Is there a connection between Incoterms® and the shipping line..??

Welcome to the last article of “annus horribilis” = 2020


    • Is there a connection between Incoterms® and the shipping line..??
    • Should Shipping Lines be concerned with Incoterms®..??
    • How does Incoterms® affect the shipping line..??

These are few of the questions raised by readers who have complained that their booking was on FCA, FOB, CIF etc but the carrier refuses to show this commercial information on the bill of lading.. Commercial information includes details about the Incoterms®..

Let’s analyse the questions starting with the definition of Incoterms®.. The ICC (International Chamber of Commerce), defines Incoterms® as below :

The Incoterms® rules are an internationally recognized standard and are used worldwide in international and domestic contracts for the sale of goods. First published in 1936, Incoterms® rules provide internationally accepted definitions and rules of interpretation for most common commercial terms.

The rules have been developed and maintained by experts and practitioners brought together by ICC and have become the standard in international business rules setting. They help traders avoid costly misunderstandings by clarifying the tasks, costs and risks involved in the delivery of goods from sellers to buyers. Incoterms® rules are recognized by UNCITRAL as the global standard for the interpretation of the most common terms in foreign trade.


sales contract and tradeAs you can see from the explanation above, Incoterms® are primarily an integral part of the sales contract between the seller and buyer..

So technically and legally there is no connection between Incoterms® and the shipping line as these terms do not form part of any contract between a customer and the shipping line..

Remember that a sales contract and contract of carriage are two different things..

The sales contract incorporating Incoterms® are between a buyer and seller whereas the contract of carriage is between the customer (either buyer or seller) and the shipping line..

But in practical life, there are cases where clients ask a shipping line to quote “FOB Durban to CFR Shanghai” or to quote “DDP Shanghai”..

Although they have nothing to do with the Incoterms®, due to perceived obligations or in their enthusiasm to assist the client, some staff at the shipping line’s office may quote the client on the basis of their request without being aware of the implications of these terms and what they need to include/exclude in the quote..

If the staff quoting are not conversant with the Incoterms® rules, they may be exposing themselves or the company to the possibility of submitting a wrong quotation and there could be disputes at a later stage over it..

For example, if the quote is requested by the buyer/consignee of the goods from FOB Durban, they would be expecting the shipping line to be quoting only from the time the goods are on board the ship in Durban..

The costs upto FOB Durban will be the responsibility of the shipper and as such, the shipping line’s quote cannot include loading costs, pre-carriage etc at POL Durban..

For a container carrier, making reference to or quoting based on FOB Incoterms® rules could get complicated because the term FOB is not the right term to use for containerised shipments but the client is using it and requesting a quote on that basis..

FOB seems to have become an integral part of the container shipping industry, like a part of the furniture, sort of a boilerplate, and an established term in the industry for a very long time and continues to be used incorrectly for containerised shipments instead of the correct term which is FCA (Free Carrier)..

The confusion in the industry could be because the versions prior to Incoterms®1980 did not have a rule which made reference to a hand over/reception point on land, prior to loading on board a vessel, especially for containerised shipments by sea or different means of transport (so-called combined or multimodal transport)..

The term Free Carrier (previously FRC, now FCA) was introduced in the 1980 version order to deal with this frequent case, but since people are creatures of habit, the usage of the term FOB continued..

There is also a disconnect in what “customers” refer to as FOB and what “carriers” refer to as FOB..

Customers understand and refer to FOB as an Incoterms rule where FOB = Free On Board, because in reality, for them this is what it is..

The buyer bought the goods on FOB basis meaning in simple terms, they agreed with the seller that they (the buyer) will only be responsible for costs from the time the container is on board and not before..

Note, I have used FOB and container in the same sentence loosely based on the current incorrect practice because it seems many in the container industry are still unwilling to forget FOB, but it is not right as clarified above.. 

For Carriers, FOB is a “business” term used to classify cargo that is commercially controlled by consignees at a location port (FOB) as opposed to cargo that is commercially controlled by shippers at the same location port (CIF)..

For a carrier, FOB cargo means cargo for which the freight is collected at the POD as opposed to CIF for which the freight is prepaid at the POL..

Totally different meanings..

In the other example “DDP Shanghai”, if the carrier indicates in their quote that it is DDP Shanghai (although irrelevant to the buyer), then they would be expected to include all the charges upto DDP Shanghai which includes customs clearance, duty, VAT etc which are generally beyond the scope of a carrier’s activity..

