Part 1 of this series of articles discussed an imaginary situation where the seller and the buyer have differences in processing an EXW transaction. These differences were caused by the freight forwarder's preferences that mutated EXW into something closer to FCA. The seller, unaware of the added risks incurred, was following the request of the freight forwarder, but with some reservations. 

The conversation between the seller and their adviser revealed the anomalies and explained some of the possible corrective measures. The seller, at the end of that conversation, raised the issue of FOB and container traffic, and questioned why this may be problematic. Here we pick up where we left off in the last article. 

Adviser: You were asking why FOB should not be used with container traffic. 

Seller: Yes, a lot of buyers seem to want to buy on this term, and the fact that the goods are shipped in containers does not seem to bother them at all. So what is the problem? 

Adviser: The problem is not one, but many. Firstly, we need to understand that the term FOB had been around for a long time before maritime container transport was invented. The term FOB has been questionable for nearly the past 50 years. The main issue has been the risk transfer point between the seller and the buyer in the FOB contract. In fact, in a rather famous court case of 1954, the judge expressed his concerns about the means by which risk would be transferred with the following words

Only the most enthusiastic lawyer could watch with satisfaction the spectacle of liabilities shifting uneasily as the cargo sways at the end of the derrick across a notional perpendicular projecting from the ship's rail (Devlin J in Pyrene Co Ltd v. Scindia Navigation Co Ltd [1954] 2QB402 at 419).

The Incoterms themselves appear to have been somewhat unclear over the years. The Incoterms 1990 stated:

It should be noted that FOB, CFR and CIF all retain the traditional practice to deliver the goods on board the vessel. While, traditionally, the point of delivery of the goods according to the contract of sale coincided with the point for handing over the goods for carriage, contemporary transportation techniques create a considerable problem of 'synchronisation' between the contract of carriage and the contract of sale. Nowadays goods are usually delivered by the seller to the carrier before the goods are taken on board or sometimes even before the ship has arrived in the seaport. In such cases, merchants are advised to use such 'F-' or 'C-' terms that do not attach the handing over of the goods for carriage to shipment on board, namely FCA, CPT or CIP instead of FOB, CFR and CIF.

The Incoterms 2000 stated in part:

The buyer must bear all risks of loss of or damage to the goods from the time they have passed the ship's rail at the named port of shipment.

The Incoterms 2000 also stated:

This term can be used only for sea or inland waterways transport. If the parties do not intend to deliver the goods across the ship's rail [such as is the case for containerised traffic] the FCA term should be used.

The introduction to the Incoterms 2000 highlights the uneasy fit with containerisation:

The delivery point under FOB, which is the same under CFR and CIF, has been left unchanged in Incoterms 2000 in spite of a considerable debate. Although the notion under FOB to deliver the goods 'across the ship's rail' nowadays may seem inappropriate in many cases, it is nevertheless understood by merchants and applied in a manner which takes account the goods and the available loading facilities [emphasis added]. It was felt that a change of the FOB-point would create unnecessary confusion, particularly with respect to sale of commodities carried by sea typically under charter parties.

With all due respect to that statement, it is exactly why this is not well understood that problems arise. The Incoterms® 2010 Rules make it quite clear that the term FOB is not the preferred choice for container traffic because in practice the container is invariably part of a multimodal movement. In fact, a recent study on container movements conducted by the Port of Melbourne, Australia, reveals that 54% of export containers are 'staged.' This means that these containers are not delivered directly from the exporter's premises to the wharf, rather they go through third parties (such as container packing warehouses, freight forwarders, containers parks, etc). 

Prudent risk management practices would have the risk transfer when the journey commences or when the seller loses control of the goods by handing them over to a third party. Indeed this is the case in FCA, CPT and CIP that are the multimodal answer to FOB, CFR and CIF. But let's stick to FOB… particularly as there has been a change in the risk transfer point. Under Incoterms 2010, the risk transfer point under FOB is once the goods have been placed on the vessel. In the absence of a court case, at the time of writing, this is understood to mean that the whole consignment has to be loaded on board, but this does not mean stowed and lashed. 

Seller: Look, that is very nice, but my buyer is comfortable with FOB, after all they have been doing this for years. 

Adviser: If I had $5 for every time I heard "we have been doing this for years" I would have retired a rich man long before I sat down to this conversation with you. Some say history is everything—yes it is, but to learn from, for otherwise there is no progress. There is also another counterargument to the, "I have been doing for years" claim. That is, "If you stand in one place long enough, eventually a bus will come along and run you over." 

Times change, processes change, and we need to respond to those. The buyer wants to minimise their risk and so does the seller. It is a matter of negotiation. I am going to put it to you that the seller is best placed to transfer the risk to the buyer when they (the seller) lose physical control of the goods. This is because they cannot control the risk without possession of the goods—under these circumstances someone else has the goods, and that someone else should carry the risk.

In FOB transactions, the seller would be responsible for 10 or more uploads and offloads from the time the goods leave the export premises until they are loaded on to the vessel, as shown in Table 1. Do you really want to be responsible for this?

<img src=http://www.bearing.com.cn/direc/myimg/201112285.jpg>

Table 1: 10+ product movements prior to loading—how will the seller mitigate risks?

Seller: Well, when you put it like that, I don’t really want to retain all these risks, but the buyer wants me to deliver on board. 

Adviser: I am going to suggest to you that you can negotiate with the buyer to take the goods to the wharf, but not load them on the vessel. You can do this by using FCA, XXX Port, Incoterms® 2010 Rules. If you do this, you retain the risks until the cargo terminal operator has the goods made available to them, but terminal movements and loading on the vessel are at the risk and cost of the buyer. You need to explain to them that times have changed and so should contract delivery clauses. By the way, you still have no obligation to contract for carriage under these circumstances. 

Seller: OK, I get it now. I guess that I can try to change what I have done in the past and convince the buyer to do the same. 

Adviser: Yes, that's the spirit. 

Seller: You said something about other terms before: CFR, CIF, CPT and CIP and risk transfer. I am not sure that you explained that completely though. 

Adviser: You are right, I did not, but that is another session again.

 

 

( linda )28 Dec,2011

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