Incoterms_® and Commercial Contracts

Ship and goods on different quays under FAS

Under FAS, if the seller has delivered on the quay, indicated by the buyer, but the boat arrives at another quay, must the seller agree to buyer’s request that seller move the goods to this new quay? Article A4 provides delivery must be ‘alongside the ship’, but also allows seller to ‘select the point within the named port of shipment that best suits its purpose’. Can the seller select a point other than physically ‘alongside the ship’?

• Under article A4 FAS Incoterms® 2010, the seller delivers the goods by placing them alongside the ship nominated by the buyer at the loading point, if any, indicated by the buyer at the named port of shipment. Under article B7, the buyer must give the seller sufficient notice of the vessel name, loading point and, where necessary, selected delivery time within the agreed period. By providing this information, the buyer makes it possible for the seller to deliver alongside an arrived ship.
• Failing receipt of precise notice on the loading point and the selected delivery time, the seller may use its discretion to select a point that best suits its purpose, and the delivery time within the agreed period. Moreover, in the absence of precise information of place and time, the seller can deliver the goods even when the ship has not arrived.
• Where the buyer has given an indication as to the loading point but later wants to change these instructions, the seller is not obliged to cover the expenses of transferring the goods to a new loading point, provided the seller has acted in line with the buyer´s first instructions and the buyer´s new notice has arrived too late for seller to comply with it without extra cost.

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Containerized shipments and FOB, CFR and CIF

It seems we can no longer use Incoterms® 2010 FOB/ CFR/CIF rules for containerized shipments. Is this true? The Guidance Notes on the FOB, CFR and CIF rules say that they may not be appropriate for use where goods are handed over to the carrier before they are on board the vessel, such as goods in containers, which are typically delivered at a terminal.

But sometimes an exporter of goods in containers wants an ocean bill of lading (because the bank requires it in a Letter of Credit, for example). Can the parties agree to use FOB, CFR or CIF but stipulate in the contract of sale that risk passes to buyer when the goods are handed over at the terminal?

• Indeed, the Guidance Notes on FOB, CFR and CIF Incoterms® 2010 caution parties to consider carefully whether the delivery point under these rules makes using them for containerized shipments appropriate.
• For example, even where goods in a container are sold under FOB, a container is typically handed over by the seller at a container yard or warehouse, which is in practice the appropriate delivery point. Given that under FOB, CFR and CIF the seller would bear the risk of loss of or damage to the goods until they are delivered under article A4 by being placed on board the vessel, users are recommended to instead choose FCA, CPT or CIP in such circumstances. The reason is that, under these rules, risk is typically transferred to the buyer when the seller hands the goods over to the carrier, usually earlier than their being placed on board.
• In the case where an exporter of goods in containers wants an ocean bill of lading, the parties can agree as suggested above, stipulating in the contract of sale that risk passes to buyer when the goods are handed over at the terminal. FOB, CFR and CIF require the goods to be delivered on board the vessel and an ocean (shipped) bill of lading is evidence thereof, but that risk would pass at terminal. The better solution is to use FCA or CIP but agree in the sale contract that seller will tender an on board bill of lading and then ask from the carrier either the issue of a shipped bill or (more likely) an annotation on a received for shipment bill of the date of shipment.
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• This question is a good example of how important it is that the chosen Incoterms® rule and payment terms are in accordance with each other. The parties could try to refrain from asking for an on board bill of lading in the described situation. If this is not possible, then solutions offered by pricing and/or insurance could be examined.

What does ‘on board’ mean in FOB, CFR and CIF?

Regarding the delivery point under A4 of FOB, CFR and CIF, what is meant by ‘placing’ the goods ‘on board’ the vessel? Are securing, dunnage, and/or trimming of the cargo required? Who has the risk if the goods are dropped on board during loading and damage results?

• Article A4 provides that delivery must be completed ‘in the manner customary at the port’, and port customs may vary widely. For example, in some ports, goods are considered ‘on board’ for delivery purposes when they are under ship’s tackle. Further, the nature of the cargo and the type of vessel frequently dictate how loading is accomplished.
• In the absence of custom of the port, or other relevant consideration such as practice between the parties, the default position is that goods may be considered to be delivered on board the vessel when first at rest on deck.
• If goods are dropped during loading and land on deck causing damage, the risk would still be considered to be with the seller, since placing goods on board does not contemplate a process that results in damage. If, however, the goods were considered to be already ‘on board’ when under ship’s tackle, the risk would be with the buyer.
• Please also see Question 35, immediately below, on securing and trimming.

Risk transfer in ‘free in stowed and secured’ under FOB, CFR and CIF

When does risk transfer under FOB/CFR/CIF in a ‘free in stowed and secured (and even maybe trimmed)’ shipment?

