some questions about string sales in INCOTERMS 2010
Hi,friends,
Recently, I am studying the new INCOTERMS 2010 ,and there is a confusion which I can not find the answer, so I think maybe someone already have some ideas about this question: how can F.O.B and C.F.R be used in the string sales? I mean under these two there is no insurance on behalf of the buyer, the seller has no obligation to buy an insurance for the cargo. IF so,the buyer may not employ these terms in string sales, and there is a question: why ICC stipulates the string sales in the new version?
I have seen the comments posted by others. I am of the view that whether the trasaction is a direct sale( one off) or a string sale involving many, the issue of marine insuarnce lies and a supplier is never protected if he does not details of the marine cover obtained by the buyer under which teh consignment is supposed to be insured in case of FOB transactions. If the supplier is not sure that insurance has been effected or not he should take steps to safe guard his interest. Marine insurance companies do provide Contingency insurance cpovers to such suppliers where the cover operates if the buyer had not opted for insurance, or had not kept insurance in good order or for any reason does not opt for invoking the isnurance. As a Credit Insurance practitioner I have always advised exporters/ suppliers to be very clear as to the marine isnurance cover and if there is any doubt opt for the contingency cover.
Regards
viswaprema
Dear Alan & Phill Doran,
I was closely reading the replies given by Mr.Phill Doran and learning from it. We are lucky to have somebody like him for the beginers. I too had this questions in my mind as Alan - which is now cleared. One more aspect I understand on FOB & CFR is the "Freight" - which is excluded in FOB.
I heard about "Warsaw-Oxford Rules of 1932 " the very first time. Will go thru it.
Thanks
Starone
Hello Alan
What if the buyer already has his own insurance cover?
What if insurance is determined by the buyer’s local law which prevents the seller arranging cover ?
Bear in mind that Insurance is only compulsory under CIF (or CIP) – you may have a ‘string’ sale under many other conditions, and while we might say that insurance is always a good thing to have - it is not always wanted. i.e. there is a commercial choice to be made
Others may have other opinions.
I wish you well
Cheers
phill
hi,phill
First of all,really thank you for your answer.
There is one question, if the traders use FOB or CFR then the buyer should buy insurance for his own interest, SO here is this scenario: in the string sales, when the first buyer employ FOB and buy his own insurance, but he sells the goods to the second buyer, according to INCOTERMS 2010,the second trade can also use FOB,and they used this term. BUT the goods is on the road, how can the second buyer buy an insurance? I mean he does not know what have happened to the goods, maybe there happened a storm and the goods were gone. OF course, if the insurance company can not know the condition of these goods which may be on the road, they will not accept this insure.
I hope I have made myself clear.
wish you well
alan
Hello Alan
Yes, your point is clearly made.
Firstly we can have several insurance contracts running at the same time – that is, just like we may have NO cover at all, the first and second buyer in your example are both at liberty to insure separately. Clearly (and legally) they cannot both claim if a loss arises, but they can both cover.
So, the second buyer in your example may take over the first buyer’s cover or they may elect to insurer through their own arrangements.
Insurance brokers and underwriters will offer cover while the goods are already moving provided the loss or damage is not yet known to the insured. In an ‘open marine policy’ this happens all the time, with the insured declaring movements sometimes quarterly in arrears (and in that case, potentially declaring AFTER a loss has become apparent). Note too that it is an accepted condition in a “C-prefixed” string-sale that buyer’s 4, 5 or 6 down the string may actually be selling and buying damaged or lost goods to each other – without knowing it. The damage may arise after shipment and before discharge, if you see what I mean.
So, in brief, provided damage or loss is not yet disclosed, an underwriter may offer cover for the entire journey, retrospectively; but it is the underwriter’s choice to decline, of course.
Although you correctly assume: “...if the traders use FOB or CFR then the buyer should buy insurance for his own interest...” note too that the likes of CIF arose (where the seller buys insurance for the buyer) because it was crucial that the seller was sure there was insurance in place “...for his own interest...” too, but as SHIPPER.
If the cargo is not insured and if a General Average arises, the SHIPPER can have a liability to contribute to the General Average – a risk which amplifies when the CONSIGNEE has no insurance cover. To ensure the consignee did have cover, the SELLER made sure the BUYER was protected by forcing insurance into the price (i.e. CIF). It is for this reason (if you refer to A3a of your Incoterms Rules) that under any F-prefixed sale, like FOB, the seller has no obligation to get involved in the contract of carriage i.e. they wish to avoid being the shipper for the very risk I have just outlined. So, while you are correct that the buyer has an interest in insurance being in place, in Seafreight, any seller who takes on the role of SHIPPER must also be very sure insurance cover is there too. So, we can say that any SELLER in an F-prefix, where they are also the SHIPPER, must be sure insurance is in place OR they must decline to be the named shipper.
This is a complex subject Alan, I hope that I am clear in the above, but please post again if this is not the case and you require further clarification.
Cheers
phill
“...in the kingdom of the blind; what you see is what you get...”
hi,phill
Really appreciate you.
You make it very clear, this problem has confused me a lot, now I clearly understand it. BUT one more question, do you have some articles on this point "string sales", I am preparing my graduation thesis for master's degree, you may have known I will put the point on this new rule, now here we have many scholars who think in string sales the traders can not use FOB?CFR, the only one can use is CIF, so I want to find out the reasons behind this new rule, I need more sources for studying on this,so if you have any article or thesis, if it is convenient please give its title to me, I will download it from westlaw or heinonline.
thanks again
cheers
alan
Hello Alan
Sadly I cannot refer you to any specific laws or rules – I am really sorry about this.
I would point out though that what your colleagues may be referring to is ‘cif’ often written ‘c.i.f.’ Note how it is written Alan – lower case with full-stops in-between the letters.
