Author: Mahammad Jafarov, Legal Consultant, LLB at Baku State University (2018-2022), MA in Diplomacy and International Affairs at ADA University (2022-2024)
Editor: Elnur Karimov, LLD (Doctoral Program in Law) at Kyushu University, 2021-2024
Abstract
Especially in the 20th century, the globalization trend in the development of interstate business relations created a need for uniform regulatory standards for defining the boundaries of rights and obligations, risk, insurance, transport and other related relations between commercial subjects. One of the most progressive and widespread approaches to standardization has been put forward by the International Chamber of Commerce (ICC) under Incoterms. In this article, I will evaluate the rights and obligations, limits and risks defined by the “Ex Works” (EXW) regulatory mechanism, which is just one category of the Incoterms mechanism that has become a major part of international commercial practice, and I will try to evaluate how effective this category is in business practice at the transnational level.
Introduction
Factors such as the development of business-commercial relations, the increase in their intensity, the growth trend in the reflection of relations in the transnational sphere, and globalization have necessitated the application of rights and obligations and a unified approach to risk issues in the regulation mechanism between the parties. As a result of this necessity, various positions and approaches regarding unification in the regulation of relations have been put forward by various regional and international organizations. One of such organization, the International Chamber of Commerce (ICC), has defined relevant uniform standards that determine the respective rights and obligations between the parties regarding the purchase, sale and delivery of products, and which entity bears the risk. These standards have become active practical tools in regulating relations in commercial transactions both domestically and transnationally. First published in 1936, these standards – “International Commercial Terms” or “Incoterms” – have undergone changes and improved in accordance with the changing and complex business relationships in different periods (International Chamber of Commerce, 2019). Putting forward such a unified position was progressive enough to facilitate the regulation and demarcation of relations between the parties, as well as the unified interpretation of the position on rights and obligations. Incoterms, which was last updated in 2020 with some changes, currently consists of 11 categories. In this article, we will analyze only one of them – the ‘’Ex Works’’ (EXW) category. The main goal of this analysis is to assess the risks posed by the ‘’EX Works’’ to the parties and to answer questions about how practical this category is at the transnational level.
Nature of the‘’Ex Works’’ (EXW) Regulatory Mechanism
The EXW category contains that the seller delivers when it places the goods at the disposal of the buyer at the seller’s premises or at another named place. The seller does not need to load the goods on any collecting vehicle, nor does it need to clear the goods for export, where such clearance is applicable. Under this standard, the seller’s risks are minimized and the relevant risks are borne by the buyer. Based on the EXW agreement, the seller delivers the goods to the buyer and a 3rd party determined by the buyer in his area or in the territory specified by the seller (warehouse, factory, sales facility, etc.), and after this stage, all risks related to customs insurance and delivery are borne by the buyer. The seller is no longer responsible for the associated risks after delivery.
Overall, Ex Works provides a regulatory mechanism to minimize risks and costs from the seller’s point of view. For a more detailed and comprehensive overview, we can better understand Ex Work by comparing the rights and obligations, risks and costs from a relationship perspective in different categories.
Seller’s and Buyer’s Rights and Obligations regarding Ex Works clauses
Under the EXW clause, the seller is generally obligated to provide the goods and the corresponding invoice. On the other hand, the buyer must fulfil the obligation to pay the value of the goods. However, the process of buying and selling goods does not consist of a simple chain of relationships such as delivery and payment. There are many related relationships included in this chain.
In case of agreement with EXW conditions, where applicable, it is reasonable that the seller must provide the buyer, at the buyer’s request, risk and expense, assistance in obtaining any export license, or other official authorization necessary for the export of the goods. Also, at the request of the buyer, according to the risks and costs, the seller must provide any information or documents that are in the seller’s possession and required for the security clearance of the goods (University of Cambridge, 2020). From my point of view, the risks involved in obtaining any export and import licenses or other official authorizations and carrying out all customs clearance for the export of the goods are borne by the buyer and therefore the requirement to obtain relevant documents and supporting documents have to be part of the relevant agreement. The buyer must reimburse all costs and charges incurred by the seller in connection with export, license documents, and information assistance. In any case, the expenses related to providing relevant information and documents to the buyer should be taken into account (Klotz, J. M., & Barrett, J. A. (2008), page 55). Taking into account that these costs are intended to satisfy the interests of the buyer, what is usually observed in practice is regulation through the relevant contractual clauses of the payment of the additional costs incurred by the buyer. If there is no agreement on this matter in the contract, as a result of the reasonable interpretation of the EXW standard in accordance with the nature of the law, it can be concluded that the buyer is obliged to cover the relevant costs.
