There is no doubt that the new Incoterms® 2020 are very usable in the context of trade within the Europe/Central Asia land mass and transported by land, just as the 2010 and earlier versions were. But are they sufficient? TFG heard from Incoterms expert Bob Ronai on the significance (or insignificance) of Incoterms® 2020 for global trade.
Why is that? Simply because they are all relatively minor advances on an old theme from when Europe was the centre of trade. However, trade in the rest of the world, notably to, from and within Asia, has increased dramatically in the past two decades to the point where the volume carried on container ships far exceeds that transported by truck in the aforesaid land mass. Not one of the current eleven Incoterms® 2020 rules is suitable for arms-length cross-ocean container shipments when the seller and buyer are not related and do not have a history of trading together.
To put this last statement into context we need to understand a few “givens.”
The F-rules and C-rules in the “any mode or modes of transport” section of Incoterms® 2020 all revolve around “delivery” being when the goods physically are handed over by the seller to the buyer or a carrier and in the D-rules when either the seller or its carrier hand the goods directly to the buyer. The “sea” modes of FOB, CFR and CIF require the seller itself to put the goods on board the vessel.
Customs authorities handling exports always want to know when the goods are actually exported, meaning when they are intended to leave the country. Their final records of export are completed by the lodging of the vessel’s manifest with the Customs of the exporting country. The act of handing the goods to a carrier is completely irrelevant to the authorities and does not represent export which is made very clear in the rules themselves by mentioning export formalities as a separate matter to delivery.
In those countries where import duties are calculated on the export value or “FOB” value the “on board” date on the bill of lading is often used to determine the exchange rate converting the invoice value to a value for duty in the local currency.
Banks when issuing letters of credit (L/Cs) are only interested in receiving “on board” bills of lading. This is especially so when the goods themselves form part of the security for the L/C. The banks want to know that the goods are “on the water” not stuck inland somewhere in the seller’s country.
The shipping lines handling containers issue their bills of lading as a default only after the vessel has departed the load port and only with an on board date stated. If you were to ask the staff of a shipping line to issue a “received for shipment” bill of lading before the vessel had even arrived in the load port but after the container was received in the terminal you would likely be greeted with confusion. Consider the steps that a full container load goes through before going on board the vessel. The seller’s or buyer’s forwarder (depending on the agreement reached in the contract) brings the empty container to the seller’s premises for the seller to load the goods into it. From there the seller knows not, and cares not, about when and where that container arrives at the CY (container yard or terminal), or when it gets transported to the wharf to await arrival of the vessel. Consider too the steps that a small cargo of say two pallets takes before it gets on board the vessel. Typically the seller’s or buyer’s forwarder contracts a trucking company or courier to collect the cargo and take it to a CFS (container freight station) of a groupage or consolidation operator. There the two pallets will be placed into a container with other goods either heading to the same final destination or possibly to an intermediate destination for de-consolidation and re-consolidation to the final destination. Eventually that container will be placed on board the vessel leaving the export country. The point and time when the goods are handed over to the first carrier will be relevant in trucking goods across Europe, but clearly are entirely irrelevant to the act of export in cross-ocean container trade.
Typically the seller’s or buyer’s forwarder contracts a trucking company or courier to collect the cargo and take it to a CFS (container freight station) of a groupage or consolidation operator. There the two pallets will be placed into a container with other goods either heading to the same final destination or possibly to an intermediate destination for de-consolidation and re-consolidation to the final destination. Eventually, that container will be placed onboard the vessel leaving the export country. The point and time when the goods are handed over to the first carrier will be relevant in trucking goods across Europe, but clearly are entirely irrelevant to the act of export in cross-ocean container trade.
Official documents such as the certificate of origin usually require vessel details and the date of export to be shown. Commercial invoices and other documents show the vessel name and voyage number plus the port of loading and destination, not the point where the goods were delivered to a carrier.
