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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
FAS – Delivery period
In a FAS contract, delivery period is ‘week 33’. During that week, on Tuesday, the seller places the goods on the quay where the ship will load on Thursday, but, on Wednesday, they are destroyed by a fire. There is no custom of the port or trade usage. Who must bear that risk?
Answer of the Panel of Incoterms® Experts:
Delivery can take place only alongside the vessel. According to B7, the buyer has the right to specify a required delivery time in the delivery period of the contract, which has been made. Since delivery did not take place, the risk of loss of the goods must be borne by the seller.
Analysis:
The text of the Incoterms® rules indicates that the seller must deliver the goods alongside the vessel, and the ‘Guide to Incoterms 1990’ adds that the goods must be placed alongside the vessel. If the ship is not there, delivery cannot be performed. It can take place only when the ship is berthed, moored and cleared by health and customs officers, and in that case, ready to load on Thursday, since that day has been agreed upon.
As to the buyer, we can suppose that he has fulfilled his obligations and has given the notice of B7 about delivery time since it is agreed that the ship must load on Thursday, which is before the end of the delivery period. Concerning the insurance question raised in that question, A3 and B3 specify that there is no obligation. It is purely a matter of agreement between both partners. In fact, both of them should be insured, but Incoterms themselves do not have to deal with this problem.
1990 Editor’s notes and observations:
The Panel of Incoterms® Experts’ decision here sets forth the following rule for passage of risk in an FAS sale under particular circumstances: when goods are timely delivered to the quay but destroyed before ship’s arrival and prior to expiry of the delivery period, the risk cannot be said to have passed from seller to buyer.
The Panel did not further consider the related question, what would happen if the ship were very late and the goods were destroyed one day after the expiry of the [Page108:] delivery period? The likely answer is that the buyer would have been held liable, for failing to take delivery within the allotted period. Although risk can normally be said to pass under FAS only when the ship has been berthed, as per the above Panel decision, some courts and legal commentators have argued for an exception allowing for what has been termed ‘premature transfer’ of the risk in those cases when the buyer fails to meet his obligation to receive delivery in a timely fashion.
FAS – Who should be listed as shipper?
May a seller under FAS terms request that he not be indicated on the air waybill as shipper and that the freight forwarder be listed as the shipper on the air waybill and the shipper’s export declaration?
Facts:
A US seller sells goods on an FAS basis to a South African buyer. The buyer arranges shipment by a US freight forwarder. The seller requests the freight forwarder not to include seller’s name on waybill as shipper, nor on shipper’s export declaration, but rather to put the freight forwarder as shipper of record.
Above all, it should be made clear that under Incoterms 1990 FAS should only be used for purely maritime shipments.
In this case it would appear that the parties made an inappropriate reference to the FAS Incoterms® rule, which throws the entire question into doubt. If in fact the parties have completely misunderstood the Incoterms® rules requirements, the answer may depend on the interpretation of a contract involving a mistake by both of the parties; this is a matter which can only be decided under the applicable law, and is therefore beyond the remit of the Panel of Experts.
In any case, note that the seller is under an obligation to render the buyer any assistance necessary in obtaining export customs clearance.
The above cases brings to light an interesting anomaly in international trade: with FAS, FCA and FOB the transport document will frequently be initially handed over to the exporter as ‘shipper’, although from a strictly legal point of view it is the buyer who is the contractual ‘shipper’.
[Page109:]
It may happen that a particular seller does not want to appear upon the export documentation, or conversely, the buyer may wish to insist on the right to receive the transport document as the contractual shipper – perhaps the FAS buyer does not want the seller to know the ultimate destination of the goods. A shipper does have certain legal responsibilities, for example to report information to tax or customs authorities, and in some cases it may not be convenient for the seller to undertake these tasks.
In such cases it would seem that legal theory runs up against the hard rock of everyday practice, because so many traders assume that the seller must appear as shipper. If the parties wish to avoid any possibility that the seller may be considered an export ‘shipper’, they might consider selling Ex Works. Ex Works is the Incoterms® rule which is the least ‘international’, since it is from the seller’s point of view virtually the same as a domestic sale.
FAS/FOB – differences between the two rules
What is the difference, if any, between FAS and FOB as regards the following:
An exporter offers terms on FAS or FOB basis, nominating a freight forwarder to handle orders. The buyer, American, wants to know his rights under both rules.
Please note that the following answers apply unless there is a contractual stipulation to the contrary.
[Page110 :]
The Incoterms® rules and the transfer of title or transfer of property
The question is, when does title or ownership of the goods legally pass from seller to buyer? The question pre-supposes that there are various possibilities for the transfer of title, and indeed this appears to be the case in practice.
The transfer of property is a complex issue in international trade, which has resisted easy clarification or harmonization. Basic legal principles of property vary greatly from country to country. Nonetheless, the issue remains a very important one and one of crucial interest in particular cases. For example, if goods are delivered on open account to a buyer who becomes insolvent before paying the exporter, can the exporter seek to recover his property? It would appear that in some jurisdictions this is possible through the use of a socalled ‘retention of title’ or ‘reservation of title’ clause in the contract. In essence, the seller reserves title over the goods until he has received the purchase price in full.
