Up a creek (canal) without a paddle
Singapore 4 May: The ‘Ever Given’ saga had certainly captured the headlines in world media for a time, but the general public’s attention span is short. On the other hand, there is still a lot of attention from sellers, buyers, transport and logistics, bankers, insurers and of course lawyers.
At the time of writing this blog piece, the vessel Ever Given is under arrest and effectively both the vessel and the goods on board are being held for ransom for nearly a billion US dollars. The main attention grabber is the vessel’s owner declaring a ‘general average’. This is a quite an unusual situation these days, but in essence it means that everyone with goods on board the vessel must contribute to the vessel owner’s costs at a yet-to-be-determined percentage of each shipment’s value. That percentage is the cost of salvage, fines etc to be divided by the total value of the goods on board.
So, we now come to the important question: Who pays for this ‘general average’?
This is where the attention starts to be directed at each shipment’s contract of sale and the terms of trade mentioned in the relevant invoice for the goods. The York-Antwerp Rules on this topic state in legalistic language that this value includes the goods themselves in addition to the freight to the destination and the insurance premium.
However, not every shipment is transacted this way and we need to look at the invoice. It would be an unusual invoice not to mention a trade term by way of a three-letter acronym, but unfortunately it is not again unusual that most of these invoices will state one or other of FOB (Free on Board), CFR (Cost and Freight) or CIF (Cost Insurance and Freight). It is also not uncommon not to mention where a definition of that acronym can be found.
The most commonly used set of definitions is the International Chamber of Commerce (ICC) Incoterms®rules, the latest version being Incoterms®2020. But without specifically making reference to these rules, the three letter abbreviations remain undefined, possibly for lawyers and courts to determine what was intended.
Maybe the lawyers will look at the UN Convention on the International Sale of Goods (CISG) which in article 9 states, again in legalistic style:
“(1) The parties are bound by any usage to which they have agreed and by any practices which
they have established between themselves.
(2) The parties are considered, unless otherwise agreed, to have impliedly made applicable to
their contract or its formation a usage of which the parties knew or ought to have known and which in international trade is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade concerned.”
If we take this to mean that attention of the parties (seller and buyer) will be drawn towards the current Incoterms®rules, whether they knew or ought to have known of these rules or not, we run into a potential problem. Simply put, under these rules FOB, CFR and CIF are considered unsuitable for container shipments!
Nevertheless, we can use the Incoterms®2020 as a guide on one point for these three acronyms, that the seller has delivered once the goods are on board the vessel at the port of loading and that risk transferred to the buyer at that point. Only with CIF does the seller have to provide the buyer with insurance covering the buyer’s risk, in FOB and CFR there is no obligation on the seller to insure the buyer’s risk, and there is no obligation for the buyer to insure its own risk.
According to the latest Incoterms®2020 book, the more appropriate rules to use would have been FCA (Free Carrier), CPT (Carriage Paid To) and CIP (Carriage and Insurance Paid To) respectively. But the situation regarding delivery and risk for these purposes is similar, at the time of the Suez stranding the buyer had the risk.
There are three other Incoterms®rules: DAP (Delivered at Place), DPU (Delivered at Place Unloaded) and DDP (Delivered Duty Paid). In these, the seller has not yet delivered, so the risk remains that of the seller. I wonder how many of these sellers have marine insurance for their shipments. No doubt some transactions will claim to be on an EXW (Ex Works) basis, and we can only shake our heads in dismay!
The vessel’s insurer will ask the parties in every shipment to provide an indemnity to cover the future general average claim. This will be attended to by the at-risk party’s insurers if any, or that party will need to themselves provide a bank-backed indemnity.
There is possibly one spanner in the works that I have not yet seen anyone raise. In the Institute Cargo Clauses (A) wording, under the heading of “Exclusions” we read the following:
“6. In no case shall this insurance cover loss damage or expense caused by…
6.2. Capture seizure arrest restraint or detainment, and the consequences thereof or any attempt thereat”.
Does the action of the Egyptian Government arresting the vessel, restraining it from departing the Suez Canal, and seeking huge penalties and compensation come under this exception and thereby relieve cargo insurers from any need to act?
Another potential problem might be that the longer the delay, the more some buyers having transacted on open account will walk away from their transactions, leaving the unsuspecting seller to pick up the general average matter and eventually try to recover their abandoned goods at the destination. Or will these sellers too assess their resultant costs as too high and walk away, leaving the vessel owner with hundreds of unclaimed containers of potentially worthless goods?
Something to think about!
To get an in-depth knowledge and understanding of the ICC’s latest Incoterms® rules, take up the ICC Academy’s Incoterms® 2020 Certificate (INCO) programme, the world’s only ICC-endorsed online trade terms certification, that provides a comprehensive working knowledge of the globally recognised commercial trade rules and helps traders avoid costly misunderstandings by clarifying the tasks, costs, and risks involved in the delivery of goods.
About the author
The author, Bob Ronai, was the only Australian and the second non-lawyer appointed to the Incoterms® 2020 Drafting Group. He manages the LinkedIn “Incoterms” group with over 25,000 members and has presented to conferences and workshops around the world on the practical application of the Incoterms® 2020 rules.
Please note this is an opinion piece and Mr. Ronai’s views do not represent the views of ICC or the ICC Academy. If you have any comments on this article, please feel free to contact Mr Ronai.
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