While the Incoterms® 2020 rules refer to the two parties as “seller” and “buyer”, these parties generally think of themselves as being engaged in exporting and importing. Have you ever seen “seller-buyer” on a sign hanging outside a business or in a business’ letterhead? No, you will see “import-export”. The buyer almost invariably wants their risk and obligation to pay to commence once the goods are exported. They do not want to have any risk of trying to themselves export the goods out of another country where they are not a legal entity, should anything go wrong after the current concept of inland delivery.
The vast majority of cross-ocean shipments in containers is conducted under FOB, CFR or CIF with absolutely no mention of “Incoterms” of any version. Indeed the word is often used as a generic to mean “trade term”.
The current rules of FCA, CPT and CIP do not refer at all to when the goods are “shipped” or “exported” and place no obligation on either party to do that by a given date. As demonstrated above, that export date and action is what the cross-ocean container traders are concerned about.
Yes, I know, there is a new provision in B6 of FCA, but consider how impractical this is. The buyer, if agreed by both parties, and remember that both parties are always able to agree on anything in their contract, will instruct its carrier to issue an on board bill of lading to the seller. In all other instances where either party instructs a carrier to act on its behalf there is a remedy available to the other party for failure by that carrier to act accordingly. In FCA B6 there is no remedy available to the seller if the buyer’s carrier does not act on that instruction, or if the carrier fails to co-operate say by issuing that B/L as required by the seller to comply with the L/C. If some disaster befalls the goods after delivery but before the loading on board then the seller will never receive an on board B/L and will be unable to claim under the buyer’s L/C, an unacceptable risk for the seller. Interestingly this is the same reason put forward as to why FOB is not suitable for containers. Also of concern is that if the L/C calls for the bill of lading to be consigned to order and blank endorsed, the seller has no practical option but to be named as shipper on the bill of lading, introducing a whole raft of liabilities under the bill of lading which not only did they not knowingly agree to but which they will be completely unaware of.
Biting the Bullet
The drafting of the Incoterms® rules has always come under the ICC’s Commission on Commercial Law and Practice or its predecessors. This may have made some sense in the early days of trade concentrated in one geographic area, but with the proliferation of trade now covering the globe, and the availability of instant electronic communications worldwide, it is surely time to change the process. The Incoterms® rules themselves are not law, they attempt to be the definitions of three letter abbreviations widely used in trade to determine agreed-on terms and conditions in the contract of sale, but as I have demonstrated in some cases they fall short of being suitable for this purpose.
Remember that these rules have been written by volunteers each freely giving hundreds of hours of their time.
It is my opinion, as a trade practitioner with over five decades of experience that the Incoterms® rules need to be rewritten with urgency, to guide traders appropriately in what they have been doing, are doing and will continue to do, that is, use FOB, CFR and CIF for cross-ocean container shipments.
This article was edited on the 3.12.19, upon the request of the author.
The opinions expressed in this article are those of the author. They do not purport to reflect the opinions or views of Trade Finance Global.
Incoterms 2020 Rules PDF
A comprehensive 96 page guide on Incoterms® 2020, to be used in conjunction with The International Chamber of Commerce’s (ICC) new book, INCOTERMS® 2020.
Written by Bob Ronai CDCS, a member of the ICC’s Incoterms® 2020 Drafting Group, in partnership with Trade Finance Global (TFG). This 94 page guide provides an article by article commentary on Incoterms® 2020.
- Introduction and layout of the rules
- A1 / B1: GENERAL OBLIGATIONS
- A2 / B2: DELIVERY
- A3 / B3: TRANSFER OF RISK
- A4 / B4: CARRIAGE
- A5 / B5: INSURANCE
- A6 / B6: DELIVERY/TRANSPORT DOCUMENT
- A7 / B7: EXPORT/IMPORT CLEARANCE
- A8 / B8: CHECKING / PACKAGING / MARKING
- A9 / B9: ALLOCATION OF COSTS
- A10 / B10: NOTICES
- Advantages and Disadvantages of each rule and whether they work with LCs
- Rules for Any Mode or Modes of Transport
- Rules for Sea and Inland Waterway Transport
All proceeds from this book are split between the Author, and funding the TFG Student Accelerate Scholarship →