5/13/2015

Incoterms2010Rules:RevisitingtheCorrectUsageoftheTermsPart2

InternationalTradeBlog

Incoterms2010Rules:RevisitingtheCorrect
UsageoftheTermsPart2
12/18/116:00PM|ROBERTOBERGAMI|INCOTERMS

InPart1ofthisseriesofarticles,I
discussedanimaginarysituationwhere
thesellerandthebuyerhave
differencesinprocessinganExWorks
(EXW)transactionunderIncoterms
2010.Thesedifferenceswerecaused
bythefreightforwarder'spreferences
thatmutatedEXWintosomething
closertoFCA(FreeCarrier).Theseller,
unawareoftheaddedrisksincurred,wasfollowingtherequestofthefreightforwarder,
butwithsomereservations.
Theconversationbetweenthesellerandtheiradviserrevealedtheanomaliesand
explainedsomeofthepossiblecorrectivemeasures.Theseller,attheendofthat
conversation,raisedtheissueofFOB(FreeOnBoard)andcontainertraffic,and
questionedwhythismaybeproblematic.Herewepickupwhereweleftoffinthelast
article.
Adviser:YouwereaskingwhyFOBshouldnotbeusedwithcontainertraffic.
Seller:Yes,alotofbuyersseemtowanttobuyonthisterm,andthefactthatthegoods
areshippedincontainersdoesnotseemtobotherthematall.Sowhatistheproblem?
Adviser:Theproblemisnotone,butmany.Firstly,weneedtounderstandthattheterm
FOBhadbeenaroundforalongtimebeforemaritimecontainertransportwasinvented.
ThetermFOBhasbeenquestionablefornearlythepast50years.Themainissuehas
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beentherisktransferpointbetweenthesellerandthebuyerintheFOBcontract.Infact,
inaratherfamouscourtcaseof1954,thejudgeexpressedhisconcernsaboutthe
meansbywhichriskwouldbetransferredwiththefollowingwords:
Onlythemostenthusiasticlawyercouldwatchwithsatisfactionthespectacleof
liabilitiesshiftinguneasilyasthecargoswaysattheendofthederrickacrossa
notionalperpendicularprojectingfromtheship'srail(DevlinJinPyreneCoLtdv.
ScindiaNavigationCoLtd[1954]2QB402at419).
TheIncotermsthemselvesappeartohavebeensomewhatunclearovertheyears.The
Incoterms1990stated:
ItshouldbenotedthatFOB,CFRandCIFallretainthetraditionalpracticetodeliver
thegoodsonboardthevessel.While,traditionally,thepointofdeliveryofthegoods
accordingtothecontractofsalecoincidedwiththepointforhandingoverthegoods
forcarriage,contemporarytransportationtechniquescreateaconsiderableproblem
of'synchronisation'betweenthecontractofcarriageandthecontractofsale.
Nowadaysgoodsareusuallydeliveredbythesellertothecarrierbeforethegoods
aretakenonboardorsometimesevenbeforetheshiphasarrivedintheseaport.In
suchcases,merchantsareadvisedtousesuch'F'or'C'termsthatdonotattach
thehandingoverofthegoodsforcarriagetoshipmentonboard,namelyFCA,CPT
orCIPinsteadofFOB,CFRandCIF.
TheIncoterms2000statedinpart:
Thebuyermustbearallrisksoflossofordamagetothegoodsfromthetimethey
havepassedtheship'srailatthenamedportofshipment.
TheIncoterms2000alsostated:
Thistermcanbeusedonlyforseaorinlandwaterwaystransport.Ifthepartiesdo
notintendtodeliverthegoodsacrosstheship'srail[suchasisthecasefor
containerisedtraffic]theFCAtermshouldbeused.
TheintroductiontotheIncoterms2000highlightstheuneasyfitwithcontainerisation:
ThedeliverypointunderFOB,whichisthesameunderCFRandCIF,hasbeenleft
unchangedinIncoterms2000inspiteofaconsiderabledebate.Althoughthenotion
underFOBtodeliverthegoods'acrosstheship'srail'nowadaysmayseem
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inappropriateinmanycases,itisneverthelessunderstoodbymerchantsand
appliedinamannerwhichtakesaccountthegoodsandtheavailableloading
facilities[emphasisadded].ItwasfeltthatachangeoftheFOBpointwouldcreate
unnecessaryconfusion,particularlywithrespecttosaleofcommoditiescarriedby
seatypicallyundercharterparties.
Withallduerespecttothatstatement,itisexactlywhythisisnotwellunderstoodthat
problemsarise.TheIncoterms2010internationaltradetermsmakeitquiteclearthatthe
termFOBisnotthepreferredchoiceforcontainertrafficbecause,inpractice,the
containerisinvariablypartofamultimodalmovement.Infact,arecentstudyon
containermovementsconductedbythePortofMelbourne,Australia,revealsthat54%of
exportcontainersarestaged.Thismeansthatthesecontainersarenotdelivereddirectly
fromtheexporter'spremisestothewharfrather,theygothroughthirdpartiessuchas
containerpackingwarehouses,freightforwarders,containersparks,etc.
Prudentriskmanagementpracticeswouldhavetherisktransferwhenthejourney
commencesorwhenthesellerlosescontrolofthegoodsbyhandingthemovertoathird
party.IndeedthisisthecaseinFCA,CPTandCIPthatarethemultimodalanswerto
FOB,CFRandCIF.Butlet'ssticktoFOB,particularlyastherehasbeenachangeinthe
risktransferpoint.UnderIncoterms2010,therisktransferpointunderFOBisoncethe
goodshavebeenplacedonthevessel.Intheabsenceofacourtcase,atthetimeof
writing,thisisunderstoodtomeanthatthewholeconsignmenthastobeloadedon
board,butthisdoesnotmeanstowedandlashed.
Seller:Look,thatisverynice,butmybuyeriscomfortablewithFOB,afteralltheyhave
beendoingthisforyears.
Adviser:IfIhad$5foreverytimeIheard,"Wehavebeendoingthisforyears,"Iwould
haveretiredarichmanlongbeforeIsatdowntothisconversationwithyou.Somesay
historyiseverythingyesitis,buttolearnfrom,otherwisethereisnoprogress.Thereis
alsoanothercounterargumenttothe,"Ihavebeendoingforyears"claim.Thatis,"Ifyou
standinoneplacelongenough,eventuallyabuswillcomealongandrunyouover."
Timeschange,processeschange,andweneedtorespondtothose.Thebuyerwantsto
minimisetheirriskandsodoestheseller.Itisamatterofnegotiation.Iamgoingtoputit
toyouthatthesellerisbestplacedtotransfertherisktothebuyerwhenthey(theseller)
losephysicalcontrolofthegoods.Thisisbecausetheycannotcontroltheriskwithout
possessionofthegoods.Underthesecircumstancessomeoneelsehasthegoods,and
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thatsomeoneelseshouldcarrytherisk.
InFOBtransactions,thesellerwouldberesponsiblefor10ormoreuploadsandoffloads
fromthetimethegoodsleavetheexportpremisesuntiltheyareloadedontothevessel,
asshowninTable1.Doyoureallywanttoberesponsibleforthis?
Movement
ExportWarehousetoContainer