FOB – Berthing and demurrage charges
Under an FOB contract:
An Indian seller sold methanol to a European buyer FOB Bombay, shipment to be by charter party arranged by the buyer.
In the absence of special stipulation in the contract of sale, the responsibility for making the shipping arrangements, including berthing, lies with the buyer. The seller’s responsibility is to ‘deliver the goods on board the vessel’ (A4). The buyer’s duty is to ‘contract at his own expense for the carriage of the goods from the named port of shipment’ (B3) and to give the seller ‘sufficient notice of the ... loading point ...’ (B7). It follows from these three articles that the naming of the loading point – and therefore its procurement – is a matter for the [Page111:] buyer, saving contrary stipulation in the contract of sale.
As between shipowner and charterer, it is clearly the charterer (buyer) who pays the charges.
However, can the buyer claim the demurrage (due by him under the charter party) from the seller (under the contract of sale)? Our opinion is that the buyer cannot, saving contrary contractual stipulation.
The Incoterms® rule FOB B3 states that buyer must ‘contract at his own expense for the carriage of goods ...’. The responsibility for transport arrangements is thus placed squarely on the buyer.
IFOB A6 states that seller ‘must pay all costs relating to the goods until such time as they have passed the ship’s rail’. Note that the reference is to costs ‘relating to the goods’ – which implies that costs related to transport are for the buyer.
Here, the Panel of Experts firmly closed the door on the possibility for an FOB buyer to escape his contractual obligations by claiming that berthing was difficult to obtain in timely manner.
Moreover, it was not felt that the buyer should be able to pass on demurrage charges to either seller or shipowner.
This rule simply points to one of the basic differences between the two sets of maritime terms, FOB and FAS on the one hand, and CFR and CIF on the other. With the ‘F’ rules, the buyer takes the risk that transport-related costs will turn out to be higher than he anticipated when he entered into the contract. For example, sudden rises in freight rates (after the signing of an FOB contract) will have a negative impact only on the buyer. With ‘C’ rules, sudden rises in freight rates are a problem for the seller. Thus, important fluctuations in the oil markets may have important repercussions on the different choice between ‘F’ rules and ‘C’ rules (because ocean freight is adjusted according to fluctuations in the cost of the oil which powers transport ships – this is known as the Bunker Adjustment Factor – BAF). Many transport contracts allow the carrier to adjust the freight quickly, in effect, by linking it to fluctuations in the bunker market.
[Page112:]
FOB – Terminal handling charges
National carrier asks – how is FOB term defined in Germany, Holland, Belgium and UK? Main interest concerns the responsibilities of the carrier and the division of cost concerning terminal handling charges under A.M. rule (shipper/receiver – who pays what?).
The Incoterms® rules book makes clear the general division of costs under FOB, and this division should be similar in all the countries mentioned. However, under the terms of FOB, customs of the port may determine particular aspects of the division of costs, but this can only be studied in each port separately. Prior inquiry as to the particular customs of a port is the only practical solution. The members of the Panel were not aware of the A.M. rule.
The Panel did not choose to also note with respect to this instance that the FOB term can cause difficulties when goods are delivered to a seaport terminal for intermediate storage or handling prior to loading on board. The seller does not transfer costs and risk to the buyer under FOB until the goods pass the ship’s rail, but in the case of delivery to a terminal the seller relinquishes control over the goods before they reach the ship’s rail. Moreover, an FOB buyer does not expect to pay for any handling costs incurred prior to loading. Therefore, it would seem that the best solution for the seller is use the FCA rule and precisely specify the point of delivery at the seaport terminal.
For the buyer, there are advantages in remaining with the FOB rule, in that the buyer does not incur any costs or risks prior to the goods passing the ship’s rail. One compromise is to use the FCA rule, but to add a notation that ‘costs up to ship’s rail for seller’s account’. That way the seller transfers risk when he delivers the goods, but the buyer does not have to pay for unexpected overseas handling charges.
[Page113:]
FOB – Transshipment
A freight forwarder is responsible for coordinating the shipment, taking delivery from vendors in Sweden (Helsingborg) and Finland based on the FOB Incoterms® rule, shipping the equipment to a port in Indonesia and carrying out custom clearance at the port of discharge. There is no direct shipment from Sweden to Indonesia and the goods have to go to Hamburg. Who has to pay for the Terminal Handling Charges which take place during the carriage of the goods; in this case in Hamburg? To what extent should the vendor pay for the loading cost? Is packaging included in a loading cost?
Under FOB, all horizontal charges connected with the delivery, before the critical point should be paid by the seller. The transshipment, including Terminal Handling Charges in Hamburg and all related costs, are for the buyer’s account, according to section B3 and B6.
