Incoterms_® and Commercial Contracts

Preliminary remark: ‘Free on Board’ means that the seller is to deliver the goods on board the vessel nominated by the buyer at the named port of shipment (or to procure goods already so delivered). The named port of shipment may or may not be situated in the seller’s country.

The use of ‘Free On Board’ may be appropriate for goods that don’t ‘fit into a container’ such as bulk goods that are loaded/pumped/… directly on the ship from the seller’s means of transport or facilities in the port of departure.

However, when the goods are in containers, it is common for the seller to hand the goods over at a port terminal, where the goods are stored awaiting arrival and loading of the vessel, rather than actually placing them on board a ship. That terminal will often be nominated by the buyer’s ocean carrier. In such situations, the FOB rule would be inappropriate, and the FCA rule should be used.

‘Free On Board’ may not be an appropriate delivery condition, as it often contradicts logistical reality. Further, a seller should act cautiously when agreeing to load a ship with which it has no contractual relationship. Despite this, FOB remains a popular Incoterms® rule because when placing goods ‘on board’ the ship:

1. the seller brings the goods physically outside the customs territory as the ship’s rail is often qualified to be the ‘imaginary customs border’. This may facilitate some administrative formalities (customs valuation, VAT exemption, …);
2. delivery may be executed against a (negotiable) B/L as opposed to the receipt document that is issued upon arrival in terminal.¹

An on board B/L will often be the required document of delivery when payment is executed under a documentary credit² or documentary collection.

How are goods handed over to the carrier?

‘Free On Board’ means that the seller has to deliver the goods at the named port of shipment by placing them on board the vessel nominated by the buyer at the loading point, if any, indicated by the buyer (or by procuring the goods so delivered).

Exactly how this delivery is executed is to be interpreted in accordance with the customs of the named port of departure, if any. Such 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 (liquids, gaseous products, bulk, conventional shipments, …) and the type of vessel frequently dictate how loading is accomplished.

In the absence of customs 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. All operations thereafter (stowing, trimming, securing, …) are at the risk and expense of the buyer.³ If goods are dropped during loading and land on deck causing damage, this would be considered to be still at the risk of the seller, since placing goods on board does not contemplate a process that results in damage. However, if the goods were considered to be already ‘on board’ when under ship’s tackle, the risk would be with the buyer.⁴

If the parties have agreed that delivery should take place within a time period, the buyer has the option to choose the date of delivery within that period. The FOB buyer and the carrier should agree on the date and on the point of taking over the goods (the ‘loading point’) in the port of shipment and note that in the transport document. The buyer must notify the seller the name of the vessel, selected time within the period agreed for delivery when the vessel will take the goods, quay of taking delivery (loading point) within sufficient time as to enable the seller to deliver the goods on board the ship. Failing receipt of precise notice on the loading point and the selected delivery time (‘preadvice’), the seller may use its discretion to select a point in the named port of shipment that best suits its purpose, and the delivery time within the agreed period.

Where the buyer has indicated 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 without extra cost.

The carrier nominated by the buyer must then take delivery of the goods on behalf of the buyer.

The seller must, at the buyer’s risk and expense, give the buyer sufficient notice either that the goods have been delivered in accordance with A4 or that the vessel has failed to take the goods within the time agreed.

If the buyer fails to notify the name of the vessel and the loading point, or if the vessel nominated by the buyer fails to arrive on time, or fails to take the goods, or closes for cargo earlier than the time notified, the buyer must reimburse the additional costs incurred by the seller. The buyer also bears all risks of loss of or damage to the goods from the agreed date or the expiry date of the agreed period for delivery, provided that the goods have been clearly identified as the contract goods.⁵

Unless the manner in which the goods were delivered to it precludes this, the carrier will verify whether the apparent condition of the goods and/or their packaging allows for a safe journey. The carrier may also verify the apparent nature, quantity, dimensions and weight of the goods. When the seller delivers goods already stuffed into a container, the carrier will not be in a position to do so, and the transport document will contain such reservations as ‘shipper’s stow load and count’, ‘said to contain’ and/or ‘sealed by shipper’.

In order to synchronize arrival of the goods and the vessel in the port and/or warrant timely arrival of the ship for L/C purposes, it may be practical for the FOB seller to nominate a vessel on behalf of the buyer. In this situation, when carriage has been contracted on terms that do not include stowing and trimming within the ship (such as FIO LSD⁶ terms), handing over the goods to the carrier may also require the seller to stow and trim at the buyer’s risk and expense.

