Buying From an Overseas Supplier: The Contract Terms That Decide Who Carries the Loss

In an overseas supplier agreement, who carries the loss if goods are damaged or lost in transit is fixed by the contract — and the Malaysian starting point is that risk follows ownership. Section 26 of the Sale of Goods Act 1957 (Act 382) provides that, unless otherwise agreed, goods remain at the seller's risk until property passes to the buyer, and once it passes they are at the buyer's risk whether or not delivery has been made. An Incoterms® 2020 rule is the usual way of agreeing otherwise: it moves risk without moving title.

Most disputes with a foreign supplier are not really about quality. They are about which side owns a problem that arose between the two of you — and by the time the container is at Port Klang forty cartons short, the answer was settled months earlier by a document nobody read.

Who carries the loss when goods are damaged in transit?

Start with the default, then see what the contract has done to it. Under s.26 of Act 382 risk sits with the seller until property passes, and moves to the buyer the moment it does — delivery is irrelevant. The statutory position is not that risk and title travel separately; it is that they travel together until the parties say otherwise. Note too that Act 382 applies only to the States of Peninsular Malaysia. It does not reach Sabah or Sarawak, where sale of goods runs to English commercial law through the Civil Law Act 1956 route.

Section 26 opens with "unless otherwise agreed" — which is exactly what a cross-border supply contract does, so the drafting has to answer both questions. Risk is who bears the loss if the goods are damaged; title is who owns them. Sellers commonly retain title until payment clears while pushing risk onto the buyer at the port of shipment. Title matters most on insolvency: if your supplier fails while goods you have paid for are in transit, ownership decides whether you get them or join a queue of creditors.

What do Incoterms® 2020 actually decide?

Incoterms® 2020 are contractual rules published by the International Chamber of Commerce. They are not law. They apply only if the contract incorporates them, and the term must name the edition and the place — "CIF Port Klang (Incoterms® 2020)", not "CIF Port Klang".

Two adjacent questions usually come up at the same point in this process: see governing law vs seat of arbitration and arbitration clause or foreign court? the dispute clause that decides whether you get paid for how each is handled.

A rule allocates delivery, cost, risk transfer, customs clearance and, in two rules only, insurance. What an Incoterm does not do is transfer title. It does not set payment terms, define quality, supply remedies for defective goods, or give you a dispute mechanism. A contract that names an Incoterm and stops has answered about a third of the question.

The edition is not cosmetic. Between the 2010 and 2020 editions DAT was renamed DPU ("Delivered at Place Unloaded"), and the insurance obligation under CIP was raised to Institute Cargo Clauses (A) while CIF was deliberately left at Clauses (C).

Which Incoterms® 2020 rule fits your shipment?

Two things decide it: how the goods move, and how far down the chain the seller carries the risk. Four of the eleven rules are restricted to sea and inland waterway transport.

CIF is misread most often, in two directions at once. It is a sea and inland-waterway rule, so it is the wrong term for containerised or multimodal cargo — FCA and CIP are built for those. And the cover the seller must buy is Institute Cargo Clauses (C), a minimum named-perils cover, not all risks. A buyer moving high-value goods who reads "CIF" as "properly insured" is under-covered, and carries transit risk from the moment the goods are on board.

Does the CISG apply when you buy from abroad?

Not by default. Malaysia is not a Contracting State to the United Nations Convention on Contracts for the International Sale of Goods, so it does not apply merely because the buyer is here. Templates circulating online assume otherwise.

It can still reach your contract. Under Article 1(1)(b) it applies where the rules of private international law lead to the law of a Contracting State, so agreeing that a Contracting State's law governs can pull it in unintentionally. Singapore, mainland China, Japan, the Republic of Korea and Viet Nam are parties; Thailand, Indonesia, India and the United Kingdom are not.

Two riders. Article 6 lets the parties exclude it outright, so say expressly in the contract whether the CISG applies. And Article 95 lets a State declare it is not bound by Article 1(1)(b) — Singapore and mainland China have both done so, so for those two the route in is an express choice of their law, not a conflict-of-laws referral.

Why a letter of credit does not protect you against bad goods

Because it was never designed to. UCP 600 Article 5 states that "Banks deal with documents and not with goods, services or performance to which the documents may relate", and Article 4 treats the credit as separate from the sale contract. A conforming set of documents gets paid even if what arrives is not what you ordered.

So inspection is part of the payment design, not a separate clause: make a pre-shipment inspection certificate a required document under the credit, or hold a retention released only on acceptance.

