Why Use Ex Works Incoterm Rule?

Due to the popularity of John Vogt’s Incoterms® Series, he as agreed to lead an Incoterms® Workshop at Breakbulk Europe, which will be held May 17-19 at the Rotterdam Ahoy. Details to Come!

We have previously looked at the Incoterms® rules which define the obligations, risks and costs for the movement of the goods, as well as how these must be specified as Incoterms® rule (Named Place) Incoterms® 2020. For ease of reading the articles I may use just the rule but, please remember, the correct form must be used in any agreement.

The first of the rules we need to discuss is that of EXW (meaning Ex Works). The rule caters to the situation where delivery is made from the factory or works of the seller, hence the Ex Works designation. This has been a term in most of the versions of Incoterms®, and in the early days many sales occurred from the factory. But, as trade became more complex, and international, with multiple warehouses and storage locations in the supply chain, the factory became any place where the seller had inventory.

Today, the rule is more readily understood as the sale from the premises, be that factory or warehouse, where the seller can provide the goods for the buyer. The term also has the goods at the facility, not loaded by the seller, but merely made available to the buyer to collect. This sounds like a simple, easy term which favors the seller tremendously, as it leaves the buyer to arrange the collection and transport to the final place where the buyer needs the goods. Research shows that a high proportion of users specify the EXW Incoterms® rule. They do this largely in the belief that this is the rule with the lowest risk to the seller, is the lowest amount of work by the seller and allows for the fastest recognition of revenue – that is the seller can claim the sale revenue once the goods are made available to the buyer or its representative. Sounds really great for the seller, doesn’t it?

In many ways this is a fallacy, unfortunately, at least for the risk and cost aspects. The rule requires the seller to effect delivery by “placing the goods at the disposal of the buyer at the agreed point, if any, at the named place of delivery, not loaded on the collecting vehicle.” Here lurks the first practical issue. The goods are left for the buyer to load, but within or at the seller’s facility. This may include on the dock where they may be damaged by the weather. Once they are made available to the buyer, the risk passes to the buyer, even if it takes some days for the buyer’s transport to arrive. For this rule, the buyer’s transport arrives, and the transporter must then load the goods, which means the transporter must work within the supplier’s facility. That could easily mean the driver of the transport comes into a warehouse, uses a forklift, and loads the goods into or onto the transport. The liability and legal implications are significant, with third parties working in a facility, and the disruption of multiple trucking companies using equipment in the facility is significant to the point where no sensible, safety-conscious and reputable facility would allow these actions by the transporter. This loading by the transporter is highly undesirable and increases risks and costs.

The second issue is that of responsibility vis-á-vis the customs authority. If the sale is to a company which might export the goods and, in particular, a company registered outside of the seller’s country, an additional risk emerges which is rarely understood. If the goods are exported by the buying company, then the only registered entity within the origin country is the seller. In the event of a problem or fraud with export customs clearance, the customs authority in the seller’s country will most likely require the seller to prove that they had no belief the goods were to be exported and had no hand in the issue or fraud. While this does not happen frequently, the issue has the potential to be a major disruption in your operation, and a source of potential fines. Remember, that trade is not just Incoterms® rules, but is the complex web of trade legislations and customs law. Customs law overrides your trade agreement the use of EXW can leave your company subject to issues with customs.

The third primary reason to choose EXW is for the ability to achieve revenue recognition as fast as possible. One does not have to use EXW, as there is an Incoterms® rule which removes these risks of working in the facility and customs issues, and still allows for revenue recognition in much the same time scale as EXW does. The trick is to use the Free Carrier At, or FCA, rule in the unique manner by specifying it as FCA (At the sellers loading dock) Incoterms® 2020. We will discuss the FCA rule in more detail next time, but the use of the FCA rule with the named place as the seller’s facility still requires the buyer to contract transportation from the facility. But the seller must organize the loading, thereby removing the issue of a third party working in the seller’s facility. If the buyer wishes to export, the export clearance is done by the seller on the buyer’s behalf, removing the issues that caused concerns with EXW. Revenue recognition takes place as soon as the truck is loaded, so this is in practically the same time scale as the EXW, but without the risks discussed earlier.

The question then becomes why have the EXW Incoterms® rule. Practically, unless your company is assured the buyer is only registered in the seller’s country and will never export, the rule is best used only for parcels collected by courier companies. And you all thought EXW solved your problems!

And next we are on to the FCA rule, which has its own fun and problems to understand as it is flexible rule, meaning it is complex to understand and utilize correctly!
 

MAILBAG

Submit your questions to [email protected] or [email protected].

Q: “I have a question that I believe your readers might benefit by hearing John's answer to: when using FCA seller's facility, is it the seller's responsibility to load, block and brace the goods if the buyer's conveyance presented for delivery is an ocean shipping container?  Or is the seller simply responsible only to load the goods on the buyer's conveyance as they would be if the buyer's conveyance was a domestic trailer or flatbed?


