Incoterms_® and Commercial Contracts

FCA – Forwarder’s handling fees

For air shipments under FCA terms, who as between seller and buyer must pay for the freight forwarder’s ‘handling fee’ (for export clearance and other services)? Who must pay for storage at the freight forwarder’s warehouse (prior to loading on aircraft)?

The goods are delivered, as per buyer’s instructions, to the freight forwarders’ warehouse.

1. To the extent that the ‘handling fee’ represents a charge for services related to export customs clearance, it should ultimately be paid by the seller. To the extent that this fee is a charge for physical handling of the goods after receipt from the seller, this is a freight element and should be charged to buyer.
2. Storage costs at the freight forwarder’s terminal are transport costs which must be borne by the buyer.
3. In practice, considerable difficulties arise owing to the fact that the freight forwarders (particularly in connection with air transport) have a dual function. First, they could represent either the seller or the buyer. Second, they could also act as agent for the carrier. In connection with air transport, the freight forwarders usually hold the position as ‘IATA agents’. This means that they may be authorized to receive the goods on behalf of their carrier. In answering this question, this has been assumed to be the case.

The above question deals with the issue of air shipments pursuant to the FCA Incoterms® rule. As with FOB, customs clearance is an obligation of the seller, and any charges that a freight forwarder may incur in obtaining export customs clearance will normally, under an FCA contract, be billed to the seller.

It is worth mentioning that this basic principle on customs should apply regardless of whether one uses FCA Incoterms® rule for an air shipment, or the formerly common ‘FOB Airport’, which is no longer one of the 13 valid Incoterms® rules. As regards the costs of storage in a warehouse prior to shipment, this would generally be
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for the buyer’s account as a cost arising after the seller had complied with his delivery duty. However, the allocation of storage and handling costs is a frequent source of conflict, as will be seen in other queries, and it is recommended that the parties come to a clear, explicit understanding of any necessary splitting or allocation of terminal charges in those cases where the seller’s delivery obligation is at a terminal.

FCA – Manner of delivery

1. With respect to the FCA rule, who must pay the export terminal handling charges?
2. Does ‘handed over’ mean the physical transfer of the goods to the carrier?
3. Who must unload the goods from the road truck by which delivery to the export terminal is made?

1. Specific stipulations in the contract of sale or in addition to the Incoterms® rule should be made with respect to the costs of loading, discharge, and division of Terminal Handling Charges (THC). If the THC are not fully absorbed by the carrier but split between him and the shipper, it may be correct to let the ‘shipper’s portion’ fall upon the seller in the understanding that this is needed for the ‘handing over’ to be completed.
   However, no answer to this question can be derived from the Incoterms® rules themselves: in the absence of express provisions in the contract, custom of the export or trade usage will rule.
2. ‘Handed over’ means the physical transfer of the goods to the carrier.
3. Usually, the carrier owns the unloading equipment, and it therefore makes sense that the carrier should carry out the unloading and include the costs in the freight.

The Panel of Experts was studiously cautious in answering this question, refusing to go further than the general statements made in the text of Incoterms® rule FCA itself.

In particular, the Experts refrained from attempting an analysis of the possible splitting of Terminal Handling Charges (‘THC’), sometimes also known as Container Service Charges (‘CSC’) or Destination Delivery Charges (‘DDC’).

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As transport in containers has become the norm for a great deal of export goods, customs of trade based on delivery to ports have had to be replaced by customs based on delivery to container transport terminals. A practice has grown in some of these terminals, which may or may not be owned by the actual carrier, to split the charges incurred within the terminal, with some of the charges going to the ‘shipper’ – generally the exporter, although the buyer can technically also be shipper – and the other charges allocated to the consignee (generally the buyer). In some areas it would appear that an 80% / 20% split of charges was considered customary. Nonetheless, the ICC Experts felt that practice was too diverse and too unsettled for the ICC to state a final rule.

