the competent court for the resolution of disputes is that located where, under the contract, the goods were delivered or should have been delivered.

THE TIME OF DELIVERY

With respect to the time of delivery, depending on whether the Italian business is selling or buying abroad its goals may be completely different.
The Italian seller may agree with the foreign customer that the time of delivery is not binding and establish that, when delivery is delayed, its responsibility is limited to a predetermined and fixed sum of money, eliminating the risk that, due to the late delivery by the seller, the buyer may delay the payment and claim damage compensation or ask for the contract to be cancelled.

The objectives of Italian businesses purchasing abroad are different.

The Italian buyer may agree that the term of delivery is binding and set an immediate sanction in case of non-compliance by the foreign seller, as well as grant themselves the right to receive damage compensation or ask for the contract to be cancelled.

THE QUALITY OF GOODS

When are the goods defective?

The seller must deliver goods which are of the quantity, quality and description required by the contract and which are contained or ¬packaged in the manner required by the contract. (Art. 35 of the United Nations Convention on Contracts for the International Sale of Goods, Vienna Convention, which Italy ratified with the Law 765/1985).

Except where the parties have agreed otherwise, the goods do not conform (Art. 35 of the Vienna Convention) with the contract if:

• they are not fit for the purposes for which goods of the same description would ordinarily be used;
• they are not fit for any particular purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract;
• they do not possess the qualities of goods which the seller has held out to the buyer as a sample or model;
• they are not contained or packaged in the manner usual for such goods or in a manner which is not adequate to preserve and protect the goods.

How long does the warranty last?

What are the rights of the buyer and, on the other hand, what are the obligations of the seller in the case of defective goods? What must the buyer and the seller do in the case of defective goods?
The conditions of the warranty may be freely agreed by the parties provided that such parties are professional buyers/sellers (businesses selling to consumers, instead, must comply with mandatory regulations).

In the case of defective goods, in the absence of any other contractual provisions, under Art. 46, the Vienna Convention establishes that the buyer may:

• require delivery of substitute goods provided that the lack of conformity constitutes a fundamental breach of contract (a breach of contract is fundamental if it results in such detriment to the buyer as substantially to deprive him of what he is entitled to expect under the contract, Art. 25);
• require the seller to remedy the lack of conformity by repair, unless this is ¬unreasonable having regard to all the circumstances;
• enforce his claim for damage compensation (Art. 47).
The request for replacement goods or for repair must be made in conjunction with the notice of defects within a reasonable time.

PRODUCT SAFETY

With respect to product safety within the EU and the related implications in terms of international contracts and in terms of the role of the various people involved (manufacturers, distributors, final customers), please see the EU legislation concerning product safety and CE marking.

Customs Advice – Incoterms 2010

Customs Advice – Incoterms 2010

supply chain - incoterm 2010

What are the International Commercial Terms (INCOTERMS)?

INCOTERMS are a set of rules developed by the International Chamber of Commerce to establish the responsibilities, the costs, and the risks related to the delivery of goods in international sale contracts. In addition to requiring that the shipment be organised differently, Incoterms define how the cost of carriage and the associated risks should be apportioned.

List of INCOTERMS divided into 2 groups:

First group of Incoterms:

The 7 Incoterms listed below may be used with any mode of transport:

- EXW – Ex Works
- FCA – Free Carrier
- CPT – Carriage Paid To
- CIP – Carriage and Insurance Paid To
- DAT – Delivered At Terminal
- DAP – Delivered At Place
- DDP – Delivered Duty Paid

- EXW – Ex Works
The seller delivers when it places the goods at the disposal of the buyer at the seller’s premises or at any other agreed place (factory, works, or warehouse).

- FCA – Free Carrier
The seller delivers when it places the goods at the disposal of the carrier or of any other person designated by the buyer at the seller’s premises or at any other agreed place.

- CPT – Carriage Paid To
The seller delivers when it places the goods at the disposal of the buyer at an agreed place. The seller is responsible for the transportation costs to the agreed place of destination.

- CIP – Carriage and Insurance Paid to
The seller delivers the goods to the carrier at an agreed place. The seller is responsible for the transportation costs associated with delivering the goods and must also provide insurance cover against loss or damage to the goods during carriage.

- DAT – Delivered At Terminal
The seller delivers the goods when it places at the disposal of the buyer at an agreed terminal at the port or place agreed. This incoterm replaces the old DDU (Delivered Duty Unpaid) and clarifies an ambiguous aspect of the former incoterm, and states that the costs of warehousing at the destination and the costs associated with customs operations to destination are to be paid by the buyer.

DAP – Delivered At Place
The seller delivers the goods when it places them at the disposal of the buyer and ready for unloading at the place of destination. DAP also replaces DDU.

- DDP – Delivered Duty Paid
The seller delivers when it places the goods at the disposal of the buyer ready for unloading in the agreed place of destination. The seller bears all costs associated with the transportation, including customs duties and import taxes. This incoterm places the maximum obligation on the seller.

Second group of Incoterms:

This group includes 4 Incoterms rules which are applied when the place of delivery and the place to which the goods will be carried are both ports. For this reason, these rules may be used only if a part of the carriage is by sea:

- FAS – Free Alongside Ship
- FOB – Free On Board
- CFR – Cost and Freight
- CIF – Cost Insurance and Freight

FAS – Free Alongside Ship
The carrier delivers the goods, leaving them alongside the vessel (e.g. on a quay) nominated by the buyer at the named port of shipment. If the goods are containerised, FAS is not recommended.

FOB – Free On Board
The seller delivers the goods placing them on board the vessel nominated by the buyer at the agreed port of shipment.

CFR – Cost and Freight
The seller delivers the goods on board the vessel or procures the goods which have been delivered on board at the agreed and specified port of shipment.

CIF – Cost Insurance and Freight
The seller delivers the goods on board the vessel or procures the goods which have been delivered on board to the specified port of shipment. The seller must also provide insurance cover against the risk of loss of or damage to the goods during the carriage.

In order to avoid misunderstandings, unexpected costs, and delays in the transportation, it is recommended that the parties specify the exact point to which the Incoterm refers. E.g. EXW Milan – FOB Hong Kong port – CPT Hong Kong airport.

In international carriage, insurance, is automatically activated and in case of loss, damage or theft, it gives the right to minimum compensation. This type of insurance is called carrier’s insurance. However, such compensation, is not calculated on the basis of the true value of the transported goods, but is calculated based upon the weight and the chosen mode of transport (on average this compensation is equal to €1 per Kg). For better guarantees, it is necessary to provide an additional insurance policy with higher limits of indemnity and greater coverage.

FOR FURTHER INFORMATION ON INCOTERMS, OR FOR A FREE CONSULTATION, PLEASE POST A QUESTION ON “THE EXPERT ANSWERS” SECTION, OR CONTACT US VIA E-MAIL BY CLICKING ON THE LINK BELOW
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