EVALUATION OF COMMON DELIVERY TERMS IN VIETNAM UNDER INCOTERMS 2020
Article by Legal Specialist at Dai Ha Thanh Law Firm – Nguyen Huu Nam - Bachelor of Economic Law and Legal English, Hanoi Law University.
Globalization and the expansion of international supply chains are driving the rapid growth of cross-border trade. As a result, selecting the appropriate delivery terms under Incoterms is becoming increasingly crucial in commercial transactions. A well-chosen term not only optimizes costs and minimizes risks but also enhances supply chain efficiency. Vietnam is emerging as a leading trade and manufacturing hub in Southeast Asia, where delivery terms such as CIF, FOB, FAS, and EXW are commonly used, depending on the mode of transport and business strategy. This article will analyze the advantages and disadvantages of these widely adopted Incoterms, helping businesses make informed decisions when operating in the international market.
- Overview of Incoterms
1.1. Definition and Characteristics
1.1.1. Definition
Incoterms (short for International Commercial Terms) are a set of rules issued by the International Chamber of Commerce (ICC) to define widely recognized and globally used trade terms in international commerce. These rules outline the allocation of costs, responsibilities, and risks between sellers and buyers in the transportation of goods. By establishing clear guidelines, Incoterms help facilitate smooth and efficient international trade, minimizing potential disputes and misunderstandings.
1.1.2. Characteristics
With its nature as an international trade practice, Incoterms possess fundamental characteristics such as universality—being widely recognized and applied in business transactions across regions or globally; and non-mandatory nature—only becoming legally binding when expressly agreed upon and referenced in a sales contract by the involved parties.
Additionally, since Incoterms are not laws, the introduction of a new version does not invalidate previous ones. Parties are free to use any edition of Incoterms that best aligns with their agreement, as long as they explicitly refer to the chosen version in their contract.
1.2. Legal basis for application and Key considerations
1.2.1. Legal basis for application
The legal basis for applying Incoterms in Vietnam is stipulated in Clause 2, Article 5 of the Commercial Law 2005: “...Parties to commercial transactions involving foreign elements may agree to apply foreign laws or international commercial practices if such foreign laws or international commercial practices are not contrary to the fundamental principles of the Vietnamese law.” Accordingly, based on this provision, parties engaging in international trade activities in Vietnam are free to agree on the application of Incoterms to govern their rights and obligations in transactions, as long as they comply with the fundamental principles of Vietnamese law.
1.2.2. Key considerations
Firstly, regarding scope of application, Incoterms define general rules related to delivery, such as cost components (insurance costs, transportation fees, customs clearance expenses for import/export), responsibilities (delivery, cost payment, insurance purchase), and the point of risk transfer. Other aspects, including pricing, payment methods, product quality, and the transfer of ownership, must be explicitly stipulated in the contract.
Secondly, regarding respecting contractual agreements, buyers and sellers may adjust responsibilities and obligations based on their negotiating position in the transaction, provided that such adjustments do not fundamentally alter the nature of the delivery terms. Any modifications to responsibilities or obligations must be explicitly specified in the sales contract.
Thirdly, concerning referencing Incoterms in contracts, the selected delivery term should be stated under the "Delivery Terms" section of the contract. The recommended citation format is: "(specific Incoterms rule), (designated location), (Incoterms version)". The designated location and the applicable Incoterms version must be clearly specified to avoid misunderstandings and potential disputes. Additionally, as mentioned earlier, if any adjustments to responsibilities are made, they must be explicitly stated below the citation. An example of a proper reference format is as follows:
Article 5: Delivery Terms for the Goods
The goods shall be delivered under the terms of FOB Hai Phong Port Incoterms 2020.
- The Seller shall be responsible for delivering the goods on board the vessel at Ho Chi Minh Port and for paying the loading charges.
- The Buyer shall be responsible for paying the freight charges, the insurance for the goods, and the unloading costs at the destination port.
1.3. Classification of Delivery Terms Under Incoterms
From a general perspective, Incoterms are categorized into four groups: C, D, E, and F, each defining different levels of responsibility between the seller and the buyer:
- Group E (EXW): The buyer has full control over the shipment, while the seller's only obligation is to prepare the goods and make them available at their premises.