Firstly, we assume that the contract refers to the Incoterms® rules and not liner terms, and secondly, that the Incoterms® rules used are FOB Helsingborg and FOB named port in Finland. As far as the FOB Incoterms® rule is concerned, the buyer has to enter, at his own expenses, into a contract for the carriage of the goods from the named port of shipment. However, customs of the port, customs in the trade or previous course of dealing can always impose a different solution. As for loading costs, it is necessary to distinguish between the Incoterms® rules, which are found in the contract of sale between the buyer and the seller, and liner terms, found in the contract of carriage between the transporter and his client. Under the Incoterms® rules, loading the goods on board is the seller’s responsibility. Note that packaging is generally not considered as part of the loading costs, although normal packaging is the seller’s responsibility under section A9 of the Incoterms® rules to the extent that the circumstances relating to the transport are made known to the seller before the contract of sale is concluded. If liner terms were used the loading and unloading charges would generally be included in the freight and then would be paid by the buyer. However, the ICC cannot pronounce definitively upon an interpretation of liner terms, since those are not ICC products.
Finally, note that in case of a containerized shipment the term FCA should be used instead of FOB.
[Page114:]
The Panel attempted to provide some general education in its response, apparently in the belief that the question was based to some extent on the very common misunderstanding amongst traders of failing to properly distinguish the contract of sale and the contract of transport. The Incoterms® rules should only appear in the contract of sale; that is the only place where they make sense.
It does happen (although the ICC opposes the practice) that a carrier will quote a freight rate on ‘FOB’ terms. Such a freight quote cannot involve Incoterms, which only regulate the relationship between the seller and buyer, and do not concern the carrier. However, when a dispute arises under a carriage contract which contains such an ‘FOB’ rule, it should not be surprising that some traders mistakenly assume that issues arising under the carriage contract are covered by the Incoterms® rules.
‘FOB Airport’ – Payment of dangerous goods fee
Under the FOB Incoterms® rule, who as between seller and buyer must pay the ‘airline dangerous goods fee’?
The seller believes that this fee should be paid by the buyer, because an FOB seller is not responsible for the main international transport.
Assuming that the contract is silent and that the charge is payable to the airline as part of the freight charges, the fee should, as between seller and buyer, be borne by the buyer. The Incoterms® rule FOB B3 makes it clear that the buyer must ‘contract at his own expense for the carriage of the goods ...’.
Incoterms 1990 normally give guidance as to the precise division of costs in term 6 of each Incoterm, which in FOB talks of costs before and after passage of the goods across the ship’s rail. This illustrates the difficulties caused when the FOB term is used for the sale of goods carried by air.
The better term for air shipments is FCA, which, under B6, obliges the buyer to pay all costs after delivery, which is in turn defined in A4 as ‘when the goods have been handed over to the carrier or to another person acting on his behalf.’ Thus, under the FCA rule, the airline dangerous goods charge would fall on the buyer (either when booking the space --under B3 – or when the [Page115:] goods are handed over, depending on when the charges are levied by the airline).
Note that the Panel’s answer is the same regardless of whether the parties have referred (as recommended) to FCA airport or whether they have referred to the term ‘FOB’ airport, which has been dropped from the list of valid Incoterms® rules.
Usage of FOB for airport shipments (‘FOB airport’) continues to be quite common, notwithstanding its absence from the roster of valid Incoterms® rules. The reason that FCA is preferable is that FOB may lend itself to an interpretation according to which the seller must load the goods ‘on board’ the aircraft. This can lead to disputes as to payment of charges incurred in the airport terminal. At least in this case, however, the costs are clearly related to transport; therefore, there would be no difference in result between FCA and FOB airport. The ICC continues to recommend that FCA be used in place of FOB for airport shipments, and that generally FOB be restricted to use in purely maritime contexts.
FOB – ‘Deadfreight’ claim
As between seller and buyer, under the FOB Incoterms® rule who must pay a ‘deadfreight claim’ by the buyer’s shipbroker, resulting from the ship loading lightweight?
A UK buyer bought solid fuel on terms FOB ‘stowed’ Incoterms®, payment by letter of credit negotiated in a London bank on basis of clean bill of lading. The buyer believes that the charge should be payable by the loadport freight forwarder, who was appointed by the seller.
Liability for deadfreight is imposed by the contract of carriage, and it therefore rests on the cargo interest who has contracted for the carriage of the goods, in this case the buyer.
Deadfreight is an incident of the contract of carriage and is a liquidated sum payable by a cargo interest, normally a voyage-charterer, for having failed to ship the quantity of goods which the cargo interest has undertaken to ship under the contract of carriage.
The buyer here is presumably attempting to recover from the seller deadfreight which he has paid or is [Page116:] bound to pay to the carrier under the contract of carriage. In the absence of any specific term in the contract of sale stipulating for such recourse – as is common, for example, with demurrage clauses – the buyer will have to bear this cost himself, and this for two reasons.
First, this is a liability under the contract of carriage, for which the cargo interest party to that contract is exclusively liable. Second, the division of costs in A6 and B6 provides no guidance, as a deadfreight charge can hardly be described as a cost ‘relating to the goods’: it is a liability under the contract of carriage for nonshipment of goods.
