Incoterms and their Application in the Case of Grays’ and Easter Eggs

Grays’ in Launceston, Tasmania ordered 900 chocolate Easter eggs in special packaging from Specialist Goods in Adelaide at the price of A$15 to be reached one week before Easter. A deposit of 50% was made for this. Specialist Goods then placed the order to Swiss chocolate manufacturer Innisbruck under Incoterms CIP 2010 Adelaide for the manufacture of these eggs. A deposit of 30% was made for the manufacture of these and delivery was to be at the end of March (Advanced on Trade, 2014). The packaging of these eggs by Innisbruck was manufactured in Fuzhou, China and the order for extra packaging was placed under FOB Shanghai which was expected to be received in early February (AIT – Worldwide Logistics, 2012). The packaging to be received by Innisbruck was delayed in delivery and the company decided to split the order into two – the first of 500 eggs to be manufactured with the available packaging and to be shipped as soon as the manufacturing was done and the second order of 400 eggs to be manufactured and then shipped when the packaging was received from China (Akarca, 2011). The shipment of 500 eggs arrived in Adelaide and the freight forwarding company hired by Specialist Goods decided to store the shipment and combine it with the second part of shipment received. This was the standard practice for deliveries in Tasmania. The delay in delivery led to Specialist Goods to order the freight company to deliver the shipment but air when the second order arrived. This total order was delivered but not until after April 19 as opposed to the delivery date being before April 15 (IContainers, 2018). Further, one package of eggs was damaged because it was mistakenly left at the tarmac in the Melbourne airport. This delay in delivery of Easter eggs and spoilage of one package of eggs led to various consequences. The issues which need to be addressed in this report are mentioned in brief below: 

The freight company’s demand of three times the actual freight for immediate shipment by air(IncotermsExplained.com, 2015).

Grays’ rejection of the delivery due to the order being late and because one package was damaged in transit.

Grays’ claiming the return of its deposit for the damages it suffered, the delivery not received and for the loss of profit which it would have earned had the eggs being delivered on time.

Specialist Goods’ return of the deposit which it had paid to Innisbruck for the manufacture of Easter eggs(International Forwarding Association, 2015).

Remedies Available to Grays’ for the Return of Deposit Paid to Specialist Goods

For the purpose of this report, references can be made to Incoterms or the International Commercial Terms that explain the tasks, rules and responsibilities associated with the international transportation of goods. These terms are rules and regulations for the shipment and delivery of goods with reference to an agreement and are given by the International Chamber of Commerce for the purpose of communication with all the parties involved in a sale transaction. These are commonly used terms, rules and guidelines for international transactions of a commercial nature and are encouraged by governments, trade associations, and courts of law. Incoterms, however, are not government laws (Mo, 2016). Rather these are government rules for clarification of any disputes arising in relation to delivery, shipment, payment and bearing of risk in case of default of fulfillment of agreements and contracts. These rules are accepted by governments and trade practitioners worldwide and help to remove any disputes arising at the time of delivery as well as after delivery (Noah, 2016). The Incoterms were first issued by the International Chamber of Commerce in 1923 and published in 1936. The current terms were issued in 2010 and officially published in 2011. The International Chamber of Commerce have begun revisions of these to be issued in 2020. 

However, it should be remembered that Incoterms do not define terms and conditions of a service contractand do not determine ownership of goods. These rules do not contain specifications regarding protecting parties from losses and are only concerned with the delivery of goods. Furthermore, loading of products in containers is not included in Incoterms.

