F.O.B FREE ON BOARD (…NAMED PORT OF SHIPMENT)

FOB means that the seller of the goods must load the goods onto the container, deliver the container to the port and load it on a vessel. In case of break bulk cargo it has to be loaded on board the vessel. The buyer on the other hand takes possession of the goods when they pass over the ship's, rail at the named port of shipment. The buyer is therefore responsible for all costs and risk of loss of or damage to the cargo from that point. Under the FOB terms, the seller must clear the goods for export. Despite the fact that FOB term should only be used for sea or inland waterway transport, it is used for all kinds of transport in the everyday conversations among traders.

Under the FOB contract, the seller has no obligation for the freight cost or insurance cost, this is the responsibility of the buyer. When shipping commodities, the FOB term can be profitable for the buyer if the buyer is chartering a vessel. Usually a good freight rate can be negotiated providing the buyer is a frequent customer in the freight market. In shipping commodities, a saving of $1 to $3 per metric ton by the chartered party (a company chartering the vessel) can result in substantial additional revenue. On a 20,000 MT shipment this difference translates into $20,000-$60,000 profit. There are potential risks associated with chartering a vessel, such a demurrage. Nevertheless, there are ways to limit those risks to a minimum and still bear the advantages.

FOB Stowed or FOB ST. (Short for Stowed) term may often be seen in a commodity contract. Stowed or ST. means that the seller is responsible for stowing the goods loaded on board the vessel inside a vessels hall. Furthermore in addition to FOB Stowed the contract may mention FOB ST L/S/D. The term L/S/D stands for Lashing/Securing/Dunneging. In this case the Seller is also responsible and has to pay for L/S/D.

F.C.A. FREE CARRIER (.... NAMED PLACE)

Under the Free Carrier terms of sale, the seller must deliver the goods, clear the export into the possession of the carrier specified by the buyer at a specific location. The seller may choose a place where the carrier shall deliver the goods into his possession if no specific point is indicated by the buyer. Provided the buyer instructs the seller to deliver the goods to a freight forwarder who is not a "carrier", the seller is said to have completed his obligation when the goods are in custody. The seller must under FCA provide a commercial invoice in accordance with the contract of sale; provide at his own expense export license if required; bear all risks of damage or loss of goods until they have been delivered into the custody of the carrier, freight forwarder, or other person chosen by the buyer; provide enough notice that the goods have been delivered into the carrier's custody; provide the buyer with documentary proof stating that the goods have been delivered; pay any costs associated with checking quality, measuring, weighing, country etc. which are needed for the purpose of delivering the goods to the carrier.

The buyer's responsibilities under FCA terms are to pay for the goods; obtain at his own risk and expense any import license if needed; take care of all customs formalities; contract of carriage at his own expenses; take delivery of goods and bear the risk of loss of or damage to the cargo from the time that it is delivered. Incoterms set out other responsibilities for the buyers and sellers, most of which are common sense after the main distinctions are made. FCA terms are not as popular as FOB, CIF or CNF Incoterms among traders.

C.I.F. COST INSURANCE AND FREIGHT (.... NAMED PORT OF DESTINATION)

Unlike the CFR term which was re-named from CNF, the CIF Incoterm did not change from the first publication of Incoterm in 1936. Together with the FOB term CIF is probably the most frequently used term in the international trade business. The only difference between CIF and CFR is insurance that the seller is responsible to obtain at this own expense for the contractual amount. The insurance usually covers the full value of the goods plus 10%. The insurance covers all risks including war risk from the seller's warehouse to the port of discharge only.

The CIF term requires that the seller clear the goods for export. The buyer should be careful with CIF terms if he is acting as a trading house in the middle of the end buyer and supplier where a letter of credit is involved. For the same reasons as with CFR where the buyer controls the insurance of the goods, CIF value on the 2nd L/C will be different from the 1st L/C unless the trading house or 1st beneficiary under the L/C is not making any money on the transaction and transfers the L/C at the same face value. Since this is not the case in most transactions trading houses must be aware of this problem.

A solution can be found by asking the 2nd beneficiary (supplier) to contract the insurance for more than 10% over the invoice value to match the amount on the 1st L/C. Doing this may alert the suppler to the amount of profit, the trading house, is making on the transaction. Nevertheless, if such a situation occurs and you are stuck with a transferable L/C this may be only way out. There is however another more expensive solution, which is getting another spare insurance policy and substituting it to the bank during the document negotiation stage. Most banks will allow for such substitution of documents since you (the 1st beneficiary) are responsible for presentation of all documents required by the L/C. To avoid such problems from the start, it is best to ask for a CFR letter of credit and negotiate out the cost of insurance from the purchase contract

C.F.R. COST AND FREIGHT (.... NAMED PORT OF DESTINATION)

The main point of the CFR term of sale is that the seller's responsibility include the arrangement of the freight to bring the goods to an agreed port of destination at his expense. The buyer, however, is responsible for insuring the goods during transportation. It is not mandatory for the buyer to insure the goods, but if something should happen to the goods during transportation the seller could not be held responsible for the damage. After the goods have been delivered on board the vessel, the responsibility is transferred from the seller to the buyer.

Under the CFR terms, the seller must clear the goods for export, but once the goods arrive at the port of discharge all duties and taxes are for the buyer's account and responsibility. The seller must provide the buyer with necessary export documents such as a full set of original bills of lading, certificates of origin, commercial invoices, certified if needed, etc. CFR term can only be used for sea and inland waterway transport.

In the commodity business the buyer usually prefers to organize the insurance and be the beneficiary in the insurance policy. This control of insurance allows the buyer quicker compensation in the event of cargo damage or loss. In case a letter of credit is involved and the buyer is a trading company acting as an agent, the control of insurance will allow him to insure the cargo for the amount stated in the first letter of credit (L/C) , assuming that the first amount is greater than the second amount on the back to back L/C or a transfer of the original documentary credit. If seller would be responsible for insuring the goods he would usually insure the goods for the invoice amount. Again, in order for a trading company in the middle of a transaction to avoid discrepancy of the L/C insurance value must correspond to the value requested on the first L/C. In case this point is overlooked ad the cargo is under-insured, the bank will find a discrepancy in the documents and the trading company will have a difficult time collecting payment from the buyer and honouring its obligation to pay the supplier.

Before the Incoterms were updated in 1990, CFR term was called CNF cost and freight. Some trading companies still use the old CNF term in their correspondence with each other.