Finally, note that the term ‘stowed’ is not defined by the Incoterms® rules. Traders should be careful in using this type of provision that they understand the consequences --in terms of both division of cost and transfer of risk – of the modification.
FOB – What does it mean to ‘effectively’ pass ship’s rail?
As the Incoterms® rules are not published with an official legislative history and transcripts of the deliberations of the drafting committee are unavailable, we can only conjecture as to the meaning of the word ‘effectively’ in the above context. FOB was once applied more broadly than is counselled today, so that FOB was used even for those export shipments involving multimodal transport, roll-on roll-off ships (RO-RO), or containerized cargo (prior to Incoterms 1976). In the case of FOB shipments via RO-RO vessels, in particular, the issue of ‘effectively’ [Page117:] crossing the ship’s rail was important because the goods passed underneath the ship’s rail. However, since the advent of FCA it is no longer necessary today to specify ‘effectively’ for FOB, because Incoterms 1990 make it quite clear that shipments via RO-RO vessel, or involving multimodal transport or containerized cargo, call for the use of the Incoterms specifically-designed for such circumstances: FCA, CPT and CIP.
Thus, Incoterms® rule article B5 places on buyer the duty to ‘bear all risks of loss or damage to the goods from the time they have passed the ship’s rail’. Clearly, the drafters could have chosen to state ‘until the goods are safely deposited in the ship’s hold’ if that had been their intention. One could be confused here by the provision in the FOB Incoterms® rule A4 that the seller must ‘deliver the goods on board the vessel’, which could be interpreted wrongly to mean that the seller must safely deposit the goods on the ship’s deck or in its holds. The correct interpretation is that in the context of FOB A4, the meaning of ‘delivery’ is that the seller must, at his cost and risk, make sure that the merchandise has, in good condition, been hoisted over the ship’s side and is prepared to descend to the deck or the holds. The risks associated with the descent of the goods to the deck are for the buyer, as are all costs and risks associated with stowing and trimming the goods.
In an FOB sale, the obligation to make the contract of carriage lies, not with the seller but with the buyer. Consequently, the seller is not contemplated by Incoterms 1990 as the party who is likely to receive a bill of lading from the carrier and who will then tender it to the buyer.
Nonetheless, the seller is under a duty to tender the buyer the ‘usual document in proof of delivery’ (A8) and not the usual transport document. This envisages the seller procuring from the carrier a document such as a [Page118:] mate’s receipt, which the buyer will then exchange for a bill of lading by tender to the carrier.
It should be added, however, that the FOB contract is a flexible instrument. It is perfectly possible for the sale contract to stipulate, albeit incorporating Incoterms 1990, that the seller is to make the contract of carriage, or that he is to procure the bill of lading and then tender it to the buyer. This will nonetheless be an FOB contract, to which Incoterms 1990 will apply if incorporated, with additional duties imposed explicitly by the contract.
We assume that the question means that the seller and buyer have agreed that payment will be made against tender of a ‘clean on-board bill of lading’. Here, risk of loss or damage to the goods still passes across the ship’s rail. However, if the seller has, in addition to his basic duties under Incoterms 1990, undertaken the duty to tender a ‘clean on-board bill of lading’, he will not be in a position to make such tender, and he will not be paid by the buyer. In these circumstances, the seller is under two types of duty: documentary duties and physical duties. Although he has delivered the goods across the ship’s rail, he is not in a position to tender the documents stipulated for in the contract of sale and will not therefore be paid by the buyer.
1990 Editor’s comments and observations:
Is the traditional interpretation of FOB well-adapted to current transport practice?
One of the first things students learn about the Incoterms® rules is that costs and risks are divided at the ship’s rail. It is an ancient rule, the origins of which lie in early maritime practices. However, it is increasingly open to question whether this venerable rule actually reflects current practice. And if it does not reflect current practice, one should consider changing it, regardless of its venerable nature.
As for the practical division of costs in maritime transport, it is virtually never the case that these are split at the ship’s rail, as the Incoterms® rule provides.
Generally, the cost of hoisting goods over the ship’s rail and lowering them to the deck are considered as one indivisible cost, which is either included in the freight or not, and which is paid entirely either by seller or buyer. It[Page119:]is never the case that the cost of hoisting upward is divided from the cost of lowering to the deck. Moreover, the strict usage of the words ‘on board’ in FOB – ‘Free on board’ – can easily be misunderstood to mean that the seller’s obligation is to deliver the goods on deck or into the ship’s holds.
CFR – Transfer of risk point
A major Indonesian oil producer asks:
Apparently, in the enquirer’s experience, some counterparties are under the impression that the seller always remains responsible for loss or damage, throughout transport to port of discharge, and remains responsible for respecting a delivery date at port of discharge; moreover, the enquirer understands delivery date to refer to delivery in the port of departure and would like this interpretation confirmed.
Clearly, risk under CFR passes in the port of loading. However, a contractual promise of delivery by a certain date to the port of discharge raises the possibility of contradicting the CFR term, in that it implies that risk does not pass until delivery at the port of discharge. The Incoterms® rules cannot resolve the issue. An answer will depend on an interpretation of the contract and the attendant circumstances.
