While the Incoterms 2000 is an extremely valuable tool in international trade, the CFR ("Cost of Freight") and CIF ("Cost Insurance and Freight") terms sometimes give rise to unexpected consequences.
The notes to the "C" terms suggest that the "C" terms require the seller to contract for the carriage on the usual terms at his own expense. Although the "C" terms are frequently mistakenly believed to be arrival contracts, in which the seller would bear all risk and costs until the goods have actually arrived at the agreed destination, the "C" terms are said to be of the same nature as the "F" terms in that the seller fulfils the contract on the dispatch of the goods in the country of shipment. What makes the "C" terms distinguishable from other terms is that the:
- Risk passes on delivery to the carrier;
- But the seller is bound to arrange to bear the costs of the contract of carriage to a named destination.
It is the question of what the seller's obligations are under the contract of carriage with respect to the payment of duties, taxes and charges not only at the port of loading but also the port of discharge that gives rise to some confusion. This aspect is dealt with in A6 of all the "C" terms.
By way of an example, a South African based supplier recently sold goods to customers in the United States on a CFR Incoterms 2000 basis. The seller contracted for the carriage of the goods in terms of which the seller as shipper was not responsible for any costs of discharge.
A6 under the CFR Incoterms provides that the seller must pay the freight and all costs arriving from the contract of carriage, including the costs of loading the goods on board the vessel as well as any costs at the port of discharge that are for the seller's account under the contract of carriage.
It is the underlined portion that has given rise to debate.
B6 states that the buyer must pay:
- All costs and charges relating to the goods whilst in transit until their arrival at the port of destination, unless such costs and charges were for the seller's account under the contract of carriage; and
- Unloading costs including lighterage and wharfage charges, unless such costs and charges were for the seller's account under the contract of carriage
This provision is a little confusing in that it appears that reference to the terms of a totally separate contract, namely the contract of carriage, affects the seller's obligation under the contract of sale.
On a literal reading in the example given, since the seller was not liable for any such costs at destination under the contract of carriage, such charges should have been for the buyer's account, alternatively should be for the carrier's account.
Although freight had been prepaid, the carrier refused to discharge the cargo unless the buyer paid for terminal handling charges at the destination.
Notwithstanding the argument that the seller could put forward that such charges were for the buyer's account, against a threat of cancellation of all future orders, the seller was forced to bear these additional costs.
The problem is exacerbated by the fact that parties very often simply refer to the term "CFR" or "CIF" without any reference to Incoterms 2000. It must be remembered that such trade terms may be interpreted in a way that is not consistent with the Incoterms in certain other jurisdictions.
For that reason it is suggested that parties may wish to specify that the international sale is in term of cfr Incoterms 2000, save to the extent that it is amended by these terms, or costs at the port of discharge not included in the ocean freight be for the buyer's account. The same rationale would apply to the CIF term.