The Incoterms and the guidelines to be followed under them which apply to the case of Grays’ and Easter eggs are discussed in brief below:

• EXW – Ex Works
  • The seller is responsible for goods available at the named place of delivery. (It is the responsibility of Specialist Goods to deliver the Easter eggs to Tasmania. Similarly, responsibility of Innisbruck to deliver the packaging of eggs to Adelaide.)(Robinson, 2016)
  • The maximum obligation is of the buyer and minimum of the seller. (Grays’ has more obligation than Specialist Goods for the delivery of the eggs. In case of packaging, on the other hand, Specialist Goods is obligated.)
  • The risk of bringing goods to the final destination is incurred by the buyer. (The risk of delivery of eggs is of Grays’ and of packaging is of Specialist goods.)
• FCA – Free Carrier
  • The seller is responsible for clearing the goods for export. (Innisbruck is responsible for clearing the packaging for export from China to Australia.)
• CPT – Carriage Paid To
  • The seller pays for the freight charges when the goods have to be delivered to the buyer. (Specialist Goods will be accountable for covering the freight cost, including the air freight cost, to Tasmania.)
• DAT – Delivered at Terminal
  • The seller is responsible for bearing risks of loss to goods till the delivery terminal(Searates, 2010). (In this case, the loss of damaged package of eggs at the tarmac of the airport will be borne by Specialist Goods and not Grays’.)
• FOB – Free On Board
  • The seller bears all costs and risks up till the point the goods are loaded to the vessel. (Innisbruck is responsible for payment of costs and bearing risks till the packaging material is on board the vessel for export.)
  • The buyer pays the cost of freight from the place of arrival till the place of final delivery. (Specialist goods is responsible for payment of freight charges for delivery of packaging material to Adelaide. Similarly, the freight charges for delivery of Easter eggs to Tasmania will be borne by Grays’.)

The recommendations in case of the issues mentioned in the beginning of the essay are being discussed below:

Remedies available for Grays’ for the return of deposit paid to Specialist Goods

Under EXW, the maximum responsibility of delivery of goods is of the buyer. The seller is responsible for bearing all costs and risks till the time of delivery of goods (Trade Finance Global, 2017). In this case, however, the goods were not delivered and an advance deposit of 50% of the total amount had been made by Grays’ to Specialist Goods. According to me, there should be a refund of either the total deposit made by Grays or at least some part of it should be refunded. It was the responsibility of Specialist Goods to deliver the Easter eggs to the place of delivery and failure to do so should result in remedies being made available to the concerned party. Specialist goods should be allowed to claim a part of the deposit which was made by Grays in exchange of eggs which had already been manufactured by them and packaging which had already been ordered by them from Innisbruck. 

Remedies Available to Grays’ for the Loss of Profits due to Non-Delivery of Goods within the Stipulated Time

Remedies available to Grays’ for the loss of profits due to non-delivery of goods within the stipulated time

Grays entered into a sales agreement with Specialist Goods for the delivery of 900 Easter eggs by the week of April 15 i.e. one week in advance of Easter. But Specialist Goods failed to deliver these on time due to which Grays had to suffer a loss of revenue and profit which it otherwise would have earned. According to me, there is no remedy available to the party. It is not the responsibility of Specialist Goods to ensure that the company earns revenue and makes profit. In case of non-delivery of Easter eggs, Grays should have made alternative arrangements to increase their revenue during that period of time if goods to be sold were not delivered. Specialist goods should be held accountable for goods not delivered and in that case, the advance deposit made should be returned as explained above but no remedy will be available for loss of profit to Grays (Trade Finance Global, 2015).

Remedies available to the freight forwarding company for its increased freight cost

As per Tasmanian standards, the freight forwarding companies consolidate the delivery of two or more consignments to be delivered to the same company. The freight forwarding company stored the consignment with 500 Easter eggs which were packaged and delivered early and within the promised time period to combine with the 400 eggs delivered later (Burnett & Bath, 2009). Specialist Goods ordered the freight forwarding company to deliver the consignment by air as soon as possible. This led to the company claiming three times the freight originally agreed upon. According to me, the company should be compensated the amount incurred by them for air delivery of the consignment. Late shipment of the eggs was the result of lack of proper management by Specialist Goods but its brunt should not be borne by the freight company. According to Incoterm CPT (Carriage Paid To), the seller is responsible for payment of freight charges till the goods are delivered to the buyer. The freight company can claim compensation from Specialist Goods. 