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• If parties agree on a variant in their contract of sale by adding ‘stowed, secured, trimmed’, then the costs for the buyer would most likely be understood to begin only when the goods were safely stowed/ secured/trimmed as set out in the contract, and passage of risk would likewise be delayed.
• In order to be sure about allocation of costs and risks, though, under any variant of an Incoterms® rule, parties are strongly encouraged to make their intent clear in their contract of sale.

Goods destroyed mid-loading under FOB

Under FOB, what happens if goods are destroyed during loading when only part of the goods has been put on board? Has delivery been made under article A4, so that risk for the goods already on board has passed to the buyer?

• Article A4 provides that the seller must deliver the goods by placing them on board – ‘them’ referring to all the goods.
• As all the goods have not yet been delivered, the risk (article A5) has not yet passed and the risk is for the seller.
• The answer will be different if partial delivery is agreed or allowed under the contract of sale.

Packaging, containers and break bulk under FOB

We are the seller under FOB contracts stating that the cargo must be shipped in fumigated wooden crates able to withstand the ocean transportation. The cargo is many times a mix of small and large wooden crates and the buyer sometimes insists that the smaller crates are to be containerized.

Are we obliged to ship in containers under FOB Incoterms® 2010? We take the position that the cargo is in wooden seaworthy crates and the contract does not mention containers, but the buyer insists that the FOB rule means the goods are to be shipped in containers. Our position is that we can ship FOB Break Bulk and if the buyer wants containers, all costs associated with containers are for the buyer.

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• The FOB Incoterms® 2010 rule does not presuppose that goods are shipped in containers. On the contrary, the relevant Guidance Note indicates that FOB may not be appropriate for goods shipped in containers due to the fact that delivery of containers takes place prior to the goods are on board the vessel, and that frequently FCA is a better choice.
• Article A9 of FOB provides that the seller must package the goods (unless it is usual for the particular type of goods to be transported unpackaged) in a manner appropriate for transport, unless the buyer has notified the seller of specific packaging requirements prior to the conclusion of the sale contract. The Introduction (‘Explanation of terms used in the Incoterms® 2010 rules’) mentions that containerization is not included in the term ‘packaging’ as used in the Incoterms® 2010 rules. Therefore, the buyer could not strictly speaking base its requirements to stow the crates in containers on the provisions of FOB Incoterms® 2010, even if the requirement is made prior to the conclusion of the contract of sale. However, the unwritten rationale of article A9 of each of the Incoterms® 2010 rules — that the buyer can impose reasonable requirements on the safe packaging of the goods — could lead to the conclusion that such a requirement can validly be made under the applicable sales law. In case of the seller’s containers (Full Container Load, FCL), transport law may treat containers not as a means of transport, as suggested by the Incoterms® 2010 rules, but as the goods (which means that they constitute packaging under transport law).

Proof of delivery, bill of lading, under FOB

In FOB Incoterms® 2010

• Who pays the cost of the bill of lading?
• And what if the seller booked the freight at the buyer’s request?

• Article A8 (Delivery document) of FOB Incoterms® 2010 states that: ‘the seller must provide the buyer, at the seller’s expense, with the usual proof that the goods have been delivered in accordance with A4’. The same article further provides that: ‘unless such proof is a transport document, the seller must provide assistance to the buyer, at the buyer’s
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  request, risk, and expense, in obtaining a transport document’.
• The above quotations mean that in certain situations such as particular trades, ports or practices with ship owners, or even practices established between the parties, the usual proof of delivery is a transport document (usually an on board bill of lading) in which case the seller pays the costs of the bill of lading. Alternatively, there are situations where the usual proof may be a receipt only, and it is for the buyer to pay the costs of the bill.
• Article A3(a) of FOB Incoterms® 2010 now contains a possibility that: ‘if requested by the buyer or if it is commercial practice and the buyer does not give an instruction to the contrary in due time, the seller may contract for carriage on usual terms at the buyer’s risk and expense’.
• The Incoterms® 2010 Drafting Group did not consider in detail whether the reference to the buyer’s costs would entail the costs of producing a bill of lading. On balance, it is submitted that the reference relates to the freight costs only, and that the seller may have to bear the costs of the carrier issuing a bill of lading in practices where a transport document is the usual proof of delivery. As the seller may even conclude a contract of carriage on the buyer’s behalf, a bill of lading could easily be regarded as proof that goods have been delivered pursuant to FOB so modified.

Loading a ship under FOB, CFR and CIF

How to load a ship under the Incoterms® 2010 rules FOB, CFR and CIF?

