This is the fifth guest article written by L M Mohamed Ismail1. We thank Ismail for this wonderful article and look forward to seeing more such contributions from him and others.
- INCOTERMS has been the mainstay of international trade since 1936. Whilst the purpose of Incoterms was to provide clarity on the individual roles and responsibilities of both the buyer and seller, confusion has always remained on the interpretation of the various terms. The International Chamber of Chamber has, over the years, published several revisions to cater to the various changes that have taken place in the commercial world. The latest revision was published in 2020, superseding the 2010 edition.
- This monograph will attempt to compare the commonly used term FOB and the infrequently used FCA. Before we dwell on the variations of these terms, let us look at the functions of both terms.
- Once the cargo is on board the vessel, it’s the buyer’s responsibility and therefore, if the buyers desires to protect themselves against financial losses due to marine perils, they should insure the goods.The three most frequently used international sales terms are i) Ex Works ii) FOB and iii) CIF. While a Ex Works imposes the minimum requirements on the seller, the buyer has to arrange and pay for the logistics as well as the paperwork to complete the delivery of the goods upto the final destination. Similarly, a CIF sale requires the seller to arrange and pay for the transportation as well as the paperwork up to the time the goods are unloaded from the vessel at the destination port. As for FOB, the duties and the related costs are shared between the buyer and seller. Here the seller will make the goods available up to the ships rail at his cost. Once the cargo is loaded on the ship, all costs and expenses including the ocean freight for getting the shipment to the destination rests on the buyer.
- One must be cognisant that the FOB condition does not impose any insurance requirement either on the buyer or seller. Herein lies the financial challenge. The seller should keep the goods insured untill it is loaded on the nominated ship to protect himself against known and unknown calamities. Once the cargo is on board the vessel, it’s the buyer’s responsibility and therefore, if the buyer desires to protect themselves against financial losses due to marine perils, they should insure the goods.
- Whilst it is common for shippers to generally have an inland transit insurance cover, these are usually up to the time the cargo reaches the port. Very few sellers take a full FOB sale cover given that such products are uncommon in many countries. This effectively means that when the cargo is lost or damaged whilst in the port awaiting loading on to a vessel for export, the seller is uninsured. While accidents and losses in the ports are rare, should one occur they can be extensive and catastrophic. A few incidents which come to our mind are the Kobe earthquake & Tian Jin explosion in 1995, the Tsunami in 2005 and the latest being the Beirut explosion in 2020. Re insurance statistics have shown that the losses from these four events ran into billions and unfortunately a large number of cargoes in these ports were uninsured.
- Let us look at the roles and responsibilities of the interested parties in a FCA sale. FCA is the abbreviation for Free Carrier and which requires the seller to deliver the goods, cleared for export to the carrier nominated by the buyer at the place of the export. In order to avoid any disputes, this information is usually stated in the sales contract.
- From a risk perspective the seller’s responsibility ceases once the cargo is handed over to carrier’s representative at the loading port. From this point onwards the goods are at the risk of the buyer, who should arrange the necessary insurances to protect their cargo. Hence, a simple tweak from FOB to FCA will protect the seller against catastrophic financial losses in that they would no longer be on risk for the loss to the cargo once it has been handed over to the designated carrier.
- In the 2010 version of the Incoterms it was stated that FOB terms should only be used for sea voyages. However, it is common for air shipments to be still be sold on FOB terms. We understand that many shippers who ship by air, have suffered severe financial losses, due to cargo being lost or damaged whilst at the cargo terminals prior to loading, for lack of insurance protection.
- Whilst only CIF and CIP terms require the seller to purchase insurance covers to cover the cargo, the other INCOTERMS leave it to the respective parties to arrange their own protection/cover. If the goods are uninsured whilst in the custody of the carriers at the ports, it would put the buyer or seller exposed to potential financial losses. The benchmark on who should be mindful on the Incoterm being used would depends on whether they (buyer or seller) have paid or been paid for the goods. In a scenario where the seller is yet to be paid for the goods, it would be financially prudent for seller to opt for FCA terms wherein he merely needs to have an insurance cover till the goods are handed over to the carrier’s representative at the exporting port. This way the financial interest of the exporter is protected. Where the buyer has paid for the goods, it would be prudent for them purchase of goods on FCA terms and with the insurance cover commencing from the time the cargo is handed over to the carriers representative.
- Conclusion: Whilst INCOTERMS has always endeavoured to understand the documentary and logistical needs and challenges of all the parties involved in a particular transaction, much depends on the accurate interpretations of the various terms. Despite being around for 85 years, it is still common for the trading community to be unaware of the various INCOTERMS terms and their provisions. This has given rise to misunderstandings, disputes and litigation, leading to costly losses and expenses. As the saying goes a little knowledge is a dangerous thing, it is imperative that all the stake holders equip themselves not only with the right definition of a particular term, but also ensure that the correct sales term is used.
1. L M Mohamed Ismail,a marine insurance broker employed with Acclaim Insurance Brokers Pte Ltd and is involved in various classes of marine insurance. He can be reached at firstname.lastname@example.org.
Good day! Hope you are doing fine and safe!
With regard to FOB or FCA the article is focussing on the insurance coverage point of you.It would be better if we also clarify on the division of costs between the seller and the buyer.Typically under FOB terms the seller takes care of all the expenses up to the transportation of goods to the port/terminal , storage at port/terminal , loading to ship/aircraft expenses.Whereas under FCA terms the seller takes care of expenses up to transporting goods to port/terminal . Buyer takes over the responsibility at terminal along with the storage at port/terminal , loading to ship/air craft expenses.
H. L. Santharam / Connect Cargo Pvt Ltd
Sorry but FOB can only be used for bulk or break-bulk by ship. It cannot be used for air because cargo is handed to the carrier at an airport or even at a forwarder’s premises and not “on board” an aircraft which by the way is not a “vessel”. FCLs are typically delivered at the moment the seller closes and seals the container on the back of the truck provided by the buyer’s forwarder at the seller’s own premises so option (a) of A2 in FCA. LCLs similarly when picked up by that forwarder are option (a) or if the seller themselves deliver to the forwarder of CFS then option (b) not unloaded. Air would be similar to LCL.
As a member of the Incoterms 2020 Drafting Group, I can confidently inform you that the above article is riddled with errors and misunderstandings. Even the explanations as to when risk transfers with FCA are incorrect. My advice to you is that this article is misleading and should not be taken as any authority whatsoever on the topic of the Incoterms 2020 rules.
L M Mohamed Ismail
Thanks Bob for your comments. Please permit me to clarify. My article clearly states that FOB should not be used for Air shipments. The purpose of the article was to highlight this mistake when air shipments are arranged at FOB terms. Many in the trading community use INCOTERMS loosely and this becomes a challenge when there is a dispute on an insurance claim. On the comment that delivery takes place once the container is sealed will become applicable if the local trucking to the port is arranged by the Buyer. This is not always the case. In most times the buyer may not have the wherewithal to arrange such services. In such instances the buyer is required to have the container trucked to the port and have it placed in the custody of the nominated carrier. I will be happy to correct any mistakes or errors in the article as the primary aim is to promote awareness and greater awareness of the sales terms.
I have no comments except to thank you for the article which was shared in my LinkedIn forum on Switch Bill of Lading. I shall connect you on LinkedIn would request your active participation in my postings. I may admit that we trade finance bankers do not have expertise on maritime and Insurance industries and I often rely on articles like yours to enrich my knowledge. I am in my semi retirement stage but I still crave to updkill my knowledge.
With best regards.