Remedies available to Specialist Goods for the return of deposit paid to Innisbruck

Specialist Goods had deposited 30% of the total order amount as way of advance payment to Innisbruck for production of 900 Easter eggs. Innisbruck had ordered packaging for the eggs from China. But there was delay of shipment of packaging and thus, delay in delivery of eggs to Specialist Goods. Under FOB (Free on Board), the seller bears all costs and risks till the goods are loaded on to the vessel of shipment. After that, the responsibility of the goods is of the buyer. Accordingly, Innisbruck is responsible for bearing the cost of the delay in delivery of eggs. Therefore, the deposit made by Specialist Eggs must be returned to them to compensate for the delay which led to Grays rejecting the final delivery and their loss of profit. If not the entire deposit, then at least a part of it must be returned to Specialist Goods.

Criticism of the acts of various participants

• Absence of a written contract in between all the parties stating the action to be taken in case of non-delivery of the products agreed upon.
• Lack of a proper judgement on the part of Innisbruck. They accepted the order for production of 900 Easter eggs without realizing that they might be short on packaging.
• Lack of a proper system of communication between all the parties to decide the course of action in case of late delivery of eggs.
• The storage of consignment of 500 eggs received in due time by the freight forwarding company in order to wait for the remaining eggs to consolidate the entire order.
• Lack of care and check in terms of management of eggs due to which there was spoilage of a package at the airport.

Advise for all the participants

• A formal contract should exist between all the participants stating the terms and conditions of delivery and what is to be done on case of breach of contract.
• Better practices by freight forwarding companies and delivery of consignment as and when received.
• Better risk management by all the parties. Proper modules to be developed by all parties as to what is to be done in case of delays of delivery.
• Proper communication between all parties relating to orders and their fulfillment. 

Advanced on Trade, 2014. Advanced on Trade. [Online] Available from: https://www.advancedontrade.com/2014/12/what-are-differences-between-dat-and-dap.html. [Accessed 27 March 2019].

AIT – Worldwide Logistics, 2012. aitworldwide.com. [Online] Available from: https://www.aitworldwide.com/Incoterms-FOB. [Accessed 29 March 2019].

Akarca, O., 2011. morethanshipping.com. [Online] Available from: https://www.morethanshipping.com/should-i-buy-cif-or-fob/. [Accessed 27 March 2019].

Burnett, R. & Bath, V., 2009. Law of International Business in Australasia. Sydney: The Federation Press.

IContainers, 2018. icontainers.com. [Online] Available from: https://www.icontainers.com/us/2018/10/16/history-of-incoterms/ [Accessed 27 March 2019].

IncotermsExplained.com, 2015. intercoms.com. [Online] Available from: https://www.incotermsexplained.com/the-incoterms-rules/the-eleven-rules-in-brief/ex-works/. [Accessed 27 March 2019].

International Forwarding Association, 2015. firwarding.net. [Online] The role of Incoterms rules for international trade and logistics. Available from: https://ifa-forwarding.net/blog/european-logistics/the-role-of-incoterms-rules-for-international-trade-and-logistics/. [Accessed 27 March 2019].

Mo, J., 2016. International Commercial Law. 6th ed. London.

Noah, D., 2016. shippingsolutions.com. [Online] Available from : https://www.shippingsolutions.com/blog/incoterms-cpt-spotlight-carriage-paid-to. [Accessed 27 March 2019].

Robinson, J., 2016. shippingsolutions.com. [Online] Available from: https://www.shippingsolutions.com/blog/from-exw-to-ddp-incoterms-2010-plain-and-simple. [Accessed 27 March 2019].

Searates, 2010. Incoterms. [Online] Available from: https://www.searates.com/reference/incoterms/. [Accessed 27 March 2019].

Trade Finance Global, 2017. Delivery at Terminal – What is DAT? [Online] Available from: https://www.tradefinanceglobal.com/freight-forwarding/incoterms/dat-delivery-at-terminal/. [Accessed 27 March 2019].

Trade Finance Global, 2015. tradefinanceglobal.com. [Online] Available from: https://www.tradefinanceglobal.com/freight-forwarding/incoterms/fca-free-carrier/. [Accessed 27 March 2019].