In the process of concluding the sales agreement, both buyer and seller are interested in advantageous division of costs, responsibilities and the supply of goods risk. These matters have the crucial meaning for determining the basic component of every sales agreement which means: price, which can be reduced in case when the buyer provides the organisation and realization of goods transportation. As a rule, the more responsibilities the seller has, the higher price is. However, it is not the only aspect of sales transaction which is influenced by form of dividing the transaction costs, responsibilities and supply of goods risk by parties.

Determining the costs division, responsibilities and supply of goods risk plays special role in international trade, in which the goods switching the owner often have to cover a huge distance what increases the possibility of getting lost, destroyed, becoming defective, but also the risk of delayed delivery (in case when the time of delivery shall be defined as the moment when the goods are delivered to the buyer’s place). Likewise, if the payment of goods depends on delivering them to buyer’s place, the time of payment is also postponed, what is of course disadvantageous for seller.

The matters listed above have also fundamental meaning for tax settlement of each transaction, for version of the agreement and for pursuing claims resulting from agreement through the courts. For instance, the seller who was obligated to deliver goods to the place designated by buyer has to present different circumstances than the seller who had obligation only to leave the product at the disposal of buyer obligated to collect the goods. Those sellers have to make also different evidence effort in the court to prove the delivery.

The set of  international sale terms

For above-mentioned reasons prior determination of the form of dividing the costs, responsibilities and goods supply risk has the essential meaning in concluding the sales agreement. Nowadays it is standard to refer to Incoterms (International Commercial Terms) in international trade relations. Incoterms constitute the set of international sale terms developed, recommended and published by International Chamber of Commerce – ICC, referring to United Nations Convention on Contracts for the International Sale of Goods. Each of terms constitutes a separate form of regulating given sale transaction, parties agreement with regard to costs division, responsibility for goods and type of transportation which the parties may choose in case of particular sales agreement. This is a specific model that can be used by parties to establish particular sale.

All of the Incoterms are submitted to general rules of use. Firstly, using these rules always depends on the joint will of parties and should always be clearly indicated in agreement. It must be kept in mind that provisions of agreement always prevail over provisions of terms, and the parties of agreement can freely decide in what scope will they use given term in the process of executing the agreement. Secondly, it should be stated that Incoterms relate directly only to relations between seller and buyer and they do not apply directly to third parties e.g. carrier or forwarding agent.

Incoterms 2010

Nowadays the binding version of Incoterms is Incoterms 2010 which consist of 11 terms. Terms are arranged in the specific manner: the first one has minimum and the last one has maximum of seller’s responsibilities.

The terms are divided in four groups depending on delivery conditions, location of bearing the costs and acquiring the risk criteria, groups – E, F, C and D.

1. Group E consists of one term of delivery:
- EXW – Ex Works – the delivery shall take place at the moment of leaving the goods by seller to buyer’s disposal at seller’s workplace or other named place; if the buyer will not report at place and the time of delivery, the goods are considered to be issued, in consequence they are stored at buyer’s cost and risk; the EXW term should not be used in the situation when the buyer can not directly or indirectly fulfill formalities connected to goods export; the risk of losing or damaging the goods passes from seller to buyer at the moment of leaving them to buyer’s disposal at named place and time under the condition that the goods were duly separated i.e. clearly isolated or identified as subject of an agreement in any other way.

2.Group F includes the delivery terms which define the takeover costs and risk by buyer from seller at named place of delivery.
- FCA – Free Carrier – the delivery shall take place at the moment of delivering the goods by seller to buyer or carrier at seller’s workplace or other named place, the seller is responsible for loading; in case of this term the risk of losing or damaging the goods passes from seller to buyer at the moment of delivering the goods to the carrier;
- FAS – Free Alongside Ship – the goods are considered delivered at the moment when the seller leaves them to buyer disposal at named home port;
- FOB – Free On Board – the goods are considered delivered after being loaded on indicated by buyer ship at seller home port;
Both FAS and FOB are used only in maritime and waterborne transport.