Under the Incoterms® rules, goods are delivered on board the vessel in the port of shipment, and any date mentioned in connection thereto normally refers to the date of delivery in the port of shipment.
Despite this clear rule under the Incoterms® rules, it is nonetheless possible that the parties decide to use the term ‘delivery’ in a different sense in a particular contract (for example, if the contract spoke both of a ‘date of shipment’ and then a later ‘date of delivery’). Thus, it [Page120:] could well be that a court would consider that the parties had mutually agreed to a modification of the meaning of term ‘delivery’ as defined in the provisions of Incoterms® rule CFR A4. Thus, if it could be established that the parties intended that the goods be delivered in the port of discharge by a certain date, then their express intention would supersede the Incoterms® rules. However, it would raise the further question of whether it was also the parties’ intention to alter the transfer of risk accordingly. This example shows how careful parties must be when changing the basic scheme provided by the Incoterms® rules: a modification of a cost or delivery provision may also alter the transfer of risk provisions.
One of the most common misconceptions concerning the Incoterms® rules is to think that the transfer of risk under CFR or CIF takes place at destination. It does not: it takes place at the ship’s rail in the port of departure, exactly as with FOB.
This misconception seems logical, because with CFR or CIF one identifies the name of the port of destination (e.g., CIF Singapore, for goods shipped from Los Angeles to Singapore), whereas with FOB one states the name of the port of departure (e.g., FOB Los Angeles, for goods a shipped from Los Angeles to Singapore). As a result, FOB is associated in the minds of traders with ports of shipment, CFR and CIF with ports of destination. But this leads to the erroneous conclusion that seller is at risk under CFR or CIF during the main international transport. Rather, the seller under CFR and CIF has precisely the same point of transfer of risk as under FOB: the ship’s rail. Once the goods have crossed the ship’s rail, all risks are for the buyer, equally true under FOB, CFR and CIF. In addition the CIF buyer will have obtained an insurance policy, but that does not eliminate the risk question or change the point of transfer of risk; moreover, there is always the question of whether the policy will be sufficient to satisfy any claims for damages.
[Page121:]
CFR – Unloading ‘liner out’
In the absence of any specific mention in the pro forma invoice or L/C, does a CFR price mean ‘free out’ or ‘liner out’?
It is clear under sections A6 and B6 of CFR and CIF that the seller will pay ‘any charges for unloading and discharge which may be levied regular shipping lines when contracting for carriage’. Thus, in the above question a factual determination would be required as to whether the transport was via ‘regular shipping line’.
As is specified at page 29 in the Guide to Incoterms 1990, ‘Liner shipping companies usually include costs of loading and discharge in their freight rates, but in charter party operations there may be provisions stipulating that the discharging operations should be wholly or partly ‘free’ to the carrier (‘free out’ stipulations)’.
As is further specified at page 79 of the Guide to Incoterms 1990, ‘In any case, the expression ‘liner terms’ is vague and ambiguous, and it is recommended that the parties specifically deal with the conditions of the contract of carriage in the contract of sale when carriage is not be arranged by regular, well-known shipping lines’.
Once again, the very wording of the questions indicates that the inquirer may not have fully appreciated the distinction between the Incoterms® rules – as terms of the contract of sale – and ‘liner terms’ or ‘free out’ provisions, which are forms of quoting freight rates under contracts of carriage.
Although there is no official definition of ‘liner terms’, it is perhaps safe to say that the common meaning assigned to this term is that the freight includes a certain amount of loading and unloading services. ‘Free out’, in contrast, implies that the freight does not include any unloading services. Both of these terms apply only to carriage contracts.
It is essential that the transport responsibilities under the contract of sale match up with the transport responsibilities under the contract of carriage.
[Page122:]
CFR – Unloading charges – Tramp vessels
Under the CFR Incoterms® rule, who must take care of unloading charges when tramp vessels are used?
A Russian state agency sold steel coils on terms CFR Karachi, with shipment via tramp vessels. A dispute arose as the division of unloading costs in the port of destination.
Under the CFR Incoterms® rule A3/B3 and A6/B6, it is clear that unloading charges in the port of destination are for buyer’s account unless they are levied by regular shipping lines as part of the freight.
CFR – Importer refusing to timely receive goods
In the event of CFR sales, is there anything a seller can do about the problem of an importer who does not accept the goods immediately upon arrival and seeks more or less to use the vessel as a floating warehouse?
The Panel’s opinion is simply that the CFR buyer is responsible for costs resulting from his failure to take timely delivery. The question did not state how in practice the buyer was able to defer delivery, and these facts may have been relevant.
CIF – Unloading costs
Under CIF, section A6, ‘Division of Costs’, we see that the seller must ‘pay all costs ... including ... charges for unloading at the port of discharge ...’. However, under CIF, section B6, we see that the buyer must ‘... pay all costs and charges ... as well as unloading costs including lighterage and wharfage charges’. Are these sections not contradictory with the respect to the seller’s obligation to pay for unloading in the case of a CIF sale?
