Your questions answered

Client Question:

The buyer’s vessel is delayed and our cargo has incurred storage in the port. As an FOB seller, can we avoid these charges?

Answer:

The assumption in this answer is that the parties are using Incoterms Rules.

Bear in mind that the Rules are not compulsory, and particularly with common commercial terms like FOB, which may be validly expressed F.O.B., f.o.b. or fob in reference to other systems or customary meanings, we must accept that alternative definitions abound, some of which are unstable, and some of which are contradictory when compared to variants of the same term.

As an aside – but an important aside – the Rules apply because they are written correctly, written into a sales contract and crucially the parties physically execute the supply in the manner the Rule directs.
It is only my experience, and perhaps not yours, but Incoterms Rules are rarely written correctly; most sellers and buyers lack formal contracts; and merchants frequently behave in a manner contrary to the Rule.

On this basis, it is a very big assumption to use the Rules to answer the question. Be aware of this provision.

Although the FOB term is not recommended for containerised cargoes, it has a long tradition and retains a valid use with bulk cargoes carried on conventional services.

Port operations vary from place to place, but frequently the physical conditions required for FOB are still encountered when sellers are allowed access into a port or harbour, delivering bulk or uncontainerized cargo in the restricted or controlled area.

But there is another important condition in FOB which is that the buyer’s vessel has already berthed and is receiving cargo. This is equally true of FAS and the twin terms CFR and CIF, albeit that these last two involve the seller’s nominated vessel.

If you reference your copy of the Rule, you will see that the diagrams given in the Explanatory Notes clearly show that the seller has open access to the harbour, but also that the vessel is already in port.
If the parties really were using Incoterms Rules FOB, the question of storage in the port due to late arrival of the buyer’s vessel could not arise.

As I say, if the seller (or buyer) do not act in the manner directed by the Rule it is difficult to say for certain if the Rule applies, or not.

In the modern port, cargo is preplanned and received before the vessel docks. The vessel comes to the cargo – as opposed to the traditional sequence of FOB where the cargo comes to the vessel.

For this reason, in modern models the Rules encourage the Seller to consider the FCA term. The unsuitability of FOB isn’t just about containers it is about the port operation.

Had the seller sold FCA, risks and costs would have passed on handover to the carrier and crucially, the buyer would be the carrier’s principal. The port costs would therefore pass to the carrier / charterer who in turn would on-pass these to their principal, presumably the Buyer.

But that is hindsight, and the seller in question is faced with a storage charge to settle.

There is a provision in the Rules that the FOB buyer is responsible for all risks and costs should their nominated vessel fail to arrive or arrive late. No indication is given that the goods must be inside or outside the port at this moment, and this Article might be interpreted to answer the immediate question.

If so, the seller has recourse to the buyer for the costs incurred.

However, this position cannot be used to deflect the claim of the Port Authority on the seller, that is if the seller has engaged the Port Authority in their own name.

As mentioned, in a true FOB contract the buyer would contract with the carrier directly, and the carrier would contract with the port.

The seller would only bring the cargo into the port area when called upon by the buyer to do so. The buyer will have the contract with the port authority, through the carrier or charter arrangement.

If this is impractical and the seller is requested to facilitate the interaction with the port operator, it is required that they do so as an agent of the buyer and do not act in their own name.

In summary – if the parties feel they can use the Incoterms Rule FOB definition to resolve their dispute, the buyer must bear these additional storage costs.

However, the seller will incur them if they have engaged the port authority in their own name, and the recovery of their disbursement from the buyer is a separate action to the obligation they have to settle the fees directly with the port.

Source: Freight Training