International Sales Contract and Carriage of Goods by Sea - Essay Example

?INTERNATIONAL SALES CONTRACT AND CARRIAGE OF GOODS BY SEA Introduction International sale by carriage of goods by sea is one way for a country to get goods and services it needed. The parties involved in this type of transaction are the exporter and the importer or whom we commonly refer to as the seller and the buyer. Many of their concerns are similar. Whether they are beginners or experienced traders, they are satisfied when they receive shipments sooner or if there is no mix-up in the delivery of goods. Accurate documentation specifically in the area of quoting terms of sale is very vital to the success of the shipment and of the business. This essay will dwell on two terms of sale: the CIF and FOB. It will discuss their distinction and how Incoterms 2010 affected these terms of sale. It will attempt to find out which of these two terms is viable to the 21st century traders. C.I.F and F.O.B : Their Distinct Characteristic and how they work The terms C.I.F. and F.O.B are two abridged business terms. Both are used in international trade covered by carriage of goods by sea. The term C.I.F is an abbreviation of Cost, Insurance and Freight. If the Contract of Carriage contains price quotation on C.I.F, it presupposes that the seller will shoulder the payment of cost of crating and packaging, insurance and the freightage. Here, the carrier is considered an agent of the seller. The ownership of the goods is retained by the seller throughout the trip and passes to the buyer upon reaching the point of destination and the cargo is discharged in favor of the buyer.1 C.I.F requires the seller of the goods to arrange for the carriage of goods by sea to a port of destination and provide the buyer the documents necessary to obtain the cargo from the carrier. 2 According to Villanueva the insurable interest is with the seller and the taxes are not due as the sale is deemed perfected only upon reaching point of destination.3 One of the significant features of a CIF contract lies in the performance of the bargain, which is to be fulfilled by the delivery of documents and not by actual physical delivery of goods or shipment by the seller according to the case of Manbre S. Co. Ltd. v Corn p. Co. Ltd. 4 The Term F.O. B. is the abbreviation of the terms of sale Free On Board. Here, if the contract of carriage contains price quotation with FOB, the seller is presumed to comply with the obligation to deliver the goods to the vessel. The one responsible for payment of the freightage is the buyer and the vessel or carrier is an agent of the buyer. Hence, delivery to the carrier is delivery to the buyer. Under this term, the buyer acquires ownership over the goods upon delivery by the seller to the carrier. The buyer here now has insurable interest and the sale has been considered perfected upon delivery to the vessel.5 The term FOB, which is one of the popular commercial terms, is commonly used and misused. Though frequently used to describe inland movement of cargo, it is specifically refers to ocean or inland waterway transportation of goods. 6 In both CIF and FOB, there is intervention of the carrier. Both terms also use bill of lading, which is a document of title that denotes ownership of cargo or goods, which can only be transferred by endorsement. The carrier issues this document whenever the carrier ships merchandise, goods or cargo. 7 Responsibilities and Duties in CIF and FOB Contacts Compared One of the differences between the CIF Contracts and FOB Contracts lies in the following areas: In CIF, the insurable interest is with the seller while in FOB, the insurable interest is with the buyer. Another important difference between FOB and CIF contract is that, FOB contract specifies the port of loading, however CIF contract specifies the port of arrival.8 The difference between the two terms of sale pertains to the rights and duties of the seller and buyer. The primary duty of the seller in FOB contract is loading. 9 And the buyer specifies the vessel on a port nominated by the buyer and on which the goods are to be loaded by the seller on behalf of the buyer and procure a bill of lading. In case the seller loaded the goods on a vessel on a port other than the specified port, the buyer may refuse the delivery of the goods as discussed in the case of Manbre.10. The nominated port in FOB contract is a binding condition between the buyer and the seller. When it comes to perfection of sale: In the CIF, the sale is deemed perfected upon reaching the point of destination, in contrast to FOB where sale is deemed perfected upon delivery to the vessel or carrier. According to Babb and Martin, 11 in FOB contracts, the price includes all the charges up to and placing the goods in the hands of the carrier of the proper vessel. It is presumed here that title passes when the goods are delivered “free on board”. In CIF contracts, on the other hand, the price quotation covers not only the cost of the goods at the point of shipment but also paying the insurance and freight to the point of destination. 12Comparing the two, the contract of FOB has limited responsibility imposed on the seller. The seller’s responsibility extends only to all the necessary preparation before shipment, including loading charges, but not freight or insurance. This is because it is the buyer’s responsibility and utmost concern to make all the arrangements regarding the shipping (including selecting the date and port, nominating a ship and give notice to the seller) and insurance of the goods.13 Another contrasting feature between the CIF contracts and FOB contracts is the timetable. In CIF, the seller has control over the timetable. There are no interlocking timetables since the seller provides the ship and the goods unlike in the case of FOB contracts. 14 The FOB buyer has the right to and is obligated to determine the time of shipment more precisely by a so-called FOB instruction. Such FOB instructions contain a notification about the name of the vessel in which the loading space has been reserved and about the exact date, at which the vessel can take over the goods. 