John’s response:

In the previous article, we looked at the 11 Incoterms® and stated they were for all trades, international as well as domestic. They define the obligations, risks and costs associated with the movement or logistics the goods between the buyer and seller.

In this article, let’s look a little deeper into using Incoterms® in practice. The first is the form of the statement to identify the rule. This must be the Incoterms® rule chosen accompanied by a “named place,” which defines where the risk transfers, and the year of the Incoterms® rule chosen. I have seen many contracts with goods shipped FOB. FOB is for breakbulk or bulk goods transferred in a port, so leaving this open means the seller can deliver to any port and claim it has complied with the contract. Also, the point where risk has transferred has altered over the course of Incoterms® revisions, moving from the quay to across the rail to the current point which is “stowed.” If you do not specify this fully, you are at risk. The correct form in all cases is FOB (Terminal name, Port of Loading, Country) Incoterms® 2020.

Within each Incoterms® rule there are 10 sections which describe what needs to be done by the buyer and seller. Within these 10 sections, called articles and numbered A for seller and B for buyer, the actions, risks and costs are more fully defined. The nice part about these is they are laid out with the buyer and seller obligations separately, so if you are the buyer or seller you can concentrate on the appropriate portion of the document. The articles cover broadly the following:
 

These are not laid out in the sequence of flow of goods, so some searching is required to see the full obligations, risks and costs, but they do give all the needed actions required of the buyer and seller. There are some areas where the wording is, to be generous, broad in its definition, and this leaves some understanding and interpretation for the user. For example, for C and D terms, the seller must “assist” the seller with the appropriate information to clear customs for export. Equally the buyer must “assist” the seller with any documents and/or information. It does impose an obligation, without specifying what the information must be, unfortunately. If not spelt out in the agreement, then this is a less than precise area of the requirements. Transfer documents are dealt with in an equally vague manner.

In addition to the Incoterms® rule chosen for the transaction, the trade agreement must also cover:

• What the goods are so they can be identified.
• Where title transfers for the goods.
• What are the terms of payment.

These must be addressed in the agreement, and it is not correct to use Incoterms® to define the title or payment points, these must be in words. The payment is most often triggered at the time of title transfer, but can be done immediately or within a period. Paying for goods before title transfers can place the buyer at increased risk, and after title the seller. Security of payment for the goods is essential, so this often gives rise to Letters of Credit in international moves and bank guarantees for domestic moves. These will be discussed later in the series, but note that the terms of these financial instruments MUST be the same as the Incoterms® rule chosen, as a mismatch may invoke extra moves or risks and costs to ensure payment.

There is another issue that must be raised. In the U.S. there are some old terms that look like Incoterms® contained in the Uniform Commercial Code (UCC) which is a commercial code (not federal law) written and adopted by most states with some changes in the 1950s. Of course, Louisiana with its Napoleonic code has not subscribed to all of the code. The terms are FOB Origin and FOB Delivered. These have no meaning outside the U.S., have never been updated, and have been superseded by the Incoterms® rules with its many revisions to make it remain current and of value. These should not be utilized in modern trade agreements.

In the two previous articles we have identified that an Incoterms® rule is essential for any movement of goods between the seller and buyer. It must be correctly specified and accompanied by clauses which clearly define the point of title transfer and payment trigger and the terms of the payment. With these complete, your trade is fully specified, clear and unambiguous to between buyer and seller.

Missed Jon Vogt’s Previous Articles? Find Them Here:
For Incoterms, Devil is in the Details (February 8, 2022)
Why Everyone Needs a Better Understanding of Incoterms (January 11, 2022)

About the Author
John has his own consulting company and, at the end of his 42 years in industry around the world, was the Vice President of Global Logistics for Halliburton. Thereafter he spent five years as a Professor of Record for the University of Houston-Downtown MBA for International and Supply Chain courses. He has experience as a Board Director and has traveled the world to improve trade.

In his career, he has driven the correct use of Incoterms as part of the trade improvements he has implemented to drive efficiency and effectiveness. In his role as a professor of record, he taught multiple courses on the use of Incoterms and trade-related agreements. Alongside his colleague Dr. Jonathan Davis (Associate Professor, Supply Chain Management Chair GMSC Department, Marilyn Davies College of Business, University of Houston-Downtown), he has published three formal research papers on Incoterms with two more in consideration, making him the most published Incoterms researcher. He has also published numerous articles, presented papers at multiple international conferences around the world on logistics, trade and compliance including Incoterms. He has served as track chair for multiple conferences as well.

John has a Ph.D. (Logistics), an MBA, and a B.Sc. (Engineering), holds the title of European Engineer (Eur. Ing), is a Chartered Engineer (UK) and has been elected as a Fellow of the Institute of Engineering and Technology (UK). You can reach John at [email protected].