Incoterms 2010 – Ex-Works (EXW)

Introduction
The International Commercial Terms (Incoterms) which are owned and monitored by the International Chamber of Commerce (ICC) consists of 11 different terms under the 2010 rules.  Which term to use is dependent on a number of factors, such as the mode of transport, the local laws in the countries of import and export and the contract terms between the buyer and seller (normally, but not always, the importer and exporter).

Domestic Contracts v International Contracts
One of the changes brought about by the ICC with their 2010 version was to encourage the use of Incoterms in domestic contracts as well as international ones.

In this respect the ICC recommends that the Ex-Works (EXW) Incoterm should be used with domestic trade, but that in some circumstances Free Carrier (FCA) is more appropriate for international contracts.  It might be useful to explore the reasons behind this recommendation and to highlight the various decisions that organisations might have to make when using the EXW Incoterm.

Composition of a Normal Trade Transaction
If the route a package sent internationally is visualised and described sequentially, then it will rapidly become obvious that the route is divided into sections.  Generally speaking the first section will cover the movement of the goods from the origin point to an export port and/or frontier station.  The second section will cover the movement of the goods from the port of export and/or frontier station to the final port/frontier station of import.  The third section will cover the movement from the port of import to the final destination point.

Each of these sections will carry different responsibilities (processes that always have to happen, such as export and import customs control), possible risks (factors which might or might not happen and if they did usually carry a cost to resolve) and specific costs relating to the physical shipment, documentation, and the aforementioned responsibilities and risks.  From this perspective the Ex-Works (EXW) Incoterm is one of the easiest to understand since the responsibilities, risks and costs pass from the seller to the buyer at the seller’s factory door (or another named place) right at the beginning of the first section.  This is the incoterm which has the minimum obligation for the seller, but, conversely, the maximum obligation for the buyer.

A possible weakness of the Ex-Works (EXW) Incoterm
EXW changed under the new 2010 rules as, for the first time, the previous tricky question of who was responsible for the cost and practice of packing the goods (when they needed to be packed), was firmly put into the responsibility sphere of the seller.  Essentially the seller must pack the goods (where required) in an appropriate manner for the type of transport used.  Not really a problem (generally) for domestic shipments: slightly more problematic for international ones though.

To start with, the seller, in order to pack the goods in such a way that they will survive the transport requirements of the contract, needs to know what type(s) of transport their package will encounter during its journey to the final destination.  Various types of transport can require different types of packing.  Different categories of packing normally carry different costing elements.  There is also the matter of ensuring that the volume of packaging does not compromise the buyer’s ability to use a particular form of transport.  In addition, any local regulations in the country of import (especially with regards to wood based packaging materials) might require specialised packing and associated documents, such as fumigation or phytosanitary certificates.  These are all matters that need to be considered at the contract stage so that costs and requirements can be agreed from the beginning.

Then there is the question of documentation.  Under the EXW incoterm, the seller only has to supply a commercial invoice.  It is the responsibility of the seller to ensure that the information on the invoice is fit for purpose, in that it provides all the details and declarations required to assist the buyer to import the goods into the country of import.

Apart from this, however, although the seller has an obligation to assist the buyer in obtaining export licences, security clearance and any other official document, it is the buyer’s cost and responsibility to actually obtain these documents.  In fact, under the actual rules of Incoterms 2010 it is not even the seller’s responsibility to provide packing lists or fumigation certificates (for wooden packing).  However, from the viewpoint of good customer service, it is usually in the seller’s interest to be more proactive in this area. But generally speaking, the buyer would be responsible for obtaining and paying for all other documents relating to the export of the goods, such as Certificates of Origin, insurance certificates or transport documents.  The seller is obliged to render assistance to the buyer by providing relevant information under the EXW term, but not to obtain these documents themselves.

In addition, the seller is not responsible for loading the goods onto any collecting vehicle.  Their responsibility passes to the buyer once they have made the goods available for collection at the agreed time and place of collection.  This usually only becomes a matter of argument when specialised equipment for loading is required, such as fork lifts and cranes.  It can sometimes be difficult for the buyer to arrange these services without assistance from the seller.  It is good practice to ensure in these circumstances the contract between buyer and seller specifically mentions who is responsible for loading and securing the cargo into the collecting vehicle.  If the contract states that this is the responsibility of the seller (and the seller has covered the costs in the initial price to the buyer) or the buyer, then this does tend to avoid any misunderstandings.  What should be avoided are presumptions made by both parties which are usually only realised on the day of collection.

It can also sometimes be very difficult, if not impossible in some countries, for the buyer to arrange the export clearance of the goods.  Most countries now require the exporter/shipper to be registered officially in the country of export and this registration process can sometimes carry legal responsibilities which the buyer may wish to avoid.  In my experience, this is where a good courier or freight forwarding company can be invaluable, but it is good practice, if entering an ex-works contract, for the buyer to ensure that they can actually arrange the export customs clearance themselves or through a proxy.

These requirements for additional packing, export documentation and being legally able to arrange the export of goods are three reasons why trying to utilise the EXW incoterm in an international contract may not be the best option available to the buyer.  However, if the seller has no wish nor intention to involve themselves in any of these matters, then the buyer may have no choice.

Risks to the Seller
The seller, should, however, carefully consider whether they wish to take the risk of an EXW contract. Under this Incoterm, the seller has no idea, once the goods have left their premises, what happens to the goods.  Technically the buyer could sell the goods without actually exporting them.  This could cause a problem, especially in countries operating a Value Added Tax (VAT) system, where the VAT has not been included in the price because the intention stated by the buyer was that they were going to export the goods.  It is, therefore, in the Seller’s interest to ensure that the goods are exported (and relevant proofs can be  provided to HM Revenue and Customs if they come asking).  In these circumstances, it would be better for the seller to enter into an FCA (or FAS/FOB if applicable) contract instead of an Ex-Works one.

Maria Narancic from Point to Point Export Services is an independent international trade adviser who assists organisations world wide with their international trade projects, documentation, Documentary Credits and import/export training.  She is based in the United Kingdom.  If you require any further assistance with the matters mentioned above, please do contact us by e-mail on info@point-point.com

Comments are closed.