- Group F (FCA, FAS, FOB): The seller is responsible for preparing and delivering the goods to the carrier at a location designated by the buyer.
- Group C (CFR, CIF, CPT, CIP): The seller covers all transportation costs to the destination, but the buyer assumes the risk of loss or damage once the goods are handed over for shipment.
- Group D (DPU, DAP, DDP): The seller is responsible for delivering the goods to the final destination and bears all risks and costs associated with transportation.
Alternatively, Incoterms can also be classified based on the mode of transport. Specifically, seven terms apply to all modes of transport, including EXW, FCA, CPT, CIP, DAP, DPU, and DDP. Meanwhile, four terms are exclusively used for maritime and inland waterway transport, namely FAS, FOB, CFR, and CIF.
- Evaluation of Commonly Used Delivery Terms in Vietnam
With its long coastline and well-developed seaport system, Vietnam has a significant advantage in utilizing Incoterms suitable for maritime transportation. Terms such as FAS, FOB, and CIF have become widely adopted in international trade transactions within the country. Meanwhile, other delivery terms, such as EXW, are also frequently used when multimodal transportation is involved or when businesses have specific logistical requirements. The following section, presented by Dai Ha Thanh Law Firm, will provide an evaluation of the commonly used delivery terms in Vietnam mentioned above. (Note: This analysis is based on Incoterms 2020.)
2.1. CIF
CIF (short for Cost, Insurance, and Freight) requires the seller to contract and bear the costs, including insurance and freight charges, necessary to transport the goods to the designated port. However, the risk of loss or damage to the goods is transferred to the buyer once the goods are loaded onto the vessel at the port of departure.
2.1.1. Advantages
For the seller, CIF allows them to choose an insurance policy that aligns with their needs and budget while incorporating the insurance cost into the selling price, thereby creating a competitive advantage. Moreover, once the goods are loaded onto the vessel, the risk transfers to the buyer, limiting the seller's liability in case of defects or losses during transportation.
For the buyer, this term reduces the initial financial burden and the complexity of arranging transportation and insurance. It also ensures that the goods are insured throughout the shipping process, providing greater security upon receipt.
2.1.2. Disadvantages
For the seller, CIF presents certain drawbacks, such as the obligation to purchase and pay for insurance, which may not align with the buyer’s desired coverage level. Additionally, proving that sufficient insurance has been provided can be challenging if documents are not thoroughly checked. Finally, CIF does not guarantee immediate payment upon the arrival of goods, leading to the risk of delayed or non-payment.
For the buyer, CIF has several limitations. The risk of loss or damage is transferred once the goods are placed on board the vessel, which may occur before payment or inspection. Furthermore, verifying the insurance details arranged by the seller can be difficult, and the buyer has limited control over the transportation process, affecting logistics management and planning.
2.2. FOB
FOB (Free On Board) is a trade term under which the seller is responsible for delivering the goods onto the vessel designated by the buyer at the specified port of shipment. The risk of loss or damage to the goods transfers to the buyer once the goods have been loaded onto the vessel, and from that point onward, the buyer assumes all associated costs.
2.2.1. Advantages
For sellers, FOB minimizes their responsibilities regarding the selection of a carrier, payment of cargo insurance costs, and arrangement of the transfer point for risk. Additionally, since sellers are not required to coordinate with multiple service providers (such as loading and shipping companies), the administrative burden of managing shipments is significantly reduced.
For buyers, FOB offers flexibility in selecting transportation and insurance services that best suit their needs, enabling them to have better cost control and optimize their logistics planning. Buyers can proactively schedule shipments, monitor transport timelines, and negotiate suitable delivery dates, which is particularly crucial for seasonal goods or perishable products. Furthermore, this term benefits businesses that own their own fleet or have long-term shipping contracts, allowing them to optimize costs and ensure stability in their supply chain.
2.2.2. Disadvantages
For sellers, although FOB simplifies the delivery process, they remain dependent on the buyer for vessel arrangements. This reliance can pose challenges in containerizing goods, adjusting relevant shipping documents, and negotiating market-based pricing with service providers. The lack of control over the shipping process may also lead to complications in coordinating logistics and meeting delivery schedules.
