3.5.2 Applicable to Maritime and Inland Waterway Transport:
FAS: Free Alongside Ship
FOB: Free On Board
CFR: Cost and Freight
CIF: Cost, Insurance, and Freight
INCOTERMS specifically designed for Maritime and Inland Waterway Transport cater to the unique characteristics of shipping goods by sea or water. These terms clarify the responsibilities of the seller and buyer regarding delivery, risk, and costs, with a focus on port-to-port logistics. Below is a detailed explanation of the terms you mentioned and their application.
Applicability of INCOTERMS to Maritime and Inland Waterway Transport
- Designed for Port-to-Port Shipping:
These INCOTERMS focus on goods transported over water and specify responsibilities related to loading, transportation, and unloading at ports.
- Relevance to Bulk and Non-Containerized Cargo:
Commonly used for goods shipped in bulk or non-containerized loads.
For containerized cargo, terms like FCA, CPT, or CIP may be more practical since they account for multimodal logistics.
- Transfer of Risk:
Risk transfer typically occurs at the port of shipment (FAS, FOB) or once goods are on board the vessel (CFR, CIF).
Key Maritime INCOTERMS
- FAS (Free Alongside Ship)
Responsibilities:
The seller delivers goods alongside the ship at the named port of shipment. The buyer assumes all costs and risks from this point onward.
Risk Transfer:
Once the goods are alongside the ship at the port.
Use Case:
Suitable for bulk or heavy cargo that cannot be easily containerized.
- FOB (Free On Board)
Responsibilities:
The seller is responsible for delivering goods onto the ship at the port of shipment. The buyer assumes risks and costs once the goods are on board.
Risk Transfer:
When the goods are loaded onto the vessel at the port of shipment.
Use Case:
Common for international trade where the buyer arranges sea freight from the port of shipment onward.
- CFR (Cost and Freight)
Responsibilities:
The seller arranges and pays for transportation to the named port of destination, but the buyer assumes risk once the goods are on board the ship.
Risk Transfer:
At the port of shipment when the goods are loaded onto the ship.
Buyer’s Tasks:
Import duties, customs clearance, and unloading costs at the destination port.
Use Case:
Appropriate for buyers comfortable handling risks during sea transit but seeking to simplify logistics.
- CIF (Cost, Insurance, and Freight)
Responsibilities:
The seller arranges transportation and provides insurance coverage up to the named port of destination. Risk still transfers to the buyer once the goods are on board the ship.
Risk Transfer:
At the port of shipment when the goods are loaded onto the ship.
Insurance:
The seller is required to secure minimum insurance coverage (typically Clause C of the Institute Cargo Clauses).
Use Case:
Ideal for buyers wanting protection during sea transit but who can handle destination logistics.
Comparison of Responsibilities
| Term | Seller’s Responsibilities | Risk Transfer | Buyer’s Responsibilities |
|---|---|---|---|
| FAS | Deliver alongside the ship, clear export customs. | Alongside the ship at shipment port. | Load onto ship, pay for freight, insurance, and destination costs. |
| FOB | Deliver onto the ship, clear export customs. | Onboard the ship at shipment port. | Freight, insurance, and destination costs. |
| CFR | Deliver onto ship, pay for freight to destination port. | Onboard the ship at shipment port. | Insurance and destination costs (unloading, customs). |
| CIF | Deliver onto ship, pay freight, and provide insurance. | Onboard the ship at shipment port. | Destination costs (unloading, customs). |
Important Considerations for Maritime INCOTERMS
- Port-Specific Requirements:
Always specify the port clearly (e.g., “FOB Shanghai” or “CIF Rotterdam”) to avoid ambiguity.
- Insurance (CIF):
The seller’s insurance under CIF is minimum coverage, which might not fully protect high-value goods. Buyers should consider additional coverage if necessary.
- Unloading Costs:
For CFR and CIF, unloading at the port of destination is typically the buyer’s responsibility unless stated otherwise.
- Risk During Transit:
FOB, CFR, and CIF transfer risk at the port of shipment, meaning any damages after loading are the buyer’s problem even if the seller arranged the transport (CFR/CIF).
