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I can visualise a few raised eyebrows to the question “Will the container industry ever forget FOB“..
Especially since FOB has been and still seems to be an integral part of the container shipping industry on many fronts..
It has been an industry standard, part of the furniture, sort of a boilerplate, an established term in the industry for a very long time..
So what changed and why this question..??
Well, before I go there, let us examine the definition of FOB..
FOB (Free On Board) as one of the Incoterms rules was designed to be used only for sea or inland waterway transport..
Under this rule, the seller delivers the goods on board the vessel nominated by the buyer at the named port of load or procures the goods already so delivered..
The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from thereon..
When to use FOB
Under the above definition, FOB is suitable only for cargoes wherein the shipper is responsible for delivering/loading the goods on board the ship..
Examples of these type of cargoes would be Bulk/Break Bulk cargoes under FIO – Free In and Out terms..
When the contract of carriage is on FIO basis, the shipper bears the cost and responsibility for the loading operations instead of the carrier so the FOB Incoterms rule would be appropriate..
When not to use FOB
FOB is not a suitable term to be used where cargo is delivered to the carrier and customer is not responsible or involved in loading the cargo on board, such as :
- bulk shipments where the contract of carriage is on FLT – Full Liner Terms basis where the carrier is responsible for the loading operations..
- containerised cargoes which are usually delivered to a container terminal where it is received under the control of the carrier..
For the above cases, the term FCA (Free Carrier) would be the appropriate Incoterms rule to be used..
FCA has been around since the 1980 version of Incoterms.. It was created to deal with the frequent cases where the reception point in maritime trade was no longer the traditional FOB-point (which up until the 2010 version was “passing of the ship’s rail”), but a point on land prior to loading on a ship, like a container stack inside the port, or for loading by other means of transport like intermodal or multimodal transport..
But even though FCA has been around for long, many trades around the world still seem to use FOB as the Incoterms rule for containerised shipments, which is incorrect..
This maybe due to the fact that the definition of FOB or Free On Board is pretty clear to understand even for a layman..
OK while this is the general definition and description of the Incoterms rule FOB, the world of shipping uses it quite often in another context..
While there is no technical or contractual connection between shipping line and Incoterms®, the term FOB has been linked to shipping business and has been widely used by shipping lines and the freight market for many years..
If you are on the shipping side of the industry you may have used/still using the term FOB business to refer to cargo and/or business that is negotiated, controlled and paid for by the consignee, importer, their agent or the freight forwarder at the destination port..
The antonym of FOB business is CIF business which is used to refer to business that is negotiated, controlled and paid for by the shipper, exporter, their agent or the freight forwarder at the origin port..
Simply put, shipping lines refer to the market controlled by the importers as FOB market and the market controlled by the exporters as CIF market and they even have special rate negotiations and discussions based on the market that they are targeting..
It is a well known gripe among the shipping lines/agents/forwarders that the freight rates they are able to get in the “FOB market” are higher than the “CIF market”, especially on cargoes coming out of China to various parts of the world, as it gives the exporters an upper hand than the importers..
In the container trade in every market around the world, there is always a struggle from the importers, forwarders, shipping lines, agents to capture more and more of the FOB business that is available in that market..
So while FOB may not be the appropriate Incoterms rule to use in the context of containerised shipments, it may still be around for a long time in the context of “freight collect” shipments and FOB business even in the container industry.. 🙂
What do you think..??
Very Interesting article!
If FCA incoterms 2020 allows for onboard B/Ls (presumably at the insistence of the buyer) I presume that the seller is required to be shown as the shipper and therefore enter into a contract of carriage with the carrier and thereby (perhaps unwittingly) become potentially liable for demurrage and/or detention charges; something which would not have been contemplated by the seller when entering into a FCA contract with the buyer ?
Hi Abrar, yes it is possible that the seller may unwittingly become liable for demurrage/detention if they show themselves as shipper on the bill of lading.. But they are under no obligation to either enter into a contract of carriage or show themselves as shipper..
They could be showing themselves as shipper based on the relationship with the buyer.. More so if the shipment is on L/C then the buyer will be providing the carrier with the bill of lading instructions.. They could do this though with an LOI from the buyer to the carrier waiving the shipper on the bill of liabilities relating to demurrage/detention etc..
ICC, Paris seems to be trapped in its own cocoon. When the opportunity arose to set things right, fall in line with industry practice, create something new or modify the rules to align with the ground reality, they came up short while revising the rules and creating Incoterms 2020. Sadly, therefore, the divergence continues.