Therefore carriers are very reluctant or even pedantic about showing commercial information on their bill of lading especially if it includes references to Incoterms® and cargo value as these are not under the control of the carriers..

The carrier doesn’t want to undertake the liabilities and risks that comes with the commercial and Incoterms® information when it is not a part of their contract..


Article republished after critical updates

*** End of Article ***

13 thoughts on “Is there a connection between Incoterms® and the shipping line..??”

  1. It is true that delivery terms are not directly indicated in BL.It is indicated as phrases like freight collected (FOB) or prepaid(CFR).so,there is connection and implications

    Reply
    • It is possible for a shipment to be freight prepaid and delivery terms to be FOB as well. Take for example a scenario where origin agent pays for ocean freight. Freight collected and Freight prepaid cannot be used interchangeably with CFR and FOB because CFR and FOB are contractual terms between the buyer and seller which assign risks, costs and responsibility. Freight collect and freight prepaid are terms of payment between the buyer/seller and/or their agent depending on which incoterm was used.

  2. It is true that incoterms ( delivery terms) are not found in any BL directly.
    In the BL the phrase freight is collected imply, FOB shipment and collected at destination point.
    Similarly, prepaid represent CFR shipment.So, delivery terms have relation where freight is to be collected.

    Reply
  3. I sale 1 x 20 ‘from the shipper place to be delivered under hook Port Dakar – Senegal – My customer was the consignee in Africa sales in EXWORKS

    I initiated the operation after being paid freight, and the shipper was paid for his goods as well. Everyone was paid, and the consignee did not recover his container. What blocked it was customs fees that the consignee could not pay for lack of money.

    The shipowner sent a copy letter by e-mail of a letter at the attention of the shipper to warn him of the daily parking charges and as a merchant of the bill of lading he invited him to resell the goods or return them.

    The problem is that because everyone was paid, I sent the original 3 BLs to the consignee my customer by registered letter with acknowledgment of receipt, and signaled the sending of the recommended by mail the same as his shipment.

    Given that we are not in possession of the BL we can not help the shipowner. On the shipowner’s letter it is stipulated that the shipper is in solidarity and may be subrogated to pay the costs incurred.

    What are the risks involved…..

    Reply
  4. Most lines use terms like CY – CY rather than proper incoterms. My employer cites CIF for such moves, meaning that THC and such are included in the cost of freight. The lines that I currently use do not use this term.

    Reply
  5. Incoterms are related to contract of sales, not contract of transport. This isn’t meaning that contract of transport isn’t impacted by Incoterms, just that contract of transport is a specific arrangement between seller and buyer, along the contract of sales.
    One good example: Our company is running a solid LCL NVOCC dept. We are receiving import cargo from all over the world. It happens often, not every week but a couple of times monthly, that from specific origins, for a CIF basis shipment, supplier refused to pay for origin local charges and sometimes even for freight, so HBL is on collect basis with amounts to collect. This can be puzzling considering CIF incoterm definition, but it happens.

    Reply
    • What we know about CIF is that it does not include local handling charges and custom clearance at destination port.

    • Hello Rafael,
      Am also in LCL NVOCC business….am glad to share below.
      A contract of sale is between a seller & a buyer hence a contract of carriage being one of the functions of a BL is an arrangement/agreement between shipping line and the customer(seller buyer) at time of booking either by an email or a call…
      It also happens in LCL business the consignee does not interpret between a consolidator & the carrier.
      FOB means the consignee controls the shipment at destination, CIF seller bears all the costs until port of destination excluding all local destination charges.
      It happens carrier refuses to insert/indicate the incoterms on the BL a clear indication that line was not involved in sale contract….However if some charges are to be COLLECTED the consignee at destination will be advised by the LINE on same and cannot take cargo delivery unless complied….FAILURE to collect on behalf of the shipper….LINE will be responsible for the loss.
      So there is a connection indirectly….to avoid loss of business and customer relations.

  6. Great article Hariesh. Forwarders and SL use incoterms all the time, especially when quoting clients and in their own contracts with the customers. This a dangerous practice which adds to the customers confusion in the already treacherous world of incoterms which very few people (including seasoned professionals in international logistics) seem to be familiar with.

    Reply
  7. It is a fact that Shipping Lines indicate CIF and FOB terms in their Bills of Lading because of it is mandatory for their POL and POD agents to know whether the freight charges are “Prepaid” or “Collect”.

    Reply

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