At this time, the buyer must also notify the seller of any security information requests in a timely manner to allow the seller to provide support with relevant information and documentation. The buyer must reimburse the seller for all costs and expenses incurred by the seller in providing or assisting in obtaining documents and information.
One of the most basic conditions of commercial relations is the determination of the position of the parties regarding the obligation of carriage. The EXW terms and conditions do not imply any obligations for the seller regarding transportation, carriage obligations under these terms rest solely with the buyer (Goode, R. M. (2012), page 196). The seller already fulfils his obligation after the delivery of the goods, and after this stage of the relationship is over, the seller is no longer the subject of the next stage of the relationship. Obligations related to insurance also fall on the buyer in the relevant category of relationships. According to the EXW clause, the seller has no obligation to conclude an insurance contract before the buyer. However, from my perspective, the seller should, at the buyer’s request, provide the buyer with the information necessary for the buyer to obtain risk and expense insurance in order for the goods to reach the buyer’s desired destination in a reasonable manner.
The seller is also under an obligation to deliver the goods at the agreed place and date. The seller bears the risk and is responsible for the damage caused to the buyer due to the failure to fulfil the delivery obligation at the required level. Specifying the place of delivery between the parties is quite important, and the buyer can express the position on the place of delivery, especially in order to insure himself against additional risks and costs (Goode, R. M. (2012), page 196). Also, agreeing on the time of delivery and handover is one of the conditions to be determined in the agreements between the parties. Due to delays in delivery and takeover and failure to provide the necessary advance notice during delays, respective obligations and risks arise for the parties. In case of breach of time obligations, the party that caused the damage or lost benefit is responsible for restoring the other party’s legal situation.
The seller must pay all the costs relating to the goods until they have been delivered in accordance with the proper fulfilment of delivery obligations. While the buyer undertakes to cover all costs from the moment of delivery of the goods. The buyer will be liable for any damage or any additional costs incurred as a result of failure to take delivery of the goods or failure to give appropriate notice when they are placed at his disposal. The seller undertakes to give the buyer any notice necessary to ensure the delivery of the goods. The buyer is also obliged to notify the seller in advance of his position regarding the time and place of delivery of the goods, as well as the situation that may cause damage to the seller. The buyers will be liable for any damage or any additional costs incurred as a result of failure to take delivery of the goods or failure to give appropriate notice when they are placed at their disposal. After delivery, as mentioned above, the relationship is formed in which the obligations of the seller are completed and the obligations of the buyer begin. In this regard, payment of all duties, taxes, and other charges, as well as transportation costs and related customs costs, must be paid by the buyer according to the agreement with the EXW clause (Goode, R. M. (2012), page 196).
In accordance with EXW relations, the seller must pay the costs of inspection operations (such as quality inspection, measurement, weighing, and counting) necessary for the delivery of the goods in the quantity and quality criteria defined in the agreement before the delivery of the goods. The seller must, at its own expense, package the goods, unless it is usual for the particular trade to transport the type of goods sold unpackaged. The seller may package the goods in the manner appropriate for their transport unless the buyer has notified the seller of specific packaging requirements before the contract sale is concluded. Packaging is to be marked appropriately (CFI Team (2022). The buyer has to cover the cost of any mandatory pre-shipment inspection, including any inspection ordered by the authorities of the exporting country.
Conclusion
To sum up, in the EXW category agreements, the proportionality of rights and obligations in the relationship between the seller and the buyer determines more favourable conditions for the seller in terms of risk and costs. They only cover the minimum scope of responsibilities and costs. On the other hand, agreements in this category have relevant practical advantages for the buyer too. As the shipping costs and responsibilities are on the buyers’ side, they can control the entire shipping process to ensure the products are safe. The shipping method is favourable to subsequent local transportation. Additionally, buyers can also better forecast the costs and avoid sellers charging a higher shipping fee. In accordance with the interests of the parties, and business strategies, the EXW standard, which is observed more at the domestic level, takes its place as an effective regulatory mechanism for the parties at the transnational level for the reasons mentioned above.
References:
- CFI Team, Ex Works (EXW), 2022 – Corporate Finance Institute – https://corporatefinanceinstitute.com/resources/commercial-lending/ex-works-exw/
- Goode, R. M. (2012). Transnational Commercial Law: international instruments and commentary (2nd ed.). Oxford University Press.
- International Chamber of Commerce, Incoterms® 2020, 2020th edition, September 10, 2019
- Klotz, J. M., & Barrett, J. A. (2008). International sales agreements: an annotated drafting and negotiating guide (2nd ed.). Kluwer Law International.
- University of Cambridge, Incoterms 2020 – https://www.procurement.admin.cam.ac.uk/files/incoterms.pdf
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