As set forth under CIF, A6, the seller only pays for unloading charges if those charges are ‘levied by regular shipping lines when contracting for carriage’. That is to say, in the case of liner transport, if the unloading charges are included in the total freight paid by the seller, then the seller may not pass these on to the buyer.
[Page124:]
‘CIF landed’
In the case of a contract ‘CIF landed Rotterdam Incoterms 1990’, does the seller only have to pay for the discharging onto the quay, or does he also have to pay for discharging into the warehouse?
Aside from the observation that the definition of ‘CIF landed’ is not specified within the Incoterms® rules, the Panel did not set out a consensus decision as to allocation of such charges. It was noted that the only proof of ‘custom of port’ was a simple declaration of it.
What’s wrong with using CIF landed?
Unloading charges related to transactions involving the CFR or CIF Incoterms® rules are the source of continual dispute. One way that parties have sought to resolve the potential uncertainties is to add the word ‘landed’ to CIF, e.g., ‘CIF landed’.
The problem with this term is that it can lead one to wonder whether the parties did not intend to use a D rule, a delivered term which places all costs and risks of transport on the seller. ‘CIF landed’ seems to imply obligations on the part of the seller for actions after delivery, which is only consistent with a ‘D’ rule.
However, it is also possible that the parties clearly intended CIF landed simply to mean that the seller would be required to procure transport which covered any unloading costs at the port of destination.
CIF – Date of shipment
Under the 1980 Incoterms, CIF rule A4, the seller was obliged to deliver the goods on board the vessel at the point of shipment:
‘At the date or within the period fixed or, if neither date nor time has been stipulated, within a reasonable time…’
Under the 1990 Incoterms, this provision has been altered so that the seller must deliver the goods on board the vessel at the port of shipment.
‘On the date or within the period stipulated…’
It appears that the change places rather more emphasis on the specific date of shipment. In light of the trend in the oil trade towards contracts in which more significance is placed upon the date on which the cargo will be delivered, rather than the date of shipment,[Page125:]would the ICC please explain the reasoning behind the change in the 1990 text?
No change of substance was intended. A reference to ‘reasonable time’ does not add anything to what would apply anyway (cf. the 1980 Vienna Convention – if the parties fail to stipulate either a date or period, then the stipulation with respect to ‘within a reasonable time’ becomes applicable).
The 1990 Incoterms omitted a reference to ‘reasonable time’ since it was not felt to be necessary (it was felt that a reasonable time rule would be applied in any event). The concern of the questioner is a vivid indication of the degree of interest that professional exporters and importers have in establishing an absolutely perfect understanding of every nuance in the Incoterms® rules. The Incoterms® rules are important. But in this case the questioner’s concern was misplaced.
CIF – Customs costs
Certain Spanish importers who buy merchandise under CIF named point refuse to pay the costs that the transport company attempts to bill them via the transport company’s customs agent. These costs are for: the transport company’s intervention in the presentation custom declaration, verification and control of the merchandise, supervision of the transfer or unloading of the merchandise, etc.
It sometimes arises that the importer refuses to pay the customs agent for expenses the agent has undertaken, because the importer considers that said costs are included in the transport price. Under the Incoterms® rules, should the above operations realized by the transporter or his representative be paid by the importer of the merchandise?
C rules under the Incoterms® rules clearly place the costs or import clearance on the buyer. The operations of import clearance should not be considered as included in the transport price paid by the exporter of the merchandise. Strictly speaking, the term ‘CIF named point’ does not appear in the Incoterms® rules, since the only relevant point is the passing of the ship’s rail in the port of loading (especially with inland destinations, CIP should be used instead of CIF). If something else is [Page126:] intended, the CIF term should not be used. With respect to the allocation of custom costs and risk under D rules, see the ‘Incoterms 1990’ themselves or the ‘Guide to Incoterms 1990’. ‘Free delivered’, ‘CIF Spanish frontier’ or ‘Free Spanish frontier’ are not Incoterms® rules.
Who pays the customs man under CIF?
Clearly, under the Incoterms® rules import customs duties and formalities are for the buyer. However, this question provides an interesting view on the way that disputes can arise under the Incoterms® rules. Small traders rely more and more often on all-purpose freight forwarders to arrange transport, and sometimes these forwarders will also perform customs formalities. The forwarders are constantly required in practice to discern the appropriate splitting of costs under the Incoterms® rules.
Sometimes the forwarder gets the appropriate division wrong, and sometimes (as in the above case) the forwarder or agent gets it right, but the trader does not understand why he is receiving a bill from a transport company (even though in this case it is appropriate for the buyer to receive a bill for customs clearance services performed by the forwarder). This question demonstrates why it is so important for the international freight forwarding community to understand the Incoterms® rules, and it is laudable that FIATA (the international federation of freight forwarding associations) has sought to play a more important role in the development and dissemination of the Incoterms® rules.
CIF – Additional 10% insurance cover
With respect to CIF, section A3, why is the minimum insurance cover specified to be the contract price plus 10% (i.e., 110%)? The purpose of the insurance coverage is to cover the value of the goods at destination. Therefore, the additional 10% represents a ‘profit’ to third parties. Why is this necessary?
