When drawing up sales agreements for international freight shipments, you should decide on the appropriate title transfer, followed by the correct incoterm. A title transfer is a change on possession of goods from the seller to the buyer and a sale cannot take place without them. The title of the ownership will transfer from the seller to the buyer according to the terms agreed in the contract.
Problems with title transfer
Transfer of title is important because it acknowledges the seller and buyers' rights in the event of any damage to the goods. Once the transfer of title has occurred, the buyer may not be able to reject the goods, even if the complaints about quality, quantity or description are valid. If the title of transfer has gone through, the buyer is legally obliged to pay the seller. The seller can sue if payment is refused.
Problems occasionally arise in this process if the contract doesn't specify exactly when the transfer of title occurs. For example, if the goods arrive but the buyer hasn't paid the contract price, they're breaching the contract. In this situation, the ambiguity in the contract regarding title transfer means that the legal owner of the goods is arguable.
For example, the transfer of title between seller and buyer might occur as soon as the goods have been shipped from the seller's premises. Alternatively, it might occur when goods have arrived at a named place of destination, or when payment has been received. To reduce the risk of this issue arising, many businesses include a 'Romalpa clause' in their contracts. The 'retention of title' clause states that the buyer doesn't own the product they're purchasing until it's been paid for in full. This means that the passing of title is separated. An example of a retention of title clause is: 'Title to the goods shall remain vested in the Seller and shall not pass to the Buyer until the purchase for the goods has been paid in full and received by the Seller'.
After you've decided on the appropriate title transfer, you must choose the right incoterm. Incoterms are a set of international commercial terms used in international freight shipment contracts. The terms define the responsibility of the buyer and the seller relating to the movement and shipping of goods but do not address the transfer of ownership of goods. Shipments can face problems without the correct incoterm. Logistics costs could increase, the terms may not match the requirements of the buyer or seller or the buyer or seller may not be able to comply with the incoterm.
Choosing the right title transfer and incoterm
Before you commit to any decisions regarding international freight shipments, there are several important things to consider. For example, you should carry out a cost/benefit analysis to understand which title transfer and incoterm is best suited to transaction conditions. This will help to minimise any problems on the journey from the seller to the buyer. It's important to identify if there are any tax or other financial benefits available for the transaction, based on the terms of the title transfer options. You should also consider any legal issues that could delay or prevent a shipment from reaching its destination. This could include unapproved vehicles, country-specific restrictions and prohibited items. Sellers and buyers should also check that they have the correct documentation required for shipment (for example, licenses or permits) and that they can meet any required customs formalities.