ICC Digital Library Forum

In ISBP, ICC Document 470/951rev3, under paragraph 100, it states:

"For example, the fact that a bill of lading may indicate that freight has been prepaid under an EXW, FAS or FOB Incoterms is not, in itself, reason for refusal, unless the credit requires the document to be marked freight collect".

We welcome opinions from bankers and particularly non-bankers for such ICC opinion.

www.tolee.com

[edited 8/20/02 6:04:26 PM]

T.O.

This is another example of the "left hand not knowing what the right hand is doing".

On the one hand ICC's Incoterms 2000 states that it deals with "the obligation to provide proof that the respective obligations have been duly fulfilled" (Introduction #1).

On the other hand, ICC's ISBP says that we can ignore this for the purposes of UCP.

This obvious conflict weakens both hands.

Laurence

Gentlemen,

I attended a seminar, on 2 Nov 99, organised by ICC UK -to 'launch' Incoterms 2000- and chaired by Prof Charles Debattista, Chairman of the Incoterms 2000 International Drafting Group. The learned Prof made the point that the “Incoterms do provide a good template of standard default [the word ‘default’ is italicised in his notes] terms”. In other words, just like UCP, the provisions of Incoterms 2000 apply unless the relevant contract provides contrary provisions. Therefore, it is quite possible that the buyer & seller have agreed a contract on an ‘EXW, FAS or FOB’ basis (however illogical this may appear), but that the seller will pay the freight. We as bankers cannot speculate on the particular terms of the underlying contract. Also, I cannot see the buyer will have suffered any obvious harm if the seller has paid the freight.

Given the high level of discrepancies documents suffer, I would have thought anything that is likely to increase levels of compliance would be welcome, particularly by any parties that have the beneficiary’s interest at heart.

Jeremy

[edited 8/21/02 1:03:32 PM]

Jeremy,

PURPOSE OF INCOTERMS

You regard that it is OK for a DC to specify FOB and yet the parties may make the freight payable by the seller. This is destroying the very purpose for the creation of Incoterms – to standardise the rights and obligations of the sellers and the buyers based on harmonized trade practices from different trades to reduce confusions and trade disputes.

MORE CONFUSIONS AND DISPUTES BY ABUSES IN USE OF INCOTERMS

In your case (using “FOB” where the freight is agreed by the parties to be paid by the seller) you are simply trying to do the opposite – to increase the disputes amongst parties by bringing in more confusions. Although this is however good news for consultants like Laurence and us, we do not wish to increase our business by such unethical means. Incoterms allow parties to modify the standard rights and obligations but not to such an extent to create more confusions and disputes.

USA DEFINITIONS OF TRADE TERMS NOW REPLACED BY INCOTERMS

In the US Definitions of Trade Terms, we may do have six kinds of FOB – which is also known as “FOB everywhere”. But due to the confusions it could create amongst the parties, now US Definition of Trade Terms is replaced by Incoterms in USA. As an UK banker, you appear to re-open the Pandora Box.

BUYER MAY HAVE TO PAY 5% MORE IN JEREMY TYPE OF FOB

You regard FOB with freight paid by seller is advantageous to the buyer/applicant. Hence you conclude that it should not be rated as a discrepancy. This statement leads us to think that that you may not have actual trading experience and never practice MBWA.

Your statement is incorrect. With deeper thoughts, by buying with FOB with freight paid by the seller gives no advantage to the buyer at all! Why?

One Chinese word of wisdom says: “A seller will not make mistakes in selling. Only a buyer does”. That means even if the seller agrees to pay freight in FOB, he loses nothing as in his FOB calculation, he should have already added the fright on, and maybe also topping it up with 5% to accommodate any future freight increase due to CAF (not to mean C&F but to mean Currency Adjustment Factor) and BAF (Bunker Adjustment Factor). So the buyer may end up paying 5% more than the situation that he was to pay the fright by himself. I often made such 5% accommodations when I was in import export business. Sellers seldom make mistakes in pricing although they make a lot of discrepancies in their presented documents.

WHAT ABOUT CIF WITH FREIGHT PAID BY BUYER?

On the reverse situation, what about if the DC calls for CIF where the BL shows freight collect? Is this a discrepancy since the buyer may have to pay double freight, if the seller is shrew enough?

We strongly advise bankers to acquire more knowledge on transport and insurance in order to broaden their visions and to determine discrepancies more accurately and confidently.