15 Compared to FOB, CIF can present problem for new exporter or beginners in international trade by carriage of good by sea. When new exporters forgot the wharf storage and handling fees and other charges such as freight forwarder’s charges and consular fees in making a CIF shipment and by simply adding freight, insurance and export packing costs to the domestic selling price the resulting price may be too low, but more often will be too high. This is because the domestic marketing and general administrative costs included in the domestic selling price are frequently greater than the actual cost of making export sale. 16 This is the downside of the CIF, and experienced buyer or importer has abandoned the use of CIF contracts in their overseas transactions and instead use the price quotation in FOB. The FOB term is used, domestically within the United States and Canada, in two common phrases: "FOB shipping point" and "FOB destination". This designation of phrases is necessary to distinguish when the title of goods pass from the seller to the buyer. Under the terms of "FOB shipping point", the title of the goods passes to the buyer at the shipping point. In the same way, under the terms of "FOB destination", the title of the goods passes to the buyer when the goods arrive at their destination. The distinction is important as it determines who pays for the shipping costs of the merchandise. The party who holds the title to the merchandise at the time of its shipping pays for its transportation costs, unless otherwise noted (example, the bill of lading states "freight prepaid" or "freight collect"). It is likewise important that in the event the shipment is damaged while in transit, the owner must file the necessary freight claim. 17 Anent the issue of who is responsible for damaged goods in relation to the passing of risk provision in the contract, it is viewed that in FOB contracts, the risk does not pass until the goods are safely loaded on board and the loading has come to an end. The risk passes at the time in which the goods are placed on board (for the first time). When the goods fall on the quay or on deck, the seller bears the risk. 18In CIF contracts on the other hand, the FOB contract is often used for the sale of unascertained goods. However, the identification of the goods does not constitute any problems with the classic FOB contract. The loading of the goods causes the clear identification of those goods to a certain contract, since it is the buyer's obligation to provide for the loading space in the vessel. Sending a consignment notice or a bill of lading respectively does not alter the fact that the goods are identified at the time in which they pass the ship's rail. 19 The objects of such CIF contracts are usually unascertained masses of goods, e.g., raw products. The seller ships the goods without identifying them with the name of the buyer. He has the bill of lading issued to his own order. CIF contracts are often utilized in case of floating goods. Under the CIF clause the risk passes retroactively to the buyer at the time in which the goods are delivered on board at the port of shipment, except when he knew or ought to have known about the damage or loss of the goods. 20 INCOTERMS 2010 and its effect on CIF and FOB contracts The contracts FOB and CIF are two of the original 13 International Commercial Terms created by the International Code of Commerce to guide the international traders. CIF and FOB according to Cateora and Graham 21 are among the international trade terms often sound similar to domestic business but generally have different meanings. This Incoterms indicate how buyer and seller divide risk and obligations as well as the cost of a specific kinds of international trade transactions. 22 Price quotation in CIF is important and viable to the overseas buyer due to the fact that it includes the cost of goods, insurance and all other charges such as transportation and miscellaneous fees to the named place of embarkation. Pricing is a problem not only for small time exporters but also to the more experienced sellers. For a beginner, there is a need to quote terms of sale that is different to that which is normally used. For foreign transactions, the exporter needs to be familiar with Incoterms that laid down the responsibilities of seller and buyer in international trade. 23 International trade is essential in achieving and maintaining the highest standard of living in the world. 24 In International trade, like any other voluntary exchange, a price is agreed upon for the item being traded.25 Documentation plays an important role between the traders. Incoterms deal with the documentation in global trading. It specifies the party responsible in the document of trade especially in the shipment of goods. 26The creation of Incoterms for international trade was brought about by the importer’s experience whether beginner or experienced trader. The incoterms are revised every ten years and the last revision of incoterms happened in 2000. In January 1, 2011, the eight edition, Incoterms 2010 took effect. The contracts of CIF and FOB were affected though both terms are still in use and apply to maritime transactions. Incoterms 2010 narrowed down the 13 terms of sale into 11. Incoterms 2010 was grouped into the following: For any mode of transport, the terms of sale are: CIP – Carriage and Insurance Paid, CPT – Carriage Paid To, DAP – Delivered At Place, DAT – Delivered At Terminal, DDP – Delivered Duty Paid, EXW – Ex Works, and FCA – Free Carrier. 27 For the Sea and Inland Waterway Transport only, the following Incoterms are used: CFR – Cost and Freight, CIF – Cost, Insurance and Freight, FAS – Free Alongside Ship and FOB – Free On Board.28 Incoterms 2010 contains number of key changes from Incoterms 2000. Incoterms 2010 has 11 terms of sale only while Incoterms 2000 has 13. In Incoterms 2010 the FOB rule has been modified so that the seller “delivers” the goods on board the vessel. In Incoterms 2000 the seller had deemed to “deliver “the goods when they “pass over the ships rail”.29 Another key changes in Incoterms 2010 from Incoterms 2000 is the grouping of the terms of sale. There are four group rules in Incoterms 2000 which are known as E: Departure, F: Main carriage unpaid, C: Carriage paid to and D: Arrival. Incoterms 2010 establishes two classes: 1) rules applicable to all modes of transport, and 2) rules applicable only to sea and inland waterways.30 With the modification of rule under Incoterms 2010, there are only two groups for the use of terms of sale. These are: 1) rules applicable to all modes of transport, and 2) rules applicable only to sea and inland waterways. Incoterms 2010 defines FOB as “the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment onwards.31 The delivery of goods is consummated when the shipper/seller releases the goods to the buyer's forwarder. The buyer's responsibility for insurance and transportation begins at the same moment.32 In CIF contracts, delivery of goods is accomplished at the port of destination. 