For buyers, the primary drawback of FOB lies in cost control and transport management. As freight rates fluctuate with market conditions, accurately forecasting total expenses—especially when factoring in insurance premiums and additional surcharges—can be challenging. Without established relationships with shipping companies, buyers may face difficulties in negotiating favorable rates or securing vessel space when needed, increasing the risk of delays, particularly for seasonal goods. Additionally, arranging transportation, securing insurance, and handling the necessary documentation (such as transport and cargo insurance documents) require experience and expertise in international logistics. A lack of familiarity with these processes can lead to unexpected risks or increased costs.
2.3. FAS
FAS (short for Free Alongside Ship) stipulates that goods are delivered to the buyer when they are placed alongside the vessel designated by the buyer (e.g., on the quay or on a barge) at the named port of shipment. The risk of loss or damage to the goods transfers to the buyer once the goods are positioned alongside the ship, and from that moment, the buyer assumes all costs and risks.
2.3.1. Advantages
For the seller, FAS provides flexibility in choosing the delivery location, especially when delivering at a port near the manufacturing facility, thereby reducing domestic transportation costs. Additionally, once the goods are placed alongside the vessel, the risk transfers to the buyer, relieving the seller of responsibility for the goods during maritime transportation, including risks such as loss, damage, or delays.
For the buyer, they have more control over the shipping process, including the selection of routes and carriers. It can lead to cost savings if the buyer is able to arrange sea freight at competitive rates. Moreover, FAS is well-suited for various types of cargo, particularly bulk shipments, crated goods, or containerized freight.
2.3.2. Disadvantages
For the seller, they remain responsible for export procedures, including obtaining the necessary permits, covering customs clearance costs, and complying with other legal requirements. Additionally, the seller may face challenges in coordinating delivery if the buyer designates a distant port or one with unfavorable loading conditions, potentially leading to increased domestic transportation expenses.
For the buyer, FAS presents a higher level of risk compared to other Incoterms such as FOB, as they assume responsibility for the goods as soon as they are placed alongside the vessel. This includes the risks of loss, damage, or delays during maritime transport. Furthermore, this condition may be more complex for businesses unfamiliar with international shipping procedures, requiring the buyer to have a solid understanding of customs regulations, shipping formalities, and related requirements.
2.4. EXW
EXW (short for Ex Works) stipulates that the seller fulfills their delivery obligation once the goods are placed under the buyer’s control at the seller’s premises or another designated location. From that point onward, the buyer assumes all costs and risks associated with transporting the goods to their final destination.
2.4.1. Advantages
For the seller, this condition simplifies the transaction process, especially for domestic trade. Additionally, costs and risks are minimized since the seller's responsibility ends once the goods are handed over at their premises.
For the buyer, the contract price under EXW is significantly lower compared to other Incoterms conditions. The buyer retains full control over the goods and the entire logistics process, making it an ideal choice for companies with experience in international transportation and supply chain management.
2.4.2. Disadvantages
For the seller, while EXW offers several advantages, it also presents certain drawbacks. One major challenge is the limited access to international markets—this condition may cause sellers to lose potential buyers who lack the capability to arrange their own logistics. Additionally, customs clearance procedures can be an issue. Although EXW does not require the seller to handle export formalities, buyers may request assistance, which could lead to additional administrative burdens or legal risks.
For the buyer, the increased control under EXW comes with greater responsibilities and heightened risks. They must independently manage the entire transportation process, from arranging carriers and hiring freight services to handling unforeseen issues during shipping and customs clearance. This not only raises costs but also increases potential risks if not properly managed.
- Conclusion
Thus, selecting the appropriate delivery terms not only allows businesses to better control costs and risks but also enhances trade efficiency. Whether for Vietnamese enterprises or foreign companies operating in Vietnam, a thorough understanding of the advantages and disadvantages of Incoterms helps optimize the supply chain and strengthen competitive advantages. In the ever-evolving landscape of global trade, mastering and correctly applying Incoterms is a crucial factor in ensuring smooth commercial transactions, laying the foundation for sustainable growth in the international market.
The above information provides a comprehensive overview and assessment of the common delivery terms in Vietnam under Incoterms 2020. Dai Ha Thanh Law Firm, with a team of lawyers and legal advisors professionally trained domestically and internationally, is committed to providing professional legal services to our esteemed clients. If you require detailed consultation, please contact us to receive professional and effective legal advisory services.