Those who wish to go in more depth on this issue may read our comments to ICC Banking Commission now posted in our website.

www.tolee.com

[edited 8/21/02 5:15:16 PM]

Jeremy,

although it is true that there are 13 standard Incoterms, there is provision for customising these to suit any contractually agreed terms and conditions. This is a point often missed on those who infrequently use these terms or only have experience of the standard terms. So, for example, it may be possible to contract on FOB terms, but with the buyer responsible for export documentation. This does not change the essential nature of FOB, but if the parties were to agree FOB with the buyer to pay freight, this DOES change the essential nature of FOB & it would therefore be inappropriate to use the term in this way.

To permit this as acceptable under UCP is sending out the wrong message to those who would use Incoterms. We would therefore be saying that any Incoterm is acceptable to denote any contractual terms & conditions. Bearing in mind that the DC checker will not see the contract specifying the agreed terms, what can he/she use to verify compliance with the requested term in the DC ? Unless the DC specifies otherwise, if a standard Incoterm is mentioned, that is the standard by which the document checker should check the documentation. Otherwise what is the point of trying to agree on standard terms ?
One part of ICC is saying that Incoterms is a worldwide standard for contractual terms, but another part of ICC is saying that we should pay no heed to any such standard. Are we trying to portray the ICC as a schizoid organisation ?

Laurence

It is quite common with some importers to request for an FOB credit but require the bill of lading be marked "FREIGHT PREPAID".

We see in the application a clause similar to the following.

"Bill of lading to be marked FREIGHT PREPAID as per special agreement with beneficiary" OR

“Bill of lading to be marked Freight Prepaid, freight charges are payable to beneficiary outside the terms and conditions of the credit”

or

“Bill of lading to be marked Freight Prepaid, freight charges are payable in addition to LC value against actual freight invoice not exceeding ………………………”

Dear Abdulkader,

REASONS WHY INCOTERMS ARE ABUSED BY PARTIES

As a trainer and consultant, we are not surprised to see in FOB DC, the DC calls for freight to be prepaid by the seller/beneficiary. The reasons are many, to name just a few:

1 The parties, including some (not all) bankers, do not know Incoterms to such an extent that they can be protected by the Incoterms, although they use them in the DC.

2 Then you may ask why they use Incoterms which they don’t know adequately to protect themselves? Because the Incoterms is a “default” term/condition (to borrow a computer jargon here) in the DC application form and nobody wishes to rock on the boat. So they play safe and follow. In fact this is not safe at all, to use something one is not familiar with.

3 Human beings have the basic need to create. Unfortunately, parties use creativity in the wrong direction. They should exhibit their creativity in photography, videos, hi-fi, painting, music and other forms of fine arts as I do. For example, my home theatre and hi fi system cost only 10% of the value of my friend’s system but the performance of my system is 90% as good.

4 Parties seriously lack of good training on Incoterms.

5 It is not so dangerous if one is aware that he does not know Incoterms. From our experience, the most dangerous thing is that one thinks that he knows Incoterms but in fact he does not. The terms in DCs quoted by Abdulkader are good examples. The parties should have used CFR for freight being paid by the seller/beneficiary. Otherwise why should we need CFR?

6 As already pointed out by Laurence, the Incoterms allow parties to change only the non-core terms, but not the core-terms, which form the backbone to differentiate one Incoterm form another. An angel is an angel but we may paint an angel with long wings or short wings. However, we cannot replace the wings with the horns borrowed from the devil! Otherwise the angel is no more an angel in essence. She is transformed into a different thing – a devil.

WHAT IS THE PURPOSE OF PARAGRAPH 100 IN ISBP REV3?

What is the purpose of paragraph 100 of the ISBP, ICC Document 470/951rev3, that states:

"For example, the fact that a bill of lading may indicate that freight has been prepaid under an EXW, FAS or FOB Incoterms is not, in itself, reason for refusal, unless the credit requires the document to be marked “freight collect’".

Is the purpose to encourage abuses in Incoterms?

AN INCONSISTENT DC CREATES AN INCONSISTENT BL

In the examples given by Abdulkader, where the FOB DC calls for freight prepaid, then presentation of a FOB BL showing freight prepaid cannot be deemed as discrepant because of two reasons:

1 The BL complies strictly with the DC terms and conditions.

2 If the DC itself is inconsistent, to comply with an inconsistent DC, the BL must be inconsistent too.

Although Laurence and we, as consultants and court experts, should have welcome such abuses to bring us more business. However, we don’t want to waste our valuable time on such disputes which should have happened or should have been avoided. Our limited time should more effectively be used to resolve some more worthwhile cases, since we do not worry about our businesses. Hope Laurence would agree on all fronts.

www.tolee.com

[edited 8/24/02 6:02:31 PM]

T.O.