The idea of an additional 10% goes back to 1906 and the Marine Insurance Act. The purpose is to cover the average profit which buyers of goods expect from the sale. In fact, this excess insurance is a general custom in certain trades and countries, and was incorporated in the very first edition of the Incoterms® rules in 1936.
For example, in the cocoa trade, the custom is to cover the invoice price plus 12.5%. In France, international sales [Page127:] contracts are sometimes insured for up to 20% over the invoice value (though this is only the case for contracts involving international transport). However, there is nothing in the Incoterms® rules that prevents the parties from agreeing to more or less than 110% coverage, provided that both parties to the contract of sale make an express agreement to that effect.
It should be noted that the CIF Incoterms® rule insurance requirement can have a major impact in a documentary credit situation.
CIF – ‘Destination delivery charges’ (DDC)
Under the CIF Incoterms® rule, who as between seller or buyer pays for ‘DDC’ (‘Destination Delivery Charges’) costs? BAF (Bunker Adjustment Fuel Surcharges) costs?
Shipments of Chinese goods sold on a CIF Incoterms® rule basis, unloaded in US and Canadian ports. The bills of lading are marked ‘DDC collect at destination’ and ‘BAF collect’, and the total outstanding balance is listed in a box marked ‘Freight amount to collect’ or simply ‘Collect’. The carrier requests payment from the buyer. The main freight was pre-paid. For the purposes of this answer, DDC are understood to be charges generally associated with unloading and handling charges in the port of destination, and BAF are understood be a freight adjustment factor used to account for fluctuations in the price of shipping fuel.
It is necessary to draw a distinction between two quite separate questions, i.e. whether the carrier can claim DDC and BAF charges from the buyer, and whether, if the buyer pays the carriage for these charges, he is entitled to recovery from the seller.
The first question is answered not by Incoterms 1990, nor indeed by the contract of sale, but by the contract of carriage between the carrier and buyer (although it is the seller who has arranged transport), presumably contained exclusively in the bill of lading.
The second question is more properly an incident of the contract of sale, and again, the starting point should be the contract itself rather than Incoterms 1990. Thus, if the contract expressly excludes the tender of documents ‘collect’, then the seller is clearly in breach, and if the buyer has reserved his right to damages on [Page128:] accepting the documents, then the buyer can recover these charges from the seller.
Guidance on the second question is to be sought in Incoterms 1990 if the contract is silent, and the answer here is clear and as follows:
CIF – Quay dues at destination
In CIF oil cargo shipments under Worldscale Charter party terms, may the seller pass on to buyer those quay dues (‘taxes d’accostage’ – charges for the use of oil docks) which, under Worldscale provisions, are for charterer’s account rather than shipowners?
The Incoterms® Panel is of the opinion that a seller wishing to pass on quay dues as above to the seller should specifically stipulate to that effect in the contract of sale, e.g. ‘CIF Incoterms 1990 quay dues for buyer’s account’. Failing such a stipulation, it is possible that the facts in a given case (custom of trade, prior course of dealing, port custom, etc.) may justify passing these costs on to buyer, but such factual determinations are not within the ambit of the Incoterms® Panel.
The instant case is a difficult one in that the situation is not explicitly addressed in Incoterms 1990. In attempting to interpret the general terms of Incoterms, and particularly the wording of sections A4/B4 and A6/B6 of the CIF Incoterms® 1990 rule, it is in fact possible to arrive at different conclusions. Indeed, the initial response of the Incoterms® Panel on this question was not unanimous. Nonetheless, after due reflection the [Page129:] Incoterms® Panel is of the opinion that the better interpretation of Incoterms is that the seller may not pass on quay dues to the buyer (provided, as stated above, that the factual situation does not indicate an implicit agreement to the contrary).
Let us now examine the reasoning underlying the two opposed points of view, so as to explain the basis for the decision of the Incoterms® Panel.
Worldscale Terms
In the basic case referred to the Incoterms® Panel, an oil cargo is shipped under Worldscale Charter party terms to a particular port. Worldscale terms represent a standard framework for charter-parties in the oil trade. Under Worldscale terms, quay dues are allocated between charterer and shipowner depending upon the port of discharge. In the case we are considering here, the Worldscale terms indicate that the quay dues are for the charterer’s account. The Incoterms® rules, however, only govern the sales contract between the seller and the buyer, whereas the charter party is an entirely separate contract, with different parties and different terminology. The buyer, for example, is not a party to the charter party contract. Thus, the fact that the charter party allocates certain charges to the charter (who is for our purposes the same party referred to as the ‘seller’ in the contract of sale governed by Incoterms) does not necessarily preclude the seller from passing these charges on the buyer, provided the seller is justified in doing so according to the Incoterms® rules. In this case, as we have stated above, we believe this justification to be lacking.