When and how are goods made available to the consignee?

The Incoterms® rules do not deal with the receipt of the goods by the buyer from a carrier that it nominated.

In the special case where the FOB seller arranges carriage on behalf of the buyer, the buyer must receive the goods from the carrier at the place of destination of the contract of carriage made on usual terms by the seller at the buyer’s risk and expense.

Who shall pay the price for transport?

The carrier acts on the basis of a contract of carriage entered into with the FOB buyer. Therefore, it is for the buyer (usually also the consignee) to pay the price for transport from the named port of shipment.

Note: in order to deliver the goods on board the ship contracted by the buyer, the seller may have to contract another carrier to transport the goods to the named port of shipment (‘pre-carriage’). The costs and risks thereof are for the seller. Sellers are advised that such transport to the port will often not include unloading from the arriving means of transportation, port handling and loading of the ship. Unless port customs provide differ­ently, all the cost and risks thereof are for the FOB seller.

In the special case where the FOB seller arranges carriage on behalf of the buyer, the seller may try to instruct the carrier to collect the price for transport from the buyer. If the carrier does not consent and the seller ends up paying the price for transport to the carrier, the seller may claim reimbursement from the buyer.

When a party is named as the shipper on the bill of lading, it will often be presumed to be the contracting party to the contract of carriage and thus the debtor of the price for transport and all its adjustments and supplements. A party that is named as (material/documentary) shipper solely for the fact of having handed over the goods to the carrier without having contracted for carriage might find it useful to decline any characterization as contracting party to the contract of carriage upon receipt of the bill of lading.

What additional costs can be added to the price for transport?

The buyer has to pay all costs from the moment of delivery (price for transport + additional costs).

FOB-buyers are advised that marine carriers, when offering a price for transport, often also use the abbreviation ‘f.o.b.’, which is a shipping term being part of the contract of carriage. Their offer will however not automatically correspond to the cost and risk splitting operated under the Incoterms® rules but will be subject to the conditions applied by the marine carrier⁷ that may include in its f.o.b.-price for transport

• transit from the port terminal to the ship (in full liner terms)
• loading (in liner in)
• loading after attachment to the ship’s tackle (in ‘hook’)
• handling after arrival on board (in ‘free in’)
• only sailing (in ‘free in LSD’)

As delivery is, subject to port customs, executed upon placing the goods on board the ship, it would be sufficient for the buyer to contract for carriage on ‘free In’ terms. However, the contract of carriage should always include an obligation for the carrier to ensure proper stowage and securing of the goods after loading. The buyer should typically be liable for demurrage costs incurred at the port of loading, either directly to the carrier or through the contract of sale.

Additional costs caused by the seller delivering the goods at a point other than the one named by the FOB buyer and/or another moment or within another period as agreed, have to be paid (or reimbursed) by the FOB seller.

In the special case where the FOB seller has arranged carriage on behalf of the buyer, the carrier may turn to the seller should the buyer/consignee refuse to pay supplementary transport costs. The FOB seller who gives instructions to transport goods is bound by the transport agreement in spite of the fact that seller sold using the Incoterms® rule FOB. The seller may claim reimbursement from the buyer.

Is there a variable part to the price for transport (‘adjustment factors’)?

The buyer has to pay all costs from the moment of delivery on board the ship in accordance with A4 (price for transport + additional costs).

In the special case where the FOB seller arranges carriage on behalf of the buyer, the seller may try to instruct the carrier to collect the price for transport and any adjustments thereof from the buyer. If the carrier does not consent, the seller may claim reimbursement of any payment made from the buyer.

When is the price for transport payable?

The contract of carriage between the FOB buyer and the carrier will normally specify when the freight is payable. The buyer and the carrier may agree that freight is payable upon departure, usually indicated by the words ‘freight prepaid’ or ‘freight in advance’, or upon arrival – ‘freight collect’ or ‘freight payable at destination’. This will typically be agreed on booking, be included in the transport contract and subsequently be restated in the transport document. It should be noted that the transport contract often contains further provisions with respect to the payment of freight.

In the special case where the FOB seller arranges carriage on behalf of the buyer, the seller may try to instruct the carrier to collect the price for transport and any adjustments thereof from the buyer. If the carrier does not consent, the seller may have to pay for carriage at departure and claim reimbursement from the buyer.

How are the goods to be packaged?