#ofUploads/Offloads Description
2

On/Off

CPStoForwarder

On/Off

ForwardertoContainerPark

On/Off

ContainerParktoWharf

On/Off

WharftoShip

On/Off

PackingStation(CPS)

Totalnumberofcargomovements 10(ormoredependingonhowmany
forwhichthesellerretainsrisk

timesthecontainerismovedatthe

undertheFOBIncoterm.

wharf,postacceptance).

Table1:10+productmovementspriortoloadinghowwillthesellermitigate
risks?
Seller:Well,whenyouputitlikethat,Idontreallywanttoretainalltheserisks,butthe
buyerwantsmetodeliveronboard.
Adviser:Iamgoingtosuggesttoyouthatyoucannegotiatewiththebuyertotakethe
goodstothewharf,butnotloadthemonthevessel.YoucandothisbyusingFCA,XXX
Port,Incoterms2010Rules.Ifyoudothis,youretaintherisksuntilthecargoterminal
operatorhasthegoodsmadeavailabletothem,butterminalmovementsandloadingon
thevesselareattheriskandcostofthebuyer.Youneedtoexplaintothemthattimes
havechangedandsoshouldcontractdeliveryclauses.Bytheway,youstillhaveno
obligationtocontractforcarriageunderthesecircumstances.
Seller:OK,Igetitnow.IguessthatIcantrytochangewhatIhavedoneinthepastand
convincethebuyertodothesame.
Adviser:Yes,that'sthespirit.
Seller:Yousaidsomethingaboutothertermsbefore:CFR,CIF,CPTandCIPandrisk
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transfer.Iamnotsurethatyouexplainedthatcompletelythough.
Adviser:Youareright,Ididnot,butthatisanothersessionagain.
StaytunedforPart3.

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