Seller’s arguments for passing on charges
In the case considered here, the arguments that the seller makes in order to justify transferring the quay dues to buyer are as follows:
The seller must ‘pay ... any charges for unloading at the port of discharge which may be levied by regular shipping lines when contracting for carriage’; [Page130:] and CIF B6 reads:
The buyer must ‘pay all costs relating to the goods from the time they have been delivered and, unless such costs … have been levied by regular shipping lines ... pay all costs and charges related to the goods ... as well as unloading costs in question including lighterage and wharfage charges’.
Buyer’s arguments for refusing to accept charges
Buyer’s arguments are as follows:
Thus, under CIF A3(a):
The seller must ‘contract ... at his own expense for the carriage of the goods to the named port of destination’;
and under CIF A6:
The seller must ‘pay all costs relating to the goods until they have been delivered ... as well as the freight and all other costs resulting from A3(a)’;
As stated above, the Incoterms® Panel finds that the buyer’s arguments are more persuasive than the seller’s. To allow the seller to pass the quay dues on to the buyer would require a hypothetical, excessively technical reading of the CIF rule’s provisions, one which the unsuspecting CIF buyer would not likely have noticed from an initial perusal of the Incoterms® rules prior to signing the sales contract. Given the uncertainty surrounding the interpretation of the CIF rule in a charter party context, we feel that the best solution for a seller wishing to pass quay dues on the buyer in the above-stated context is to explicitly put the buyer on notice of this intention, as by specifying in the contract of sale: ‘CIF Incoterms 1990 quay dues for buyer’s account’.
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However, this does not at all imply that a given fact situation may not indicate a different outcome. If the two parties have a long history of trading in which the buyer/receiver has always paid, or if it is a custom of trade or of port for the buyer to do so, then factual determinations are beyond the scope of this Panel, and therefore the above opinion is only intended a general interpretation of the Incoterms for future reference, and is not meant to apply to or prejudice any specific case currently or previously in dispute.
The depth of analysis required to answer the above question indicates that the rule of interpretation in the Incoterms® rules is probably not yet sufficiently clear; in fact, the Panel of Experts was not unanimous in supporting the above answer.
CFR/CIF – Transfer of risk point/insurance
Why is the point of transfer of risk the same under CFR and CIF?
The only intended distinction between CFR and CIF is that with CIF the cost and obligation of procuring an insurance policy are the responsibility of the seller, and are therefore included in the price. However, the point of transfer of risk is indeed supposed to be the same in both cases.
What is the difference between risk and insurance?
Traders frequently fail to appreciate that usage of the CIF rule does NOT mean that transport risk is transferred to the buyer; rather, it merely means that the buyer is protected against transport-related risks by the seller’s provision of the required insurance policy. But keep in mind that the insurance policy may not be sufficient to cover potential damages, or may contain exclusions for common types of losses, such as those due to theft. So it is not correct to think that CFR and CIF involve different points of transfer or risk, as the questioner apparently did.
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DES – Legal obligation to insure v. Commercial need to insure
With respect to the DES Incoterms® rule, section A3(b), stating ‘Contract of Insurance – no obligation (on seller’s part)’ is this provision not misleading, in that the seller clearly does have an obligation to himself to insure for risk of loss or damage until the goods arrive at ship’s rail at the discharge port?
As is clearly explained in the ‘Guide to Incoterms 1990’, the Incoterms® rules only specify those obligations owed by one party to the other party; the Incoterms® rules do not specify those actions which may be prudent or practical for a party to carry out in his own interest. Obviously, in the case of DES, it may very well be prudent for the seller to take out insurance, but he has no ‘obligation’ to the buyer to do so. (See Incoterms 1990 book, page 8, under No. 5.)
Particularly with regard to insurance, traders frequently misunderstand the absence of an Incoterms® rule requirement (in all the Incoterms® rules except CIP and CIF). Traders mistakenly think that the absence of the legal requirement suggests that there is no need to self-insure. This is a result of failing to distinguish legal obligations from commercial necessities. Both are necessary considerations for the business person, but Incoterms only deal with bi-lateral legal obligations in an international sale transaction.
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DES – Quay dues
In the case of a gasoil shipment under the Incoterms® rule DES at destination Fos, who must pay for quay dues (taxes d’accostage) levied upon the ship?
The seller should pay quay dues because DES requires the seller to berth the ship and quay dues are levied upon the berthed ship.
As a general principle charges levied upon the cargo are for buyer’s account, whereas charges levied upon the ship are for seller’s account.
With the DES Incoterms® rule, the point of delivery (and therefore of transfer of costs and risks) is on board the ship at the port of destination. As compared to CIF, where the point of transfer is at the ship’s rail in the port of departure, with DES there is greater reason to allocate quay dues to the seller. However, in specific cases, customs of port or trade or prior course of dealing may override the above principles and indicate a different outcome.
Compare with Question No. 36, which dealt with a similar issue. It is also interesting to note the number of Incoterms® rule queries that arrived from the petroleum or gasoil sector – this would seem to make sense because petroleum shipments are very often large bulk transfers, so that issues of loading, berthing, etc., that might not be ‘worth fighting about’ for small exporters, can assume major proportions when the cargo in question is a large petroleum shipment.