The Incoterms ® 2010 rules published by the International Chamber of Commerce makes a clear distinction between rules appropriate for any modes of transport and those deemed more suitable for sea and inland waterway transport only.
These are classified as follows:
Rules for Any Mode or Modes of Transport: EXW, FCA, CPT, CIP, DAT, DAP, DDP
Rules for Sea and Inland Waterway Transport: FAS, FOB, CFR, CIF
It is apparent from our discussions with clients that a large proportion of traders continue to use FOB, CFR and CIF for goods being transported by sea, even though the ICC has made it clear that such rules “may not be appropriate where goods are handed over to the carrier before they are on board the vessel, for example goods in containers, which are typically delivered at a terminal.”
The recommendation is that where goods are shipped in containers, the following rules should be considered: FCA (instead of FOB), CPT (instead of CFR) and CIP (instead of CIF).
The main reason for this selection is that in choosing a ‘sea shipment term’, a seller is placing themselves at risk of loss or damage to the goods between handing the goods to the carrier for containerisation and effecting actual ‘delivery’ which in the cases of FOB, CFR and CIF will always be ‘on board’ the sea vessel. A Bill of Lading will evidence receipt of a container ‘said to contain……..’ and not prove safe receipt of physical goods!
FCA, CPT and CIP are therefore more appropriate for manufactured goods which will typically be shipped in containers. A simple receipt from the carrier / forwarder evidencing safe receipt of the goods will be acceptable evidence of delivery at the appropriate point.
For a detailed, practical guide to the rules, consider our popular workshop, which is also appropriate for bankers and financiers looking to provide best advice to their clients:
A Banker’s Perspective
A potential complication arises when banks become involved in financing transactions.
Take the case of an importer required to issue a Letter of Credit to a supplier in China in respect of a full container load of goods delivered on FOB basis. The typical documents will include a Full Set of Bills of Lading, which provide comfort to the bank that the goods have been received by the carrier ‘on board’ the sea vessel.
But hold on…… we established above that shipping on FOB basis could create a problem if the goods are containerised.
Case study 1
We came across an instance recently where goods were handed to a buyer’s freight forwarding agent at a port terminal and the agent subsequently failed to load the container! The delivery term was stated as ‘FOB (Seller’s Country) Port’. This situation was remedied by the agent to the satisfaction of all parties, however contractually the seller was ‘at risk’ and responsible for paying any costs, whilst the goods were under control of the buyer’s agent prior to loading.
Case study 2
A UK company exporting goods to South Africa on CIF terms was struggling with cash flow as payment terms were 60 days from invoice date. They agreed an invoice financing facility with their bank who required the following documents in order to advance funds:
- Commercial (Export) Invoice
- Copy of Bill of Lading
- Copy of Insurance Certificate
- Copy of Packing List
- Copy of Purchase Order
The goods were loaded as a full container at the seller’s premises and taken to port for clearance and loading onto the vessel.
Bills of Lading were received 12 days later and consequently funds were credited on the 14th day following dispatch of the goods from premises.
Taking the ICC recommendation, had the seller and buyer agreed terms of CIP destination, legal ‘delivery’ could have been deemed to have taken place at seller’s premises rather than on board the vessel at UK port (CIF).
In this case, the financier is likely to take the pragmatic view that the seller’s responsibility under CIP is to provide the buyer with “the usual transport document(s) for the transport contracted…” , which of course will be the Bills of Lading.
Our point here is…. could the financier exercise discretion if it is felt that the seller and freight forwarder have a strong relationship / track record in fulfilling contractual obligations following legal delivery?
Maybe, in the above case, the financier could consider releasing funds at point of loading into the container at premises, thus easing cashflow pressure by 14 days?
Clearly, in the majority of cases, banks or financiers are unlikely to fund transactions at a time where goods are ‘delivered’ at a point earlier than the vessel, particularly as they view Bills of Lading as critical to their maintaining constructive control over the goods.
We would be interested in hearing the views of traders or financiers….
Check out our related article: A Cautionary Tale of Incoterms and Payment