Consider the following perspectives of a buyer and a seller in a cross-border sales transaction: Seller (U.S.): We hope to get more business from this company – using the right means we really can make a great return on this shipment of books, and both parties are happy. In the best American tradition, we want to meet all our customer’s needs, but really, with a one-off shipment, managing the transport to the U.K. port is easy to fit in with our more regular clients. Buyer (U.K.): This is my first really big shipment from the U.S. book supplier, but I can’t afford for them to do all the work. I can deal with the U.K. side, and by contacting the Institute of Freight Forwarders I got hold of a really reputable company – they’ll sort everything out in the U.K., but will only insure from the U.K. quayside. They can even arrange delivery direct to the conference centre the day we are setting up, so I don’t have to pay any storage charges. What are the INCOTERMS? Analyse the above situation, explaining in what ways each INCOTERM would and would not be ideal for this situation.
As international borders have gradually but certainly become significantly less of an obstacle to international trade, and bodies such as the WTO and the EU have worked hard to encourage trade on an international basis, a certain level of standardisation has been both inevitable and encouraged. INCOTERMS are an example of such globalisation as they are the standard terms used across the globe in both international and domestic contracts for the sale of goods. INCOTERMS are used to determine many core elements to a contract, including collection, payment, and who is responsible for the goods. However, even standard terms cannot alleviate some of the problems that can arise. It is submitted that, due to cultural differences across the globe, the same term agreed between two parties can be interpreted very differently and the words as they appear on paper may not in reality represent a consensus. It is therefore incredibly important that the meaning of such terms of understood alongside the interpretations afforded to them by all the parties to a contract.
The scenario demonstrates that the method of transportation to be used is carriage by sea. In this situation, only the sea and waterway-related INCOTERMS need be subject to analysis. To this end, both parties seem to have agreed that they will each be responsible to bear the cost and responsibility for transportation within their respective countries – this is evidenced by the fact that the buyer has already made arrangement with a freight company for their part of the transaction.
The INCOTERM Free on Board (FOB) is not advised in the above scenario. Under such a term, the seller must bear the cost of using of the terminal and loading the vessel, the buyer would still be responsible for the freight cost of the carrier. The term here would also not specify who is to insure the goods during carriage.
On similar terms, the INCOTERM Free Alongside Ship (FAS) is equally unsuitable in this scenario. Under FAS the price invoiced by the seller would include all charges up until the point of departure. Since the buyer is intending on dealing only with the domestic element of transportation, such a term is inappropriate at evidencing the wishes of the parties.
We then turn to Cost & Freight (CFR). Under this term, the cost of carriage at sea is borne by the seller as opposed to the buyer. This seems to evidence the intentions of the parties with regards to cost of freight divisions, but remains silent with regards to insuring the goods.
Finally, we pin our hopes on Cost, Insurance and Freight (CIF). This term holds that the seller will be responsible for all costs up until they are delivered to the UK port, these costs will include both the cost of insurance and the cost of shipping at sea. Given the above-stated intention of the parties, it is submitted that the most appropriate INCOTERM to evidence the relationship of the above parties is therefore CIF.