A LITTLE KNOWLEDGE IS A DANGEROUS THING

Some peoples knowledge of Incoterms is limited to being able to expand the 13 acronyms and they assume the rest. This leads to what computer "techies" describe as GIGO (garbage in, garbage out). In other words, if your input is flawed, so will be your output.

Last year, the Banking Commission agreed to have better liaison with the other ICC Commissions, but ISBP appears to be in conflict with Incoterms. Do you know if other Commissions were consulted regarding ISBP, especially the Commission responsible (Comm. on International Commercial Practice) for Incoterms ?

If ISBP is accepted in its present draft, both Incoterms and ISBP will suffer from this inconsistency.

In addition to consultancy, I also lecture on the various aspects of international trade, including UCP 500 and Incoterms. With the introduction of ISBP, this will also have to be included with UCP, but many of my students will take both lectures. How will I answer their questions on the inconsistencies between ISBP & Incoterms ? If one accepts ISBP as valid, Incoterms cannot be & v.v.
I do not want to be placed in the situation of recommending to my students which of the two to choose in preference to the other.

Laurence

Laurence,

WE DO NOT NEED TO SAY YES TO EACH ICC PROPOSED OPINION

I am also a trainer and consultant on DC and Incoterms, same as you do. But I do not have any problem when facing the attendees who ask why Incoterms can be treated differently in Incoterms 2000 and ISBP Rev3. As an independent consultant, although also being a member of the ICC Banking Commission through the Canadian National Committee, I do not have to sell my brain to ICC and agree on everything ICC says, as some people do, as I observe from various professions, banking, training, law, you name it.

FOLLOW OUR COMMON SENSE AND OUR BELIEVE IS THE BEST APPROACH FOR A TRAINER

I have to be honest to myself and shape my independent view, which is according to common sense. I will tell them both sides of the story and add my personal view, which is as follows. Then, as a facilitator, I let them form their own independent views, which may be different from ICC, Incoterms or my view. A trainer's job is to inspire and not to mould the brains of the attendees. Arguments are strongly encouraged to be able to deal wtih the issues in greater depths.

For any use of the Incoterms, whether in UCP 500, ISP 98 or eUCP 1.0, the Incoterms must be interpreted and used in such a way as stipulated in the Incoterms Rules and authoritative publications, such as the guidebooks from ICC Paris.

When you drive a petrol SUV (“Sport Utility Vehicle” a popular car in North America, represented by UK Land Rover, Ford Blazer, Subaru Forester (one of my cars) etc.), whether on highways, avenues, lanes, streams, rapids, desert sands, rocky roads (not a Dreyers ice cream), country roads (leading to John Denver's last home?), forest, or any type of terrain, you must use petrol and cannot fill the SUV with diesel.

The ISBP is trying to fill the SUV named UCP ("Undoubtedly Consumes Petrol") with diesel.

UNABLE TO COMMUNICATE WITH PROFESSOR CHARLES DEBATTISTA

For your information, I have already brought up this matter with Professor Charles Debattista of University of Southampton, who is an active member responsible for drafting and promotion of the various versions of Incoterms. However, his computer cannot open my attachment. I use Windows 98 MS IE 5.5. I tried to send him a fax according to the fax number he gave me but not successful. So believe it or not, up to this moment I cannot send my message to him. Well, that is life.

Laurence, I hope you would team up with me to voice our views in the forthcoming ICC BC meeting in Rome in end of October this year.

This is another example why ICC BC is criticized by other trades, such as transport and insurance, for “trying to mow the lawn of his neighbours”.

www.tolee.com

[edited 8/26/02 5:56:16 PM]

T.O.

you may know from my comments at various Banking Commission meetings that I, too, speak out against ICC proposals when I consider it appropriate to do so.
The reason I would prefer not to answer questions from attendees at my lectures on the conflict between ISBP & Incoterms is that it may distract from the overall benefits to be gained from both. Lectures are for a fixed time. I would see time spent on this conflict at lectures as time wasted, which could have been more productively spent on other issues, because this is something which should be resolved before coming into the public domain.

I hope to see you again at the Rome meeting of the Banking Commission. When I attend such meetings, I generally do so representing the Irish National Committee of the ICC, so I may not be able to "team up" with you, but no doubt our views are common on many issues.

Laurence