The inspection window then decides most of what follows. A window running from arrival at the discharge port can expire before anyone opens a carton, and once goods are deemed accepted the fight shifts from "these do not meet specification" to "you accepted them". Tie it to arrival at your premises, allow sampling, and state expressly that payment is not acceptance.

Whose standard terms govern — yours or theirs?

Rarely settled by sequence alone. Where your purchase order and the supplier's sales confirmation each carry standard terms, the starting point is the last-shot analysis: a reply that varies the terms is a counter-offer, so it displaces what it answers, and performing afterwards can amount to accepting the last set sent. The Contracts Act 1950 begins from the same place — an acceptance must be absolute and unqualified.

That is the starting point, not the decider. The outcome turns on the whole course of dealing: what was brought to the other side's attention, whether either party objected, and what both then did. The practical answer is to stop relying on the analysis — issue orders under a signed framework agreement, so the terms are settled once.

What an overseas supplier agreement has to settle

• Incoterms rule, edition and named place — matched to how the goods move

• When title passes — separately from risk, and what happens on insolvency

• Specification and tolerances — annexed, not left in an email thread

• Inspection, rejection and acceptance — how long, where, and that payment is not acceptance

• Remedies for defective goods — repair, replacement, credit, and who pays return freight

• Delivery windows and what late delivery costs

• Insurance — who insures, at what cover level, and who is named on the policy

• Payment security — what the credit pays against, and which documents trigger it

• Force majeure drafted for supply chains, including port closures and export bans

• Governing law, seat and dispute resolution — chosen from where the supplier holds assets

The last decides whether the rest is worth anything. Malaysia registers foreign judgments only from the seven jurisdictions in the First Schedule to the Reciprocal Enforcement of Judgments Act 1958, within six years under s.4(1) — mainland China and the United States are not among them. Where the supplier's assets sit elsewhere, arbitration usually produces something enforceable: Malaysia acceded to the New York Convention on 5 November 1985, and foreign awards run through sections 38 and 39 of the Arbitration Act 2005. Since 1 January 2026, under Act A1737, such an award is binding without a separate recognition application — but enforcement still requires an application to the High Court.

The same terms decide what you can do when performance fails: what counts as a repudiatory breach of contract, and whether you have a clean route to terminate the contract. Getting them right is the substance of cross-border contract drafting.

Frequently Asked Questions

Does CIF mean the supplier carries the risk in transit?

No. Under CIF (Incoterms® 2020) the seller pays for carriage and insurance, but risk passes to the buyer once the goods are on board the vessel. The seller's insurance obligation is only Institute Cargo Clauses (C), minimum cover. CIF is also restricted to sea and inland waterway transport, so it is the wrong rule for containerised cargo.

Does an Incoterm decide who owns the goods?

No. Incoterms® 2020 allocate delivery, cost and risk only — they do not transfer title. Ownership passes when the sale contract says it does. Under s.26 of the Sale of Goods Act 1957 risk would otherwise follow property; an Incoterm is the "otherwise agreed" that separates the two.

Does the CISG apply to a Malaysian importer?

Not automatically — Malaysia is not a Contracting State. It can apply under Article 1(1)(b) where private international law rules point to the law of a Contracting State, and Article 6 allows the parties to exclude it. Say expressly whether the Convention applies.

The supplier's standard terms arrived with the invoice. Do they apply?

Possibly not, but it is not decided by sequence alone. Terms introduced after the order was placed and accepted face an obvious difficulty. Last-shot is the starting point; the outcome turns on the course of dealing and what both sides then did.

What happens if the goods never arrive at all?

Whoever bore the risk at the point of loss bears it, subject to insurance and any claim against the carrier. Under a sea rule such as FOB or CIF (Incoterms® 2020) that is the buyer from the moment the goods are on board.

Getting the terms settled before the first shipment

Who carries the loss is cheap to fix on paper and expensive to argue about after a container goes missing. Legal That Works advises Malaysian businesses on international and cross-border contract drafting — aligning the Incoterms® 2020 rule with the title, inspection, insurance and payment terms, and drafting the dispute clause around where the supplier holds assets. If you are negotiating supply terms now, speak to us before they are agreed.

This article is for general information only and does not constitute legal advice. Every transaction and every set of facts is different. Obtain specific advice from a qualified adviser before acting on any part of it.

Related guides

• Governing Law vs Seat of Arbitration

• Arbitration Clause or Foreign Court? The Dispute Clause That Decides Whether You Get Paid

• Paying a Foreign Supplier or Contractor

• Customised Agreement Drafting

• Corporate Guarantee vs Personal Guarantee