Rather, the onus is put back on the traders to achieve the necessary clarity in their contract. The ICC repeatedly reminds traders that they should not expect the Incoterms® rules to resolve all contractual uncertainties. In particular, when goods are to be delivered to a container terminal under FCA, traders would be well advised to specify how unloading at the terminal will take place and who will pay for it, and how any additional terminal charges are to be split.

FCA – Import duties levied by seller’s customs authorities

Under the FCA Incoterms® rule, who, as between the seller and the buyer, must pay for the import duties levied by seller’s customs authorities (i.e., duties for importation, from a third country into the seller’s country, of the same goods that are now sold to the buyer under FCA)?

A Dutch seller sold goods produced in the US on FCA Delfzijl (Netherlands) terms to a Danish buyer. Upon collection of the goods, the Dutch company claimed that the Danish company had to pay the customs duty (the import duty from the US into the Netherlands).

The seller is under a duty to deliver the goods ready for export, which means having already paid any customs duties still outstanding.

In the absence of any special terms in the contract of sale, the matter is governed by A2 of the FCA Incoterms® rule, which places on the seller the duty to obtain at his expense any export licence or other official
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authorisation necessary for the export of the goods. On the assumption that the goods could not leave the seller’s country before payment of levies charged on their import into that country, the seller is under a duty to deliver the goods to the buyer ready for export, with all prior import duties paid.

FCA – Port/airport handling charges not ‘official’ charges

According to the ‘Guide to Incoterms 1990’, under FCA, in the case of sea or air transport, charges incurred in ports or airports (trucking, handling, stevedoring, taxes levied by ports or airports authorities) are not ‘official charges’. This would mean that these charges are for the buyer’s account (since the seller must only pay for pre-delivery costs plus custom clearance, formalities and official charges). Is that statement correct?

Yes. Under FCA the seller must pay for the charges incurred before delivery including customs formalities.

In the case of air transport under the FCA term, for example, all airport charges arising after the goods have been delivered to the freight forwarder who will issue the waybill must be paid by the buyer, but the exact point should be clarified with the freight forwarder in order to avoid uncertainty or disputes.

In the case of sea transport, delivery may take place at the seller’s premises, at a terminal gate or at the terminal itself. However, according to a certain custom of port, mainly in French ports, costs up to the ship’s side are generally for the seller’s account, unless the buyer instructs the carrier to include them in the freight.

Air and sea transport must be dealt with separately because the question has been formulated by a French company and in France the custom is different in these two kinds of transport.

In the case of air carriage, the goods are always delivered to a freight forwarder who will clear the goods for export if the clearance has not been carried out by the seller himself. If the freight forwarder is an IATA agent, he will fill in the air waybill and will often choose the carrier, because the buyer commonly forgets or neglects to do it. In practice, direct delivery to the carrier never occurs. Delivery is completed when the goods have been handed over to the agent who issued the
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AWB, but the cost of customs clearance for export, if necessary, must be paid by the seller. Airport charges can be mentioned in the air waybill as disbursements, and they can be collected on arrival from the buyer along with the freight and AWB charges.

In the case of sea transport, there are several possibilities for the place of delivery: the seller’s premises, the gate of the terminal or the terminal itself. In many ports the custom is to invoice the terminal costs to the shipper, i.e., the seller. The seller may have to pay the horizontal handling costs according to the custom of the place, but, in all cases, he will have to pay for the customs clearance.

In this question the Panel was asked whether a buyer could avoid all handling charges in the port/airport of departure under FCA/FOB airport on the grounds that such charges, not being ‘official charges’, are for seller’s account. The Panel’s answer is that the correct interpretation will depend on the circumstances of the transaction and the particular customs of the port or airport.

In practice, both FCA airport and FOB airport (not currently a valid Incoterms® rule) are commonly encountered. Readers should be aware that the basic ‘problem’ with FOB airport, and the reason is no longer a valid Incoterms® rule, is that the law and practice of international trade, built around the concept of delivery to ship’s side or on board against a negotiable bill of lading, do not apply nicely to air shipments. A variety of charges can arise in connection with the delivery and handling of the goods by the freight forwarder, airport terminal, and/or air carrier. If parties are in doubt, additional drafting to achieve clarity may be advisable.

