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In the first article of this three-part series, I discussed the responsibilities of the seller and buyer in relation to freight and associated charges depending on the Incoterms® 2010 rule chosen in the contract of sale.
In this article I will focus on some of the most common variations in terms and practices that sellers and buyers need to consider under the international trade terms so that the cost of the transaction can be properly accrued and to ensure certainty about the point at which risk is transferred.
First, I will concentrate on the multimodal term FCA (and by implication CPT and CIP) and DAT and DAP; then I will discuss the sea and inland waterways transport term FOB (and by implication CFR and CIF). For the purpose of this article I will be focusing on international transactions only.
FCA—Free Carrier
Whilst the term FCA is very flexible, it can give rise to some misunderstandings between the seller and the buyer as to which costs accrue to which party and who is responsible for providing transport documents. This is because the delivery point under FCA can vary anywhere from the seller's premises to the point of export, be it the wharf or the airport, or where land-based transport is used for export, the road or rail terminal.
Given that the majority of goods are transported by sea and that these are typically carried in containers, I will primarily concentrate on this aspect.
Consignments carried in containers are inevitably part of a multimodal transport movement as they may leave the exporter's premises loose (unpacked) destined for a container packing warehouse and subsequently on to a freight forwarder's premises for eventual delivery to the export wharf. In fact, most containers are not delivered directly from the exporter's premises to the wharf; rather they are staged, meaning one or more parties are involved in the handling of the consignment from the time it leaves the export premises until it reaches the export wharf.
Recent statistics from the Port of Melbourne in Australia confirm this, as approximately 54% of export containers are staged. It is therefore important for both sellers and buyers to pinpoint exactly where delivery is to take place.
Let us work through a couple of examples.
Example 1
Imagine that the seller agrees to FCA Incoterms 2010 ex seller's premises (substitute this for an actual collection point with full postal address details). On this basis, the seller's cost responsibility is limited to the mandatory provision of export clearance, with no additional costs being incurred. The responsibility of collecting the goods from the exporter's premises and having them forwarded to the final destination is the responsibility of the buyer. The risk in transit transfer point also happens to be at the seller's premises.
This means that the buyer bears any transport risk whilst the goods are travelling within the exporter's country. The buyer may well expect to achieve a comparatively lower buying price but has comparatively more costs to bear as they are now responsible for the movement of the goods.
Example 2
Imagine that the seller agrees to FCA Incoterms 2010 Port of Imagination, Fantasyland (substitute this for an actual port location and country of your choice). On this basis, the seller's costs are extended to delivering the goods to the nominated export wharf, and the risk associated with the movement of the goods stays with the seller until the goods reach that wharf.
This means that any costs levied by the freight forwarder from the time the goods leave the exporter's premises until they reach the wharf apportion to the seller. This may include any container loading and unloading costs up until delivery is achieved. Terminal handling fees, loading and unloading charges (and other associated charges) continue to be a problem as freight forwarders and carriers across the world use different methods for charging these. For example, at times loading and unloading costs are separately shown from freight costs, whereas at other times freight charges are all inclusive.
Therefore, it is important that the seller and the buyer are able to determine which costs are included/excluded from the selling price and also at which point the risk transfers.
One of the potential sources of problems that may occur in FCA is where the buyer wishes the seller to procure a transport document or where a bank, through a letter of credit, insists on a transport document being provided. Strictly speaking, the seller is under no obligation to provide a transport document to the buyer, but even the Incoterms 2010 rules recognise that this happens and allow for this, as long as the seller is willing to do so.
There are some issues that may arise out of this situation. There may be a blurring of the risk and cost responsibilities between the seller and the buyer because of uncertainties about the additional costs incurred by the seller in procuring the transport document that will need to be recovered from the buyer. Additionally, the seller is likely to be financially worse off by agreeing to this course of action as carriers typically wish to be paid prior to the carriage of the goods or soon after the sailing of the vessel. However, the seller may have offered extended trading terms to the buyer, for example, 90 days payment terms. Under this circumstance, the seller effectively subsidises the freight cost to the buyer unless a separate invoice is issued requiring immediate payment. This may not be practicable or not so easily done where letter of credit payment terms are in place.
Under CPT and CIP Incoterms 2010 rules, the situation is somewhat different and simpler as the seller does have an obligation to provide a transport document to the buyer and additionally has responsibility for the payment of freight charges to destination. Whether unloading charges at destination are included in the freight charges or not is a matter for the seller to inform the buyer. However, the risk transfer point under CPT and CIP depends on where the first carrier becomes involved. The default position of the Incoterms rules is that the risk transfers from seller to buyer once the goods are made available at the disposal of the first carrier involved in the journey.
DAT and DAP—Delivered At Terminal or Place
The situation with charges is simpler under DAT and DAP, as under the Incoterms 2010 rules the seller is responsible for all charges and risk in transit until the goods reach their agreed destination point. Under DAT, the seller is responsible for unloading the goods at the nominated terminal, whereas under DAP the buyer is responsible for unloading the goods at the agreed delivery place.
FOB—Free On Board
By far the biggest problem with FOB is its continued incorrect application to container traffic. As discussed above, the majority of container traffic is not delivered directly to the wharf; rather it is staged. The notion of FOB relies on delivering the goods alongside the ship to be loaded onto the vessel directly from the delivery vehicle. This is hardly the case these days in practice. In fact, with the increased security measures in place at ports across the world, it is very unlikely that a delivery vehicle will get anywhere near the vessel with a container. (See my article, The Ship's Rail Is Dead: Incoterms 2010.)
It must also be remembered that the term FOB was coined at least two centuries before containers became a reality. How can a term that was invented two hundred years ago suddenly become the norm with containers that have only been around for 50 years?
The basic responsibility under FOB is for the seller to pay for all charges until the goods have been loaded onto the vessel at the agreed port. This includes loading charges. Where the buyer wishes the seller to provide a transport document, under FOB double charging may occur depending on how the carrier issues the invoice. Where the carrier separates loading charges at origin, the seller bears these, but this is not the case where the carrier only issues a total invoice charge. In this circumstance, the buyer will be paying for the loading charges at origin as they cannot be determined. Therefore, there is a hidden increase in costs.
These examples hopefully provide the reader with the understanding that the incorrect use of FOB for container traffic complicates the issue of who is responsible for bearing which charges, particularly port charges, as the lines of responsibilities become blurred. Therefore, please use FCA for sea container traffic instead.
Lastly, in relation to FOB, it should be noted that the ship's rail under Incoterms 2010 rules is no longer the risk transfer point as it was in the past. The seller now has to deliver the goods on board.
The situation with CFR and CIF Incoterms 2010 rules is simpler. Under these terms the seller is responsible for providing a transport document and paying for loading charges at origin, but not unloading charges at destination, unless these were part of the contract of carriage.
In conclusion, sellers and buyers need to be clear about the charges that may accrue to one party or the other to avoid surprises. Variations to the standard terms need to be carefully considered prior to signing the contract of sale. Changes in practices may also be required to more accurately select the appropriate term for the correct mode of transport.
In my next article I will focus on some best practices that sellers and buyers may use to manage their delivery terms risks.
| Product Model | Inside Diameter | Outside Diameter | Thickness |
| NUKRT52/3AS NTN | 20 | 52 | 25.5 |
| NUKRT47/3AS NTN | 20 | 47 | 25.5 |