Hi, using FCA Shippers premises will also be incorrect. The correct terms in that case is Ex-Works (EXW) or C&I – Cost and Insurance.
This discussion has prompted our company to review our use of our current Incoterms, and we have made the switch. This discussion confirmed previous logistics classes I have taken on the use of FCA for containerized shipments.
A very good comment and point from Mr. Hansen was provided on who pays what fees using FCA as your Incoterms. My research shows that all fees, such as THC charges, need to be “agreed to” in arrangements with the shipper. We are building a simple contract with our shipper to cover this. Although Incoterms, as I understand it, do not cover “who pays what”, this always needs to be confirmed, and I think a brief contract/agreement works fine. Do you agree?
Thanks for bringing up this topic again.
Hi Todd, Incoterms do set out who is liable for costs and risks, but it doesn’t set out the quantum or the “name” of the charge.. It is merely a guideline on which charges and risks are for whose account and at what stage.. Even if you agree with your shipper on FCA or any other Incoterm, mutual agreements and contracts will always prevail in the end and is much better for both parties to avoid any ambiguities..
Even with CIF terms, if the consignee does not show up at disport the shipment is stranded. Who is responsible for THC storage etc at disport?
I will echo the earlier comments about a good and valuable article which will hopefully reach some of all those still using FOB.
Taking the topic a step further into a discussion I have ended in a couple of times. When using FCA (port/terminal) is it then shipper or consignee that should be paying for Terminal Handling Charge (THC) at the load port?
Considering that THC in many places both contain costs for lift off from truck and lift on to vessel, I do not find clarity in the current definition of FCA. What is your take on this?
Hi Hans, I would look at it this way.. FCA = Free Carrier which means that ALL costs till the time the container is handed over to the Carrier is on account of the seller..
In modern container business all carriers accept containers INSIDE a terminal of their choice.. In most scenarios, the terminal receives the container on behalf of the carrier and stores this container in a particular stack of the carrier for a particular ship till such time it is loaded on the ship..
The terminal charges the carrier for the activity of taking the container off the truck, storing it in the terminal and when loading happens, loading it from the ground, to the trailer and loading on the ship..
This activity is part of the handover of the container to the carrier and all the charges for this handover is covered under the THC which the carrier eventually bills the seller/shipper..
Trust this is clear..
keep it up by re-educating us ,me as a clearing agent at Lesotho all my clients are using the FOB because they are only paying he local charges other costs are paid by the supplier .
thank you very much and FLT is my first time to hear about it.
Glad to be of help Mpolai.. 🙂
The Incoterms rules are now in the process of being revised. The process is practically over. What the Drafting Group has done with FOB, the ICC Drafting Group knows, so do the members of the various National Committees. Hope the DG has taken into account your views.
Hi Rupnarayan, yes everyone is waiting eagerly to see the changes..
Yes I agree with you. Habbits are difficult to change, even if FOB and CIF are no more appropriate! this is what I teach to me students at Kedge, and may be once they will be in charge they will progressively change the old-fashionned habits!
Thanks for guiding the future in the right direction Valerie..
Thank you for another informative article.
I have learnt something very interesting today.
Glad you found it informative Julia.. 🙂
Hariesh, I could not have put it better or more simple. Must mention that I am often amused when the FOB Incoterms rule is used for air freight shipments. Excellent article!
Coming from you Alexander, will take it as high praise.. 🙂 Thanks..
could it be that one of the reasons is because of the freight forwarders?
When you sell in FOB basis, the shipper pays for the THC at origin, and it’s most likely that the freight given to the “buyer” is on Liner terms which already includes both THC, origin & destination.
Who is taking that extra income?
Ricardo, in the current container trade, I don’t think many lines include THCs both ends in the rates as it simply doesn’t make sense to them and I haven’t seen any container operator quoting on FLT basis for containers..
The reason, as Valerie mentioned would be habit and more importantly as Alexander alluded, lack of knowledge in using the correct Incoterms..
In addition there are risks to FOB as seen with the Hanjin bankruptcy: shipper has goods in port but carrier contracted by buyer never shows up. Who is to blame?
FCA is also a bit muddled, best to use FCA shippers premises and not port. Then risk is very clear to both parties.
Thanks for the pointer Harry.. 🙂
It seems like every region of the world has their own interpretation on the INCOterms.
Hi Ignacio, thanks, would you mind elaborating a bit further..