Unless agreed otherwise, the goods must be packaged in a manner ‘appropriate for their transport’. ‘Appropriate for their transport’ is not equal to ‘reasonable’ or ‘usual’ but refers to a fitness for the purpose of transportation. This comprises qualities such as ‘apt’, ‘becoming’, ‘befitting’, ‘belonging’, ‘right’, ‘suitable’, and to this purpose verifiable by the carrier.

As the FOB Incoterms® rule refers to marine transportation, the seller will need to choose a packaging ‘appropriate’ for transportation by sea.

Note that, when correctly used, the marine Incoterms® rules are often used for ‘the type of goods sold unpackaged’. The indication on the transport document ‘unpacked’ does therefore not automatically mean that the goods have not been ‘appropriately’ packed for their transport. It may be ‘usual for the particular trade to transport the type of goods sold unpackaged’ (some agricultural goods, mineral products, breakbulk, …).

Is the seller or the buyer responsible for customs clearance?

When selling goods leaving for a destination outside of the customs territory, it is up to the FOB seller to carry out all customs formalities necessary for the transport (transit) to and the export of the goods from the named port of delivery/departure at its own risk and expense. This includes any export license or other official authorization that may be required. Customs formalities after departure from the named port of delivery (transit, import) are to be carried out by the buyer at its own risk and expense.

A delivery ‘on board’ the ship from an administrative point of view often equals a delivery beyond the customs territory. At that moment, all the information regarding the export of the goods the seller may need for, e.g., taxation or reporting purposes, should be available and all the customs formalities should have been completed.

The buyer must provide the FOB seller, at the seller’s request, risk and expense, assistance in obtaining any additional information⁸ the seller might need to accomplish export formalities and may have to instruct its carrier accordingly.

To avoid inconsistency, the instructions to the carrier, customs broker or freight forwarder should be in line with the assignment of obligations of the seller and the buyer regarding customs clearance under the FOB Incoterms® rule.

Who is responsible for stowage and cargo securing?

In the absence of customs 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 at the first point of rest on the vessel. All operations thereafter (stowing, trimming, securing, …) are at the risk and expense of the buyer. The buyer should therefore, when contracting for carriage, instruct the carrier to include stowage, cargo securing and any other aspect of loading the goods on the ship in the transport contract.

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. Passage of risk would likewise be delayed. Under any variant of an Incoterms® rule, parties are strongly encouraged to make their intent clear in their contract of sale⁹ in order to be sure about allocation of costs and risks.

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.¹⁰

What sort of transport document should be issued by the carrier?

In FOB sales the seller must provide the buyer, at the seller’s expense, with the usual proof that the goods have been placed on board of the ship nominated by the buyer at the named port of shipment (or have been procured so delivered) in the manner customary at that port. The buyer is to accept this proof of delivery. This proof may or may not be the actual transport document. This is because under FOB, the normal situation is that the buyer contracts for carriage, and the transport document is issued to the buyer.¹¹ In such situation, the seller is obligated only to assist the buyer in obtaining a transport document, if the buyer so requests.

The seller is advised to instruct the FOB buyer¹² to stipulate, when contracting for carriage, that the carrier must provide an acknowledgment of receipt (e.g. a mate’s receipt) to the seller.

Most international conventions for transport by sea and inland waterways require the carrier to deliver a specific transport document in respect of cargo received for carriage. This transport document serves as proof that goods have been taken into the custody of the carrier and as the place to note any reservations about to the goods. In other situations, the transport document might be used in a way that only the holder of the transport document is entitled to claim the goods (such as with a negotiable Bill of Lading).

As a general principle, it is accepted that the person who is the holder of the mate’s receipt or who is named as the (material/documentary) shipper on the bill of lading is usually entitled to obtain the bill of lading from the carrier. Where the bill of lading however names the FOB buyer as the shipper, or the seller has no interest to obtain the bill of lading, it might not be entitled to obtain the bill of lading without the consent of the FOB buyer.

Where the FOB seller arranges carriage on the buyer’s behalf in accordance with the special provision in A3a) of the FOB Incoterms® rule, the FOB seller is a contracting party to the contract of carriage and would be entitled to obtain the bill of lading from the carrier.¹³

If the buyer asks the carrier to arrange for customs documents (invoices, packing lists, certificates of origin,…) the carrier is not obliged to do so. Whenever the carrier accepts this request, particular attention should be paid to these documents which are very much formalized, in particular to the mode of transport, the goods, the applicable law and regulations and the status of the transport buyer and the carrier.

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