Brexit and Incoterms
The UK will leave the European Union on the 1st of January 2021. A ‘Trade and Cooperation Agreement’ has been concluded since 24 December. The exact effects of the deal on trade cannot yet be said with certainty. The details of the so-called ‘Trade and Cooperation Agreement’ will become clearer in the coming days. If you have a contract with a UK customer, the Brexit will not change that much in the first respect. Both the Dutch and British parties will have to fulfil their obligations. Where should you pay attention to when supplying or receiving products from a UK customer?
Consequences after the Brexit
From 1 January 2021, the UK will no longer be part of the Customs Union. As a result, the UK will be regarded as a third country and import and export duties will be levied on all products crossing the border. Because of these customs formalities, additional costs may be incurred and there is a risk that delivery commitments will not be met due to long queues at the border.
At present, the European Union and the UK are opting for ‘zero tariffs, zero quotas’. There is only one ‘but’: if any dispute between the European Union and the UK arise, one of the parties can introduce ‘unilateral’ temporary import levies or quotas as a penalty. An example of this is if one of the parties penalises the other with unfair customs controls.
If you have not made clear contractual arrangements, it is not clear who is responsible for customs formalities and who is responsible for the damage caused by these border problems. Problems must be resolved based on the contract concluded, the applicable general terms and conditions and the law applicable to the contract. Therefore, it is wise to check if the Incoterms are applicable to your contract or to negotiate that these will be included.
Delivery conditions after the Brexit
Incoterms are usually used in international contracts. These terms describe the most important terms of trade. By referring to the Incoterms in an agreement, the parties adhere to the international standard interpretation contained therein. This avoids the uncertainties that can arise because clauses are not interpreted uniformly.
Different delivery conditions are included in the Incoterms. For example, the way of delivery and what the parties must arrange. These conditions determine which party is responsible for the customs obligations and who bears the risk if goods are damaged, late or lost during transport.
Now that customs formalities are going to change, you want to know in advance what your responsibilities are as a buyer/seller:
- Ex Works (“EXW”) – delivery where (almost) all obligations lie with the buyer. The buyer must arrange transport, insurance and customs formalities. When long ques occur at the border, the buyer shall have to take care of any delay this may cause. With EXW, it is therefore wise to consult with your opposing party.
- Free Carrier (“FCA”) – when exporting to a country outside the EU, it is advisable to choose this option (as a minimum). With FCA, like EXW, the seller has few obligations towards the buyer. The seller must take care of all customs formalities arising from the export. The costs, duties and levies arising therefrom are also borne by the seller. Customs formalities, costs, duties and charges shall be borne by the buyer in the event of transit through other countries and import into the country of destination. The difference with EXW is that in the case of FCA, the seller arranges customs formalities for exports (but not for imports). As a result, the customs formalities are shared. A Dutch seller then exports the goods from the Netherlands. The British buyer imports them back into the UK. Furthermore, the buyer remains responsible for transport and other formalities.
- Carriage Paid To (“CPT”) – a form similar to Free Carrier is the Carriage Paid To. In CPT, the seller pays for carriage to the named point of delivery and the risk passes when the goods are handed over to the first carrier. The seller then arranges the customs formalities for export. The buyer arranges the customs formalities for import and transport to the UK. The cost of transport is borne by the buyer from the agreed place of delivery. Until delivery, the costs are borne by the seller. The risk of damage in transit is borne by the Buyer from the time of delivery.
- Delivered Duty Paid (“DDP”) is the opposite of EXW. In this form, the seller arranges all customs formalities. A Dutch seller arranges export from the Netherlands and transport to the UK and import formalities in the UK. In this case, the seller is responsible for the entire journey.
With 1 January 2021 fast approaching, now is an appropriate time to assess your contracts involving the UK.
The UK will become a third country, and this will change what the parties owe each other. If your contract includes EXW or DDP, it is advisable to discuss this with your counterparty. If you have opted for DDP, you are responsible for importing your products into the UK. Because of the current uncertainties, this could cause problems that you do not want. If you are entering into new contracts with a UK counterparty, agree which delivery condition is suitable. Therefore, consult your delivery contacts on time and if you have any questions, contact Robert van Muijen, Hester Derkx or Yannick van den Berk.