In the previous blog post, we considered the sales contract and delivery. ‘Delivery’ in this context is not the place of delivery, but rather, it is the point where risk transfers from the Seller to the Buyer, the Seller’s final obligation.

Appetite for Risk

To understand what risk is, we will look at some of the most used trade symbols and Incoterms® rules, and for each one, identify the point of delivery and the point where risk transfers from Seller to Buyer.

Previously, we looked at the difference between the WCO/WTO valuation symbols and the Incoterms® rules, specifically f.o.b./FOB. Taking this a step further:

• ex works as a valuation symbol describes the value of the goods, onboard the collecting means of transport, outside the Seller’s premises, cleared for export,
• f.o.b. describes the value of the goods on board the export vessel or, c & f minus freight,
• costs and freight (c&f) is the value of the goods, including the freight, at the port of entry in the Country of Import,
• c.i.f. is the c&f value, plus insurance.

The symbols only talk about the transaction value, i.e., the price paid or payable. They do not talk to risk transfer, they do not talk to delivery, and for c.i.f., they do not talk to the level of insurance.

In referencing the Incoterms® rules, the inclusion of the ‘named place’ next to the chosen symbol is of utmost importance. Section III, Article 12 of the introduction to Incoterms® 2020 states the following:

“12. The place named next to the chosen Incoterms® rule is even more important:

• in all Incoterms® rules except the C rules, the named place indicates where the goods are “delivered”, i.e. where risk transfers from Seller to Buyer;
• in the D rules, the named place is the place of delivery and also the place of destination and the seller must organise carriage to that point;
• in the C rules, the named place indicates the destination to which the Seller must organise and pay for carriage of the goods, which is not, however, the place or port of delivery.”

Put another way:

• for the C rules, the Seller has delivered in the Country of Export and pays the cost to the named place, which is in the Country of Import,
• for the EXW rule, the Seller has delivered when he makes the goods available, uncleared for export, to the Buyer at the named place,
• for the F rules, the Seller has delivered at a point and pays the costs to that point, which is in the Country of Export,
• for the D rules, the seller has delivered, and pays costs to the named place which is in the Country of Import.

So, for the Buyer, with the above in mind he must address the key question which is, “What is my appetite for risk and how do I manage that risk?”.

Risk and Managing Risk

Let us now return to the example of the Buyer of 10 containers of generators, bought under what he believes to be FOB terms. He understands that he is responsible for marine insurance and proceeds to secure a marine insurance policy.

Institute Cargo Clauses A (ICC A) is the most comprehensive Marine Insurance Policy, generally referred to as “all risks”. Whilst broadly this may be true, the fact is that ICC A has some very important exclusions. Article 4.3 and 5.1.2 must inform the decisions of the buyer about stowage of the cargo in the container.

“4.3 loss damage or expense caused by insufficiency or unsuitability of packing or preparation of the subject-matter insured to withstand the ordinary incidents of the insured transit where such packing or preparation is carried out by the Assured or their employees or prior to the attachment of this insurance (for the purpose of these Clauses “packing” shall be deemed to include stowage in a container and “employees” shall not include independent contractors).”

“5.1.2 unfitness of container or conveyance for the safe carriage of the subject-matter insured, where loading therein or thereon is carried out prior to attachment of this insurance or by the Assured or their employees and they are privy to such unfitness at the time of loading.”

One may argue that under a FOB contract, the Seller must at his own risk and expense ‘deliver’ the goods on board with the implication being that they are safely stowed in the container. Article A8 of the Incoterms® 2020 rules for FOB is very clear.

‘’A8 Checking/packaging/marking

The seller must pay the costs of those checking operations (such as checking quality, measuring, weighing, and counting) that are necessary for the purpose of delivering the goods in accordance with A2.

The seller must, at its own cost, package the goods, unless it is usual for the particular trade to transport the type of goods sold unpackaged. The seller must package and mark the goods in the manner appropriate for their transport unless the parties have agreed on specific packaging and marking requirements.”

Taking this thought a step further, the transport document (B/L or Waybill) will for containerised cargo, always include the endorsements “Shipper’s Load, Stow, Count and Seal” and “Said to Contain”. In other words, the carrier receives and undertakes to carry a container, not the content.

What are the takeaways from this?

• ICC A excludes loss or damages arising from “unsuitability of packing or preparation of the subject matter.” Notwithstanding the content of article 8.1 of the ICC A which reads, “Subject to Clause 11 below, this insurance attaches from the time the subject-matter insured is first moved in the warehouse or at the place of storage (at the place named in the contract of insurance) for the purpose of the immediate loading into or onto the carrying vehicle or other conveyance for the commencement of transit…” The Buyer would be well advised to seek clarity from the Insurer on its interpretation of the responsibility for container packing/stowing and specifically, the time the insurance ‘attaches”,
• The Incoterms® rules are silent on packing; they are very clear on the packaging. Packaging refers to the outer packaging of the goods concerned,
• The transport document makes it clear that the carrier has no knowledge of the content of the sealed container as received for carriage.

Let us now recap where we are with this transaction involving the purchase of generators.

1. The Buyer has bought 10 containers of generators, the purchase order endorsed as fob. However, the Seller is unable to deliver the goods ‘on board’ as required by the Incoterms® rules meaning that the Seller hands the goods to the carrier, or other, at someplace before the goods are on board. What is not clear is, when does risk transfer from the Seller to the Buyer? It is probable, but not clearly defined, that the Seller has quoted an f.o.b. (WCO Customs Valuation Symbol) price but is delivering under FCA rules. The implication of this being that risk has transferred before the goods are on board albeit the value declared, the price paid, or payable is inclusive of the costs to have the cargo loaded on board.
2. The Buyer has procured marine insurance under ICC A which ordinarily represents the most comprehensive level of cover. Exclusions in the policy suggest that the Buyer must at the very least, verify with the Insurer their interpretation of container packing/stowage and, the point where the insurance attaches. At face value, the exclusion clauses could suggest that inadequate packing and/or unsuitability of the container, may be grounds for repudiation of a claim arising from either of those events. One cannot rely on the Incoterms® rules or the transport document for comfort.

What have we learned?

There are clear gaps relative to risk, between what the buyer thinks he has done and how he believes he has mitigated his risk and the reality of the structure of his deal. In short; the Buyer is at risk from the time that the Seller has delivered but delivery, in this case, cannot be pinpointed to a specific time or place. The onus is therefore on the Buyer to ensure in his negotiation with the Seller that there is a clear and unambiguous understanding of the point where risk transfers. The Incoterms® rules, if properly employed, are designed for such a purpose. It is also very important to make clear in the Sales Contract, the specifications for packing and, with reference to ICC A 5.1.2, the suitability of the container for the goods shipped.

Final Word

Whilst the above applies almost exclusively with f.o.b. / FOB, the principles are also relevant for ex works / EXW or any of the other commercial terms in common use.