03-05-2014
So you have agreed a price for the sale of your goods to a buy 10,000 miles away on the other side of the world. Now you have to agree who is to do what in getting your goods from your premises to your buyer. You must also agree the point at which your responsibility as a seller ceases and your buyer’s responsibility begins, which is when he takes title in ownership of the goods. Fortunately there are established international rules for dealing with this and they contain a menu of choices designed to suit the needs and demands of seller and buyer, based on the price the buyer is prepared to pay. If you pay the highest price you, the buyer, have the least to do but, pay the lowest amount, and you have the most to do, including arranging the transport of the goods from the premises of the seller all the way to your own place of business
The rules we are discussing are known as Incoterms® and the latest edition, Incoterms 2010®, came into force on the 1st January 2011. They are divided into two groups – those which are suitable for any mode of transport and those which may be used only for transport by sea or inland waterway
Incoterms® – which is short for International Contract Terms – were first introduced in 1936. They were devised by the International Chamber of Commerce to provide a common standard of duties of the sellers and buyers of goods
One term – FOB – has caused debate over the years since Incoterms® were first introduced because there was no linguistic connection between it and the then established shipping practice known as “over the ship’s rail”, by virtue of which title in goods passed from seller to buyer when the goods were swung over the ship’s rail during loading at the port of departure. This was the demarcation line that had been established in shipping custom and practice for many years, and when Incoterms® were first introduced in 1936, the term FOB was seen as the nearest fit to the well-established “over the ship’s rail” rule. However, with the advent of Incoterms 2010® that rule has been discarded in favour of a new one, which is that title in goods sold on FOB, CFR and CIF terms passes to the buyer when the goods are loaded aboard the overseas vessel at the first port of departure from the country in which the seller is domiciled. “Over the ship’s rail” thus exists no longer for any goods sold under incoterms 2010®, and should therefore not be referred to in any discussions or communications. It has no validity whatsoever under those terms and is effectively consigned to history
Of course the new ruling, though better, may not be exactly crystal clear. It does not define what “loaded aboard the overseas vessel” actually means and we can expect legal disputes over this in years to come but a reasonable man might equally reasonably argue that “loaded” means when the lifting devices are detached from the goods or the container in which the goods are carried. Nor does it refer specifically to the goods being safely loaded but this is implied because goods should not be described as loaded if they have been dropped onto the ship during the loading process. Under the now defunct “over the ship’s rail” rule, goods that were dropped during loading onto the quayside, or into the water, were the responsibility of the seller but, once they passed over the ship’s rail, they became the property of the buyer whether loaded or dropped onto the vessel, meaning that the buyer had to make the claim. So, to summarise the position under Incoterms 2010®, the goods remain the property of the seller until they are loaded on the overseas vessel at the port of departure
One final point, incoterms 2010® are silent on the question of the stowage of the goods after the loading process is complete. With containerised cargo this should not present a problem, because there is no stowage once the container is placed in its cell on a container ship, but there may be an issue with break bulk cargo, or containers stored on or under the deck of a conventional cargo vessel. A reasonable argument would be that the stow was not a part of the loading process but, no doubt, there will be lawyers prepared to argue the contrary.
Merely choosing a particular Incoterm® is not sufficient because it may cause a shortfall in the expectation of what the buyer considers the duty of the seller and vice-versa, resulting possibly in breaks in insurance cover
Under Cost Insurance and Freight (CIF) terms, for example, the requirement on the seller to effect cargo insurance which is assignable to the buyer demands only the minimum of cover to be purchased. This would be Institute Cargo Clauses (C). Furthermore, this insurance must apply to “at least the named port of destination.” There is a clear implication that the cover can be extended beyond the destination port but, if both seller and buyer fail to agree on the specific point at which the cargo insurance is to finish, you can see there is a potential for a gap in cover for the final leg of the transit from the destination port to the buyer’s premises. You should also know that insurers traditionally do not like covers that do not operate for the full journey because this leaves them open to claims that may have occurred either before they went on cover or after cover had ceased, so far as their policy is concerned. It is far better for one insurer to cover the whole of a transit of goods from the premises of the seller to those of the buyer. Custom and practice is to arrange insurance on an All Risks basis, as described in the Institute Cargo Clauses (A), and for this to apply during the whole of the journey from seller to buyer
It is strongly advisable for both seller and buyer to have a written agreement as to the exact duties that both must undertake, and to ensure that insurance is arranged for the complete transit of the goods from seller to buyer; and that it is arranged, where possible, against all risks of loss or damage, as described in the Institute Cargo Clauses (A), plus the cover for War and Strikes risks. It is even more important to be absolutely specific with cover requirements when the goods in question are commodities such as temperature controlled goods, for which dedicated Institute Cargo Clauses have been devised
To illustrate some of the differences in cover between the (A), (B) and (C) Clauses, the (A) Clauses include cover for such risks as Theft, Accidental Damage, whilst the (B) and (C) Clauses do not cover those perils, but only those specified in the respective wordings
Under Cost & Freight terms (CFR) the seller must deliver the goods on board the vessel at the port of departure, at which point the buyer takes title in ownership. The seller must also arrange and pay for the freight from his premises to the destination port. The buyer under CFR terms is responsible for arranging the insurance of the goods from the point of loading aboard the ship at the port of departure until those goods are delivered to him
For goods sold on FOB terms, the duty of the seller is to deliver the goods on board the vessel at the departure port but he is not obliged to provide insurance on the goods nor to arrange carriage from the port of departure. Both these items are the responsibility of the buyer.
There are similarities between the FOB and CFR (Cost & Freight) terms except for the carriage from the departure port. This is the responsibility of the seller
A lesser used Incoterm® is called Ex Works (EXW). Under these terms the seller must place the goods at the disposal of the buyer at the agreed place – this is usually the seller’s premises – whereupon the buyer is responsible for them and for arranging their carriage to his premises. He takes all the risk of loss or damage from this point
Where the ‘Any Mode of Transport’ Incoterm® CIP (Carriage & Insurance Paid To) is used, it is the responsibility of the seller to procure a contract of carriage at his own expense and to deliver those goods to the chosen carrier at the agreed delivery point (not to be confused with the actual delivery to the buyer), which will probably be the first carrier’s premises, or the premises of a freight forwarder. The contract should stipulate this place of delivery in writing. The seller must also procure an assignable policy of insurance covering the goods from the point of delivery, i.e. to the first carrier, to at least the named place of destination. In day to day practice it is usual to insure the goods from the time they leave the premises of the seller until they are delivered to the named place of destination. Cover must be to at least the minimum specified in the Institute Cargo Clauses (C). In practice it is usual to arrange cover under the (A) Clauses plus War & Strikes Clauses
These are just a few examples of the 11 Incoterms® available in the 2010 edition. The more important consideration is not the name of the chose incoterm® but the details of the actual duties required of seller and buyer
These must be specified in writing and must contain accurate details of all those duties imposed on each party to the contract, details of the exact location at which the goods are to be delivered at both the start of their journey and at its end
The investigation of any claim made in respect of loss or damage to goods in transit will inevitably include a close inspection of the terms agreed between seller and buyer, and if that loss falls outside the start and finish dates in the contract, it will not be admitted by the marine insurer. In order to avoid any such shortcoming both seller and buyer must be exact in the wordings of their sale contracts, which must reflect the intentions of both parties and which must be in writing. Finally, to have effect, the contract of sale must state categorically that the goods are sold under Incoterms 2010® and specifying the chosen Incoterm
