ICC Incoterms update by qoe36584


									ICC Incoterms update.

The talk in the shipping profession now is all about what will be announced next year by the ICC
about the undated version of Incoterms that will take effect on the 1st January 2011. Do we now
already know what the main debated item is? Yes we do. Those who follow politics know what the
debates are all about, those who don’t follow, get it from the news. That is why we have specialist
magazines as there is a hunger to know what is going on in specific professions.

Those that follow shipping know the big debate that would be ended next year by this time is the
issue of the Incoterm FOB for the use of containerization. We know that with debating is that not
everyone may know who is right but we all know that at least one side is wrong and for some of us
only time will tell, as we may say with hindsight, they both were wrong. So before hindsight, let’s
look at FOB.

FOB was the first shipping term among traders, when ships were made of wood and men where
made of steel. Traders came to an agreement that they could all make more money if they used
each other’s ships than if they had to wait for their own ships to arrive back, if it ever arrived back,
before they would be able to send off their next venture.

When traders finished knocking out the mechanics of the first agreement, the term FOB, Free On
Board, was created, that meant that each trader had to bring the cargo to the ship with their own
staff (slaves) and place it on board where the ship’s crew wanted it and if they required the ship’s
lifting gear with the net, then they had to pay a required amount per lift to the crew.

If any cargo fell out the net before the net passed the ships rail, then it would be the trader’s fault
and if any cargo fell out the net after passing the ship’s rail then it would be the crew’s fault. As if
the crew were not careful enough in judging the ship’s rocking when the weight of the cargo in the
net came over the ship, much like if we had to lift a heavy bag and fling it onto our shoulder, if we
were not careful, we would fall over, so also the cargo could fall out of the net from the swining.

This FOB term has worked for centuries, and will continue to work, even if they change the name.
So what is the fight about with using it with containers? In the Wording of the ICC Incoterms 2000
book says, “Free On Board means that the seller delivers when the goods pass the ship’s rail at
the named port of shipment.” Let us stop right there, some people are saying that containers are
not handed over to the carrier at the ship’s rail. These people who say so are only some times
correct, let us explain.

Some times the carrier does receive goods in another way than pass the ship’s rail. What does this
mean? It means two things. Fist is the way we load the carrier and second where we hand over
the cargo to the carrier. The way we load the carrier has not changed since 1936 but sometimes
where we load the carrier has.

    1)    The goods are loaded into the ship without passing the ship’s rail. When does this
         happen? It can happen in two ways, A) the RORO type ship, as goods are driven up a
         ramp under the ship’s rail as Break-Bulk or containers, and B) the bulk tanker type ship, as
         goods are pumped into the side of the ship under the ship’s rail.
    2)    The second meaning is when goods are handed over to a carrier at a place before they
         are loaded onto the ship, like a warehouse. The carrier is using their own equipment as an
         extension of the ship to a land point. This is when the carriers are paying for the port
         charges of loading the ship and maybe even transport charges to the ship.

From what we now have understood from the above two points, that the exporter on many
occasions moving their cargo in containers still pays the port loading charges and the port is still
loading the container onto the ship across the ship’s rail. So why take away FOB for

How did this idea for the term “FOB not for containerization” come about and caused so much
friction with traders? To answer that question we would need to go back to Incoterms 1980. In the
1980 update of Incoterms, they introduced a new term FCA, Free Carrier. Why was this done? This
was done accommodate a land base point for containers.

However the term FCA should have been there when Incoterms first came out in 1936 as FOB
required goods to pass the ship’s rail. In 1936 we already had cargo loaded into ships without
passing over the ship’s rail, RORO and tankers. Fortunately this was never challenged in a court of
law from 1936 to 1980.

If this was done correctly in the first place with FCA in 1936, we would not have brought such
confusion to uneducated people. If we had challenged FOB in a court of law before 1980 then we
would have had FCA before the invention of containerization.

The traditional point in maritime trade is FOB, however with the introduction of containerization,
brought in a new option of handing over the cargo at a land point in the seller’s country, namely
where the container would be packed. For this new handover point, the ICC came up with the term
FCA for traders to have the extra option should they choose the land base point.

FCA for containers was never intended to eliminate FOB but rather to bring in an extra point of
handover for containerized cargo. The traditional FOB term did not display any problems as a trade
term when we introduced containerization into shipping. FCA only brought in a new handover point.

Let us take a practical example of tools used for eating. The most traditional tool is a spoon; you
could eat most food with a spoon for scooping and lifting the food. If you had some food that you
would prefer to poke like a potato, you could introduce a fork. The fork does not replace the spoon
for potatoes, as some people would like to use a spoon to enjoy their meal.

In the same way, FCA was not intended to eliminate FOB from containers, as some traders would
like to use FOB as a trade term to enjoy that commercial handover point. The most common trades
using FOB for containerization are the ones that use the “letter of credit” for the terms of payment
and that is on an increase with the world economic crises. This makes perfect sense for trade as
this proves that the cargo is on board a ship and commercially bound to the place selected by the
buyer but with the seller still holding onto the title of the goods till payment.

In the “ICC Guide to Incoterms” book on Containerization (page 15).
The Guide states that the term FOB for containerized goods has brought particular difficulties in the
maritime trade and is wholly inappropriate. The book does not give any one example of such
handicap of using the FOB term for containers.

This is unacceptable for making such a statement without any official mention of this point in the
Incoterms 2000 ICC official rules for interpretation of trade terms book which was agreed by a
committee. The author of the ICC Guide to Incoterms had no authority to bring in his own opinion in
the guide to Incoterms book sold by the ICC.

The mandate for the Incoterms guide book was only to explain the official Incoterms book that
would be coming into effect on the first of January 2000. The ICC failed to recognize that this was
the author’s own opinion as if it were true, then this matter would have been recognized by the
ICC’s Commission on International Commercial Practice.

The ICC Guide book has now brought friction to the international trade profession using the
Incoterms 2000 book. We have now a large number of traders that are not educated in Incoterms,
blindly following this “band” containerized point on FOB while the educated traders in Incoterms
continue to use FOB for containerization. They are two different books, one is by a committee and
the other is by an individual respected by the shipping industry.

The new ICC Guide should be amended so that the educated traders could continue to use FOB
as a useful term on containerization without the harassment of the often new traders lacking in
shipping knowledge. I started in shipping in 1975, at the very heart of the worldwide acceptance of
commercial containerization and have never found a problem with FOB for containers.

If this band on containers for FOB is in the updated version on Incoterms then all is not lost.
Incoterms is not a law but only commercially accepted trade terms that would be recognized in
commercial documents and those documents would then have the backing of law enforcement. If
traders use the updated version that band containers for FOB, then the courts may not accept the
trade term and risk & cost may not have switch off for the seller at ship’s rail load port.

The safest way around this problem if the ICC accept the band of containers for FOB would be to
use FOB – Port name – Incoterms 2000, as then the law courts could fully accept this version of
the risk and cost switching off for the seller at load port for containerized cargo long as the number
2000 follows the word “Incoterms”.

PMR Africa business magazine conducted their annual survey for 2008 of 160 freight forwarding
companies and one of the 5 finalist honored in February 2009 has band me as a lecturer for telling
their staff that FOB can still be used for containers, so there is a lot of education still to be done in
the market.

Jim Merrington
1975 to present
34 years in shipping

Exit: Export & Import Training
cell: 082 926 6190
email: study@exitraining.co.za
website: www.exitraining.co.za

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