DDU – Wharfage fee

Who has to pay for a wharfage fee and a landing charge raised by the port of destination authority under the DDU delivery term?

The buyer must pay for all duties, taxes and official charges connected to the importation of the goods. The landing charge and the wharfage fee can be both considered as charges linked to the carriage and therefore should be paid by the seller.

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Under DDU, the landing charge is a part of the carriage and the wharfage fee cannot be considered as a tax on the sole ground that it is customs value-based. The Incoterms® rules determine the nature of a cost according to the type of activity covered; in this case the use of the wharf. The criteria on which the cost is based are irrelevant. Moreover, the fact that it is levied by a public authority is not determining.

As a general rule under the Incoterms® rules, customs clearance responsibilities include payment of duties and other ‘official charges’ which are required for importation. The question that arose here was whether the seller could claim that the landing charges were ‘official charges’ because they were levied by a port authority, which in this case was a public or governmental authority. The Panel decided that the DDU seller could not pass on the buyer the wharfage and landing fees in the port of destination. The Panel thus appears to clarify the rule in DDU by requiring a clear linkage of ‘official charges’ to the customs clearance procedure before such charges can be considered part of the buyer’s customs responsibility.

DDU – Customs clearance

With respect to the DDU rule, since it is specified that this term means that import customs clearance and duties are for the buyer, why is it later stated that the Incoterm may be modified so that the duties or clearance is the responsibility of the seller?

Under DDU, import formalities fall upon the buyer. However, it must be understood that important responsibilities may be divided into two concepts:

1. custom clearance – administrative formalities, such as obtaining necessary licences, and
2. duties – import taxes and other official charges, such as VAT. Thus, although the seller is not responsible for either clearance or duties under DDU, he may agree to pay the costs of VAT, for example, which should be made clear by adding ‘Delivered duty unpaid, VAT paid’.

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All Incoterms® rules except EXW and FAS place some kind of customs clearance responsibilities upon the parties. In fact, these responsibilities can be subdivided further into three sub-parts:

1. payment of duties or other official charges,
2. effecting any required documentary formalities, and
3. taking the risk that it will be impossible to obtain customs clearance.

Theoretically, it is possible to split the above responsibilities between the parties, although as a general principle Incoterms always assign them entirely either to seller or buyer.

DDU/DDP – Offloading and discharging

How should questions relating to offloading, discharging etc. be handled under DDU/DDP shipments when the contract is silent?

The enquiry noted that under Incoterms 1953 and Incoterms 1980 it seemed clear that the seller would be responsible for discharging or landing the goods where it was necessary or customary to do so; however, this language was dropped from Incoterms 1990.

The issue here is the allocation of costs of discharge as between seller and buyer where the sale is contracted on DDU or DDP terms. The seller must pay all costs until the moment at which the goods reach the place of discharge under A3, and at which the goods are at the disposal of the buyer under A4.

The determining language under EXW A4 states that the seller must place the goods ‘at the disposal of the buyer’. This is precisely the same language that is used under EXW, under which it is a well-accepted and long-established rule that the seller is not required to load the goods on vehicles provided by the buyer. Just as the buyer must take the goods, at his cost, from the seller’s warehouse, so he must take goods, at his expense, from the seller’s conveyance.

Therefore, under DDU/DDP Incoterms 1990, unless otherwise specified in the contract, unloading/offloading or discharge costs and risks are for buyer’s account.

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The above issue was decided by the Panel by looking to the following determinative language in the text of the Incoterms® rules: goods must be placed ‘at the disposal of the buyer’. Since the identical language is found in EXW, and since the rule is well-established that the EXW seller does not have to load the goods, it was felt that the same result should be obtained under DDU/DD. When seller only has to place goods ‘at the disposal’ of the buyer this means that any further loading or unloading required in order for the buyer to take possession of the goods will be by the buyer’s responsibility. Certain key phrases, such as this one, are used in several of the Incoterms® rules, and the Incoterms 2000 revision will seek further standardization of the meanings of these and other recurrent phrases or terms (another example is the ‘handing over’ terminology found in FCA, CPT and CIP).

