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The Following Blog Post Was Made On: 2018-01-16
FOB, FCA and the Incoterms in the pipeline
Some 20 years ago when my work with Trade Finance began – after having worked within the shipping industry – there was a lot of talk about Trade Finance catering for the presentation of electronic documents. At that time, the "new black" was EDIfact. Since then many buzzwords have been floating around – basically aiming for the same goal: To cater for an electronic process within the Trade Finance industry. Today the hot topic is Blockchain. We will see how that plays out, but it is fair to say that the success in making the Trade Finance documents electronic so far has been limited. One reason for that is no doubt that old habits die hard. For example, many LCs still call for a negotiable on board bill of lading – in paper form. For that reason, the presentations made today are largely identical to those made in the 1930es. They are made in paper form, and include a negotiable on board bill of lading.
This has created some challenged within overlapping areas. This is for example the Incoterms, and now the challenge is popping up again as a new version of Incoterms is in the pipeline. I.e. the Incoterms 2010 is under revision, and is expected to be replaced by Incoterms 2020.
The purpose of this article is to outline the challenge, and to suggest a way forward.
The problem is that the parties (i.e. the buyers and the sellers), despite a warning in Incoterms 2010, use the Incoterms FOB rule for delivery of goods in containers. The key problem is that the seller typically loses control of the container once delivered to the container terminal. Therefore, the seller is not in control of the costs associated with storage in the terminal and subsequent loading. Likewise the risk: According to the Incoterms 2010 FOB rule the delivery from the seller to the buyer is made once the goods are loaded on board the vessel. A seller using FOB for goods in containers will therefore have the risk from the delivery to the port until the goods are on board the vessel. The seller is therefore exposed to the risk should be container / goods be damaged once at the terminal.
The background for the warning in Incoterms 2010 was an increase in complaints by sellers who was charged terminal handling charges at the port of export in FOB shipments. However, FOB is still used heavily for container shipments. There simply is a universal practice that is downright wrong.
FOB versus FCA
During the Incoterms 2010 revision the issue has been raised again, and the question why the seller is not using the FCA rule instead of the FOB rule has been asked. Without a doubt FCA is more suitable for container shipments.
Of course, the consequence of using FCA is that the presented bill of lading will not show an onboard notation. Which will normally be there when the commercial parties are using the FOB rule.
Carriers and freight forwarders usually both have "received for shipment" bills of lading as well as "shipped on board" bills of lading to cater for both scenarios. The "received for shipment" bill of lading" is usual content-wise identical to the "shipped on board" Bill of Lading" except for the first sentence in the delivery clause for example:
"RECEIVED by the Carrier from the Shipper, as far as ascertained by reasonable means of checking, in apparent good order and condition…"
As a contrast, a "shipped on board" bill of lading would for example include the following wording:
"SHIPPED, as far as ascertained by reasonable means of checking, in apparent good order and condition."
As for the security features of the two bill of lading formats, they are the same. As such both can be "negotiable" – meaning that ownership can be transferred by way of endorsement, and the original bill of lading must be surrendered in order to obtain release of the goods.
In other words: The only difference in respect of the bill of lading between used in the FCA scenario and the FOB scenario is that the first will not include an on board notation on a named vessel whereas the second will.
The Trade Finance angle
A key question is why an onboard bill of lading is (almost) always required. It is a fact that in LC transactions the bill of lading is the most "popular" of the transport documents, i.e. the majority of LCs call for a bill of lading. Such bill of lading must comply with UCP 600 article 20. This article includes the following wording:
"A bill of lading, however named, must appear to […] indicate that the goods have been shipped on board a named vessel at the port of loading […]"
In other words, when the LC calls for a bill of lading, such presented bill of lading must include an on board notation. This of course is a perfect match to transactions where the FOB rule has been agreed between the buyer and the seller. However, as described above, when the delivery of goods is in containers then there may be unforeseen challenges.
So why not simply use the Incoterms FCA rule?
For the FCA rule to solve the problem outlined in this article, the delivery (to the first carrier) must be to an inland place. This means that a multimodal transport document must be called for in the LC.