33 However, Incoterms 2010 laid new rule for CIF wherein the risk in transferred to the buyer once the goods are loaded to the ship. 34The buyer now in CIF contracts with the effect of Incoterms 2010, has insurable interest over the goods upon loading to the ship, thus modifying the old definition of CIF and FOB. The Incoterms 2010 reiterates now that both CIF and FOB are to be used only when goods are to be transported by sea or inland waterways. 35. There is a restriction attached to FOB wherein it was specifically mentioned that it does not apply to air transport. According to Reed Smith Clients Alert “ the terms should not be used where there is any form of road/rail/air transport involved, or where goods are handed over to the carrier before they are on board the vessel, for example goods in containers which may well be delivered at a terminal. 36 On FOB, there is a new requirement provided by the Incotems 2010. It is now required from the seller to notify the buyer to obtain insurance. Before the effectivity of Incoterms 2010, the seller is not obliged to make arrangement for the buyer to obtain insurance. The Incoterms 2010 imposes this obligation to the seller now, who shall be responsible for procuring and paying for marine insurance in the buyer’s name for the shipment.37 Within Incoterms 2010 both the seller and the buyer are obligated to assist in securing security release.38 . Before, within Incoterms 2000, it is a general practice of the importers of little freight volume to use CIF contracts. However, as time passes by and business expands, so is the volume of the goods being imported. This poses problems to the importer. Shipping using CIF contract create chaos in obtaining precise shipping information. Since sellers are not obliged or responsible in arranging anything beyond the port of destination, any problems that occur after that point is borne by the buyer. 39 This is the downside of the CIF, and experienced buyer or importer has abandoned the use of CIF contracts in their overseas transactions and instead use the price quotation in FOB. FOB has two benefits compared to CIF. One is a competitive shipping rate and enhanced shipment control. The buyer who is sometimes referred to as the importer is best assured that his interest and not the interest of the seller is best protected by their freight partner. Increased supply chain visibility and control is a critical FOB benefit. 40By taking title to the goods beyond the rail of the port at the overseas port of shipment, the buyer is able to obtain accurate information and timely shipment of goods by collaborating with the logistics of their chosen provider.41 The incoterms of 2000 are still viable. However, it is suggested that users must refer to incoterms 2010 for new transactions. The new version of incoterms 2010 has been modified to suit the needs of the changing time and reflect the present-day practices in international trade. It was updated to expand the treatment of cargo security, which has been the concern in inland and waterways transportation. It promotes the use of electronic communication in all business transactions.42 In the press release of the Journal of Commerce, it was stated that “the 216-page ICC Guide to Incoterms 2010 is an essential reference for both first-time and experienced users of the rules, with practical guidance on the exchange of information, packaging goods, transport documents, as well as the transfers of risks and costs from one party to another”. 43 The International Chamber of Commerce (ICC) has published the ICC Guide to Incoterms 2010 to serve as a practical resource for users of these rules, which are applied by companies for countless business transactions worldwide.44 According to Hann (2010) 45 “Incoterms help to prevent misunderstandings in international trade contracts by standardizing and defining terms to be used in contracts. This helps the contracting parties to clarify beyond, doubt which party to the contract is responsible for goods in transit at particular stages of their journey and who is responsible for important tasks such as managing export and import clearance and arranging the insurance of the goods”. The incoterms 2010 have required the parties to a contract to provide the information necessary for export-import clearance and clarify which party is responsible for terminal handling charges. Conclusion Engaging in international sales by carriage of goods by sea is at not all a very complex and difficult process. As long as parties whether as supplier or buyer know their duties and responsibilities if they avail of CIF or FOB price quotation within Incoterms 2010, the major problems in international trade will be avoided. As deduced from the comparison made between CIF and FOB, It is suggested for those engaged in international business transactions to reexamine which of the incoterms 2010 are applicable to them. Beginners in International trading must learn which of the two: CIF or FOB contracts should they obtain and enter into so as to avoid loses and inconveniences brought about by the complexities in the practice of modern international business transactions. Although, if the experienced international traders are to be asked, they prefer the flexibilities of FOB contracts and assurance in the accuracy of the shipping information as well as competitiveness of shipping rate and enhanced shipment control by collaborating with the logistics of partner carrier. With this, they can cope with the needs and difficulties of international trading by carriage of goods by sea. BIBLIOGRAPHY BOOKS Agbayani, A.F. (1991). Classes of Marine Insurance: Freightage. Commercial Laws of the Philippines. 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