DDU – Customs clearance within reasonable time

Under the DDU Incoterms® rule, is the buyer obliged to make customs clearance possible within a reasonable period of time? Would late delivery be at the buyer’s risk? Could the time for customs clearance be added to the contractual time for delivery under DDU?

Under DDU terms, the seller fears that lengthy customs procedures may prevent him from delivering the goods in the time specified in the contract. Subsequent to the signing of the contract, it became clear that the goods had to pass through a customs prior to the delivery point.

1. The Incoterms® rules do not define the time for delivery, and in particular do not require that delivery be made within a reasonable time. The time for delivery must be found in the contractual provisions or by the application of legal principles under applicable law.
2. Despite the foregoing, the Incoterms® rules do state a rule as regards risks related to customs clearance under DDU: ‘The buyer has to pay any additional costs and to bear any risks caused by his failure to clear the goods for import in time’. Thus, the risk of delay related to customs clearance is on the buyer under DDU. However, whether or not a delay in delivery is unreasonable in general, and in particular
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   whether or not such delayed delivery is the result of a delay in customs clearance will depend on the contract itself, the facts of the particular case, and on the applicable law; consequently, these further questions are not within the remit of the Panel of Experts.
3. Generally, interpretation of the contract will involve construing the intent of the parties on issues related to the time of delivery, such as the calculation of the time for delivery, the inclusion of a reasonable period of time for customs clearance, the condition upon which delivery time was agreed, and the consequences of delay.
4. This matter may well require contractual interpretation which is outside the scope of the Incoterms® rules and is therefore beyond the remit of the Panel of Experts.

The facts of this case, as suggested in the letter we received from the enquirer, were as follows: an exporter concludes a sales contract on DDU terms with delivery to an inland point, and with the understanding (which we assume was not made explicit contractually) that customs clearance would be handled at the delivery point. Subsequently, for reasons which were not made clear, it became understood that customs clearance must transpire at an earlier location, and the seller now feared that he would not be able to reach the ultimate delivery point in time.

We do not know if the seller had guaranteed a particular delivery time, or if he merely fears that he will now exceed a reasonable time. Consequently, we should consider both cases.

The further question raised is that of the buyer’s cooperation; if, in order for the goods to pass through customs, it is necessary for the buyer to perform some minimal activity, such as by supplying information to the seller or the customs authorities, and the buyer fails to do so for a very prolonged time (let us say 10 months), out of a simple desire to escape the contract, has the buyer breached any provision of the Incoterms® rules?

Thus, the following further issues are raised by the above question:

1. If the DDU buyer ‘stalls’ customs clearance by refusing to cooperate, does the late-delivering seller have any excuse or remedy?

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This Editor would personally argue that the DDU buyer should be considered under a duty to take timely delivery. Thus, if the lateness was to some extent caused by buyer’s own failure to take the goods, such breach cannot be imputed to the seller.

2. If the contract was based on the understanding that customs clearance would be at the delivery point, and it subsequently becomes clear that customs clearance must take place at a different, distant point, which will add appreciably to the transit time, may the seller be allowed an extended period for delivery?

Several cases can be distinguished here. In one case, the seller alone has made a mistake. In another case, an intervening customs regulation has changed a previous clearance procedure. Would this make any difference? The answer to these types of questions generally lies in national laws which deal with the issues of the legal impact of unforeseeable or unpredictable events upon a commercial transaction.

3. If the contract is silent as to delivery time, is there a presumption under the Incoterms® rules that delivery must be made within a reasonable time?

The Incoterms® rules do place a delivery obligation on the seller, and a receipt obligation on the buyer. Although timeliness of performance of these obligations is not specifically covered by the Incoterms® rules, it is generally covered by national law, and as a general principle neither party must unduly or unreasonably delay the performance of delivery.

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