In 2007 when UCP 600 came into force there was a significant change compared to its predecessor (UCP 500): The order of the transport documents was changed, meaning that the first transport document is now the "Transport Document Covering at Least Two Different Modes of Transport" also known as the "multimodal transport document".
Following the implementation of the UCP 600 the Drafting Group published the "Commentary on UCP 600". That publication includes the following statement:
Because transport by more than one mode of transport is the more common form in which goods are transported from seller to buyer, the Drafting Group placed this article as the first of the transport document articles. Because more transport companies seek to control the entire carriage of a cargo from its place of origin to the place of its use, the rules reflect the increasing importance of a single document covering the entire carriage, regardless of which mode of transport or means of conveyance is involved during the journey. Likewise, beneficiaries and applicants are interested in having one single counterpart that takes care of the entire carriage rather than having to address different parties for each leg and mode or means of conveyance used. The standard requirements for this document are outlined in UCP 600 article 19.
Article 19 includes the following wording:
"A transport document covering at least two different modes of transport (multimodal or combined transport document), however named, must appear to […] indicate that the goods have been dispatched, taken in charge or shipped on board at the place stated in the credit […]"
In other words, within the UCP 600 there surely is room for the LC calling for a multimodal transport document – thereby catering for the Incoterms FCA rule being agreed to between the parties.
In respect of the above it is important to also bear in mind section D of ISBP 745 (Transport document covering at least two different modes of transport ("multimodal or combined transport document")). That section includes paragraphs describing how UCP 600 article 19 is to be applied in practice. In this respect ISBP 745 paragraph D7 is relevant. It reads:
"When a credit requires shipment to commence from a port, i.e., when the first leg of the journey, as required by the credit, is by sea, a multimodal transport document is to indicate a dated on board notation, and in this event paragraph E6 (b-d) will also apply."
ISBP 745 paragraph E6 walks through the variations of the on board requirement as quoted above from UCP 600 article 20.
From the above it therefore follows, that in order to – in practice – cater for the FCA rule, the first leg of the journey, as required by the LC, must be an inland place. And that must be reflected in the presented transport document. If the first leg of the transport is a port (i.e. stated in the "port of loading" field in the LC and the transport document) then the on board notation requirement as outlined in UCP 600 article 20 applies.
This may actually prove to be the biggest change in practice, because the place of the container terminal and the port may have the same name. For example:
Place of receipt: Copenhagen
Ocean Vessel & Voyage No.: Sea pride v.1234
Port of loading: Copenhagen
Port of discharge: Hong Kong
Place of delivery: [blank]
Although the place of receipt and the port of loading is the same, it is really not the same! The place of receipt is the "container terminal in Copenhagen" and the "port of loading" in practice means on board a named vessel in Copenhagen port.
Because the first leg of the journey as called for by the LC is the place Copenhagen, the requirement quoted above from UCP 600 article 19 will apply; i.e. the presented transport document must indicate that the goods have been dispatched, taken in charge or shipped on board at the place stated in the credit. The first 2 (dispatched or taken in charge) deems a "received for shipment bill of lading" acceptable; i.e. without an on board notation in (in this case) Copenhagen.
The way forward
As argued above there is nothing in Incoterms 2010 or for that matter UCP 600 that prevents the buyer and the seller from using the FCA rule and for calling for a multimodal transport document. The main obstacle – and reason why most LCs calls for a bill of lading is habit – and most likely lack of knowledge. This may be really hard – if not impossible to change.
However, since Incoterms 2010 is now being revised, there may well be an opening, and one way forward is that the Incoterms 2020 further emphasizes their warning against using the FOB rule for container shipments. However, it should go further than that: There should be solid guidance. There should be goods examples on how to cater for multimodal transports in LC transactions. Likewise the issue – and how to solve it in practice – should be addressed in training sessions following the publication of Incoterms 2020. The examples, guidance and training should target the sellers and the buyers – but of course also the Trade Finance banks, providing the tools and guidance for advising their customers when they receive LC application using an Incoterms rule the wrong way.
I cross my fingers and urge you all to take care of each other and the LC … but also Incoterms. After all: It is family.