This is a rather general question. One should carefully examine the obligations of the seller and buyer under the relevant Incoterms® 2010 rule, especially the A4 (Delivery) and B4 (Taking Delivery) provisions. The seller’s obligation to place the goods on board the vessel in due time is the essence of the delivery obligation under these rules. If there is a different custom at the port of shipment, then the seller delivers the goods/loads the ship in the manner customary at that port. Moreover, loading may be subject to special conditions such as the provisions of the sales contract between the parties, nature of the product, type of vessel, etc.

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Formalities in intra-EU sale under FOB

The FOB Incoterms® 2010 rule requires the seller to clear the goods for export. For sea transport between Member States, there is no ‘export’ regime in the sense commonly accepted by the EU Customs regulation. However, a simplified (but similar procedure) is needed to prove the Community status of the goods in the port of arrival (that is, application for a T2L document).

Is it correct to say that a seller has the obligation to provide a T2L document to the buyer for goods delivered under FOB Incoterms® 2010 in case of sea transport between Member States?

• In order to be able to answer any specific questions regarding the parties’ obligations in respect of export, transit or import formalities, we should examine what the formalities in question consist of. A T2L-document is used to confirm the Union status of the goods traded. A T2L is mentioned in paragraph 4 of the Single Administrative Document (see Commission Regulation No. 756/2012 and further legislation references contained therein). A T2L document can simply be a ‘T2L’ notion in the commercial invoice or transport document designated solely for that quantity of Union goods.
• Article A2 of FOB Incoterms® 2010 vests the task of export clearance with the seller and the transit formalities and import clearance with the buyer. Under articles A10 and B10, the seller and buyer are under a duty to render assistance to each other in carrying out the export and import formalities, as the case may be. This will depend on the relevant administrative provisions, and on which information and documents need to be furnished at which end. In the EU, the seller does not have transaction-specific clearance obligations but merely block reporting obligations of Intrastat and VAT. Practically speaking, however, the seller is in a position to include a T2L notion in the invoice that the seller will provide anyway (also pursuant to article A1 FOB Incoterms® 2010).
• Indeed, as a general rule, the Incoterms® rules have traditionally been used in international sale contracts. Nonetheless, the Incoterms® 2010 rules explicitly state that they are available for application to both international and domestic sale contracts, presumably because in various areas of the world, customs unions (such as the European Union) and
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  free market areas have made border formalities between countries less significant.

Risk and port charges under FOB

In each of the two scenarios regarding Incoterms® 2010 rule FOB described below,

• Who bears risk of damage to the cargo, the buyer or the seller?
• Who should pay for the origin THC (terminal handling charge) – that is, a charge levied by the port of shipment that is invoiced to the shipping line?

Scenario 1: An exporter and importer have agreed upon the Incoterms® 2010 rule FOB Cape Town port. At the time the sales contract was agreed upon, it was unknown which shipping line or vessel would be used.

At the time of export, the exporter loads the container at its premises and its forwarding agent arranges for the container to be sent to the export stack for the vessel as advised by the importer/agent; the container is placed into the export stack and the importer is notified.

The vessel nominated by the buyer is delayed due to wind and collects the cargo only after the scheduled loading date.

During the time after the export agent has placed the container into the export stack, (which is customary in procuring the container so delivered in South African ports) and the placing of the container on board the vessel nominated by the buyer at the loading point, the goods are damaged.

Scenario 2: Same as above, except the vessel is not delayed due to wind, but the cargo is left behind on the quayside due to a ‘short shipment’ resulting from the vessel being overladen at the previous port of call.

The cargo is damaged between the time of delivery into the export stack and when the container is shipped on the next available vessel.

Scenario 1: The risk is for the buyer’s account as per B5 (b), as the vessel failed to arrive on time. However, if the vessel had arrived on time, the risk would remain with the seller throughout the vessel loading.

Scenario 2: The same as for Scenario 1, except that the reason is not late arrival but that the vessel was unable to take on the goods.

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Note that the Incoterms® 2010 rules strongly recommend that the marine-only rules (FAS, FOB, CFR and CIF) not be used for shipments of goods in containers because sellers typically hand over the goods to the buyerappointed carriers at points prior to vessel loading.

Under FOB Incoterms® 2010, the seller is obliged to deliver the goods on board the vessel nominated by the buyer. At delivery, the risk passes from the seller to the buyer. The moment and method of delivering the goods on board under FOB depend on the custom of the port (see the answers to earlier queries addressing the custom of the port). As apparently necessary, the Panel of Experts would hesitantly stretch the reference to the custom of the port to cover ordinary methods (i.e. into stack) to deliver containers to the carrier at the loading terminal under FOB. Such a custom may not be universal since many ocean carriers would not cover expenses at the shore side. In lieu of the custom of the port, one may be able to refer to an agreement between the parties, express or implied, to deliver the goods to the carrier this way. Ideally, the parties should use such an agreement to amend FCA and not FOB.

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