You see, the capital letter expression CIF along with the capital letter CFR and FOB may well signify the seller and buyer’s election of Incoterms Rules, or some other system of their own invention, but either way these are private definitions.
Remember that trade invented commercial terms, L O N G before the ICC got involved and by the mid-1800’s traders already had ‘cif’ – a term of their own invention which was challenged in English courts. The challenge was – could ‘delivery’ be a paper document rather than physical handover of cargo: the courts found that it could (as this was how merchants had used it for years) and this in turn gave rise to the Bill of Lading Act which gave legal weight to the customary practice of treating the bill as a ‘document of title’, albeit in a limited form.
So, it may well be that ‘at law’ that ONLY the term ‘c.i.f.’ is recognised in ‘string sales’ – paper delivery rather than tangible delivery. But, as parties to a private and transnational contract (one which is therefore not necessarily subject to a law which is based on the English precedent)* , the seller and buyer may opt for any understanding which suits their purposes – hence their election to use (say) Incoterms Rules and with them, the opportunity to stretch the understanding of string sales.
* (bear in mind we need only contemplate the law when the merchants revert to it. If they are able to operate to their mutual satisfaction and benefit without recourse to the law then the law need never contemplate what the buyer and seller intend or how they have privately interpreted what is possible)
I am truly sorry I cannot direct you to a source here but I wish you well with your studies. (You may,however, want to track down a copy of the Warsaw-Oxford Rules of 1932 which gives you some idea of how 'c.i.f.' was structured at the time - and I think it is also the basis of the Incoterms Rules too).
Regards
phill
hi?phill:
Thank you for your help, without that I can not understand this rule cearly. Just as Starone said :We are lucky to have somebody like him for the beginers. A kind-hearted man helps the beginers a lot, I will go through Warsaw-Oxford Rules of 1932 and The Rotterdam Rules, maybe there are some important points I think.
Wish you well
Cheers
Alan
Hi Phill,
I have read through this articule but a question is bothering my mind.
I had received so many proforma invoice with two different incoterm on the same proforma (FOB and CFR), why is this so? Since FOB indicate that buyer should pay the transportation cost and CFR paid for transportation cost by the seller. Please put me through on this.
Thanks,
Hello there whykay
The short answer is: I believe you are NOT seeing Incoterms on the invoice – in fact I do not think you are reading any form of commercial term. What is being expressed is a customs valuation symbol – even if your client does not know this either.
Remember, commercial terms are not obligatory between sellers and buyers (for example, Incoterms are not a law) but when commercial terms are used they are used as CONTRACT language – so you’d find them in the sales contract, not on the invoices; Incoterms serve NO PURPOSE whatsoever on an invoice.
But bear in mind too that EXPORTERS and IMPORTERS by law must declare their export and import values to customs.
What has happened, is that (in the very lazy way business has of not paying attention to the detail) the compulsory customs terms have been read and used as commercial terms – they have migrated from the contract to the invoice.
An invoice is used for customs purposes and part of that purpose is for customs to compare the price to market-related averages (to make sure the parties are not transfer pricing or dumping). This requires the officer to know what the ‘top line’ price is – i.e. the price before any additional. This value is indicated by the symbol ‘ex works”.
Trade statistics are based (in most countries) on the ‘last export price’ which is the value of the ship or aircraft etc as it leaves the country of origin (that is, before the freight). This is represented by the symbol ‘fob’.
For reasons I’ll not go into here (too much detail – and I get pulled up for that!) the customs’ officer wants to see the freight disbursement – with or without insurance as applicable. These are shown as elements of the price on the invoice by the symbols “c&f” and “cif”.
So, on an INVOICE you could see a string of symbols in descending order (it depends on the sales conditions as to how much is shown): ‘ex works’ ‘fob’, ‘c&f’ and ‘cif’.
What has happened (I believe) is that over time, buyers and sellers have misappropriated this language to their own CONTRACTUAL needs and used the expressions as commercial terms. How many times do you hear people talk of ‘ex works’, ‘fob’ and ‘cif’ as sales terms? They make this incorrect reference to these VALUATION symbols because they MUST see them, they MUST use them – but they read them as sales terms: which they are not.
In drafting Incoterms, the ICC have tried to steer people away from this – using three letter codes like EXW and FCA and DAP which do not look like the customs valuation symbols. But as they are not a law, they still have to address the definitions of the old pre-ICC terms like FOB and CIF – which they write in upper case in an effort to create some distinction (note how I wrote the customs terms – fob and cif)
Of course, the waters get muddied further when the credit calls for commercial terms on the invoice. The problem here is twofold. Firstly, commercial terms have nothing to do with the beneficiary or the issuing bank – they are meaningless in the context of the credit so why they are called fro is again a misconception by the bank of the custsoms valuation symbols, which traditionally banks needed to sight for trade statistics or central bank purposes, many years ago. The second problem is (business being lazy again) the importer will often use the applicant’s commercial invoice, received through the credit, for import customs purposes – which they are free to do: but in a model situation they would avoid this. The invoice which passes through the bank serves the needs of the credit, not the needs of customs and excise.
So, what you are actually seeing on that pro-forma is the customs’ valuation points ‘ex works’, ‘fob’ and ‘c&f’: but incorrectly written using the Incoterms system.
As I mention, I get pulled up for long answers, but I assure you there is so much more to this – the simple way to see it though is that the SELLER the BENIFICIARY and the EXPORTER are three different parties, with three different languages and vocabularies. Once their languages migrate from one use to another, it all starts to get confusing.
I hope this helps you: shout if you need clarity...
Cheers
phill
“...in the kingdom of the blind; what you see is what you get...”
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