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by Roy Becker
Early in my career, I heard debates on the topic: Where does risk pass? It seemed, among bankers anyway, this debate belonged to lawyers for argument in court. Now, thanks to the undertaking of the International Chamber of Commerce (ICC), we have the answer to the question.
A recent ICC publication, Incoterms 2010, includes definitions for each of the 11 trade terms. In a well thought out sequence, it lists each Incoterm and then stipulates where the seller delivers. Delivery is defined as: "…where the risk of loss of or damage to the goods passes from the seller to the buyer."
Once the delivery event is identified, Incoterms 2010 lists 10 responsibilities for the buyer and 10 for the seller. It addresses who jumps through hoops and over hurdles. It explains who pays for loading the inland carrier, who pays the cost of shipping to the main carrier, who pays for loading the main carrier, who pays for the cost of shipping on the main carrier, who pays for the insurance, who pays for unloading the main carrier, the inland freight, import customs, etc. Each Incoterm clearly states which responsibilities belong to the buyer and which ones belong to the seller.
A committee of 20 people (19 from Europe and one from Japan) wrote a predecessor publication, Incoterms 1990. Notice the absence of American representation. The ICC revised Incoterms in 2000 and again in 2010. Both times they invited one American, Frank Reynolds, to the committee. Understanding Incoterms is easier when read with a European mindset. Many European countries can export products with the goods never leaving the surface of the earth: by truck, rail, barge, etc. As a result some Incoterms may not apply for many U.S. imports and exports.
The Incoterm you use must correctly match the payment term you use. The two most misused Incoterms are EXW and FOB. For example, I have seen letters of credit issued to beneficiaries in Colorado stating, "Ex Works the seller's warehouse." That's easy to understand and often exporters think it is the least hassle for them. It essentially means, "the goods are at my back door; come and get them."
However, if the exporter has a letter of credit calling for an on-board ocean bill of lading issued from a West Coast port, how will the exporter obtain the bill of lading? What if the merchandise is destroyed en-route to the port and they can't get a bill of lading? They've fulfilled their obligation under the Ex Works agreement, but they can't get paid.
What about FOB? It's a term as easy for an American to understand as the American flag. However, the term FOB, as Americans understand it, does not have the same meaning to the rest of the world. Our own Uniform Commercial Code defines FOB essentially as FOB here, there, or anywhere.
As defined in Incoterm rules, FOB is reserved for ocean shipments only. Very precise in its definition, risk passes from seller to buyer when the goods are loaded on board. The 2010 revision no longer uses the phrase "pass over the rail of the ship," as used in the 2000 rules. Notice the word ship. Terms such as "FOB our plant" or "FOB Airport" are used incorrectly for international shipments, and no authoritative document exists in case of a dispute.
How can one solve the dilemma of Ex Works and FOB and letters of credit? The answer lies in asking for the correct transport document and either using an alternative Incoterm or payment term.
In the case of Ex Works, since the seller has no shipping responsibility, there is no transport document. One might reason that the seller could obtain a receipt from the first carrier who picks up the goods, such as a freight forwarder or a trucker. However, this exceeds the responsibilities of the exporter. Worse, what if the buyer sends a truck to pick up the goods or the trucker refuses to provide a receipt? I am of the opinion that EXW and letters of credit do not work together.
The term FOB is restricted to ocean shipments. For all other modes, FCA or Free Carrier, is preferred. The exporter has responsibility to deliver the goods to the carrier nominated by the buyer at the named place. Americans can easily understand FCA because of its similarities to the beloved term FOB Factory. An Incoterm rule exists for almost any situation, and traders should choose the right one to prevent misunderstanding. Frank Reynolds' book, Incoterms for Americans, provides valuable insight to enable American companies to avoid misunderstanding and problems.
| Product Model | Inside Diameter | Outside Diameter | Thickness |
| 697-2Z bearing | 7 | 17 | 5 |
| 687-2Z bearing | 7 | 14 | 5 |