3. Group C includes delivery terms which stipulate acquiring the risk by buyer at the place of delivery and acquiring the costs just only at the destination:
- CFR – Cost And Freight – the seller organizes and pays for the transport to port of destination that is until the moment when the goods will be on the ship at loading port, however it is a buyer who bears the risk of losing or damaging the goods on the whole way of transportation and organizes transporting goods from embankment at unloading port; the risk of losing or damaging the goods passes to buyer at the moment when goods cross the ship bulwark at the loading port, the buyer also bears the risk of losing or damaging the goods resulting from failure to notify the seller of the date of shipment and destination port.
- CIF – Cost Insurance and Freight – the seller organizes and pays for transport to the destination port that is until the moment when the goods will be places on the ship at the loading port and he bares the risk of losing or damaging the goods on the whole way of transportation, and the buyer organizes transport from embankment of unloading port;
- CPT – Carriage Paid To – the seller has the transport competence on the whole way of transportation;
- CIP – Carriage and Insurance Paid – the seller organizes transport on the whole way of transportation and bears its costs, including the cost of insurance;
Both CFR and CIF are used only in maritime and waterborne transport.

4. Group D includes the terms of delivery which define acquiring the costs and risk by buyer at the same place:
-DAT – Delivered at Terminal – the seller is responsible for delivering goods to specified terminal and its unloading;
- DAP – Delivered at Place - the seller is responsible for delivering goods to specified place, the buyer is responsible for unloading the goods;
- DDP –Delivered Duty Paid - the seller is responsible for delivering goods to specified place and bearing all connected costs and risks, including the duty cost; the delivery shall take place at the moment of arrival of mean of transportation, which is used to transport goods to specified place, without unloading;

Fiscal Significance

Terms of sale determined by the Incoterms have essential fiscal significance. In the first place, they are determinant to define the emergence of the income. The decisive moment of the emergence of the income is in fact the date of delivery of the goods, which may differ depending upon the parties to the contract rules of Incoterms. Conditions selected by the parties affect the time of transfer of the right to dispose of goods as owner, are therefore also relevant in determining the tax liability.

Similarly, one of the conditions for the application of the 0% tax rate is to make a supply of goods by a taxpayer – in other words to transfer the owner right to the goods to the buyer. To determine whether the above mentioned condition has been met, it is possible to refer to the Incoterms used in the transaction. To avoid the doubt of the tax authorities, it is recommended to mark the specific Incoterms rule also in the invoice.

Evidential value and the interpretation of the agreement

Trade customs in dealings and usual practice of carrying out the specific transaction by parties have crucial meaning, especially for transactions that are carried out fast and in informal, not written way. These customs and practices are not always reflected in legal regulations, which in fact are not able to codify all of the signs of human activity. Thus they are not able to ensure directly the legal protection and guarantee legal protection measures to protect the party.

Even if previous transactions between parties were characterized by defined, unchanged practice settled by parties in determined proceedings and the parties may expect that this practice shall be continued, there is no guarantee that it will actually happen. In consequence, in case of unexpected event e.g. damaging the goods while transporting, claiming the payment, parties will have to prove that the risk related to damage of goods on this stage of realization has already passed to other party. The risk connected to proving that may be avoided if the parties will include in their agreement specified above provision about using Incoterms.

In order to fully secure the proper execution of the transaction, the parties of the sales contract shall, if the contract does not contain specific rules, directly refer to the Incoterms by entering into the contract provision that trade clauses used in this contract shall be subject to the rules of Incoterms 2010 – Incoterm FCA, EX etc . This will prevent the parties before mutual misunderstandings and, if necessary, in case of pursuing claims arising from the contract, will make it easier to prove in court e.g. how the parties agreed on sharing the costs and responsibilities between each other for the transport and goods. In no case should it cause conflict between the provisions of the agreement and specific rule due to the abovementioned contractual precedence before Incoterms. If the parties, due to sales growth, make among themselves each transaction on the basis of an oral agreement, it is recommended to conclude a comprehensive agreement in writing, where they decide, on the basis of which Incoterms all future transactions between them will be realized, until further notice.