- Containerized Shipments:
If the goods are shipped in containers, terms like FCA (instead of FOB) are recommended since the handoff may occur before reaching the port.
- Customs and Regulatory Compliance:
FAS and FOB require the seller to clear export customs, but the buyer manages import customs under all maritime terms.
Choosing the Right Term
Selecting the correct INCOTERM depends on the specific needs of the transaction:
- FAS/FOB for buyers who prefer managing freight and risk starting from the port of shipment.
- CFR/CIF for sellers offering more comprehensive logistical support while still transferring risk early.
Understanding these terms ensures that responsibilities are clear, risks are appropriately managed, and both parties can focus on the successful delivery of goods.
Case of Study
Scenario: Exporting Coffee Beans from Brazil to Germany
Background:
Seller: Brazilian coffee exporter.
Buyer: German coffee roaster.
Cargo: 10 tons of coffee beans in bulk.
Shipping Method: Sea freight.
Route: From the Port of Santos (Brazil) to the Port of Hamburg (Germany).
- FAS (Free Alongside Ship)
Responsibilities:
Seller: Clears export customs and delivers the coffee beans alongside the vessel at the Port of Santos.
Buyer: Oversees loading onto the ship, arranges sea freight, pays for insurance, and handles all costs and risks after delivery alongside the ship.
Example:
The seller ensures the coffee beans are stored securely at the dock next to the buyer’s ship. Once the beans are alongside the ship, the buyer’s logistics team arranges loading, transport, and insurance. If damage occurs while loading onto the vessel, the buyer is responsible.
- FOB (Free On Board)
Responsibilities:
Seller: Clears export customs, delivers the coffee beans onto the ship at the Port of Santos, and covers loading costs.
Buyer: Arranges sea freight, pays for insurance, and handles all costs and risks after the goods are on board the vessel.
Example:
The seller contracts dock workers to load the coffee beans onto the buyer’s ship and provides proof of loading (e.g., a bill of lading). Risk transfers to the buyer as soon as the beans are on board. If the ship’s crane damages the cargo during loading, the seller bears responsibility. However, once loaded, the buyer assumes all risks.
- CFR (Cost and Freight)
Responsibilities:
- Seller: Clears export customs, delivers the coffee beans onto the ship, and pays for sea freight to the Port of Hamburg.
- Buyer: Arranges insurance and assumes all risks after the coffee beans are loaded onto the ship.
Example:
The seller contracts a shipping company and pays for transport to Hamburg. However, the buyer is responsible for insuring the coffee beans during transit. If a storm damages the shipment during the voyage, the buyer must file an insurance claim since risk transferred once the beans were loaded in Santos.
- CIF (Cost, Insurance, and Freight)
Responsibilities:
- Seller: Clears export customs, delivers the coffee beans onto the ship, pays for sea freight to Hamburg, and provides minimum insurance coverage during the voyage.
- Buyer: Handles all risks and costs at the port of destination, such as unloading and customs clearance.
Example:
The seller arranges sea freight and purchases minimum insurance for the coffee beans. If a shipping accident damages the cargo, the seller’s insurance covers part of the loss. The buyer handles unloading and customs formalities upon arrival in Hamburg. If additional insurance is needed (e.g., for high-value coffee), the buyer arranges it separately.
| Term | Seller’s Responsibilities | Buyer’s Responsibilities | Risk Transfer |
|---|---|---|---|
| FAS | Export customs, deliver alongside the ship. | Loading, sea freight, insurance, and destination. | Alongside the ship in Santos. |
| FOB | Export customs, load onto the ship. | Sea freight, insurance, and destination. | Onboard the ship in Santos. |
| CFR | Export customs, load onto the ship, pay freight. | Insurance and destination. | Onboard the ship in Santos. |
| CIF | Export customs, load onto the ship, pay freight and insurance. | Destination costs (e.g., unloading, customs). | Onboard the ship in Santos. |
Which INCOTERM to Choose?
- Buyer’s Preference:
If the buyer wants full control of logistics from Brazil onward, they may choose FAS or FOB.
If they prefer simplified logistics but can handle risks during transit, CFR is a better choice.
For added protection and minimal logistics involvement, CIF works best.
- Seller’s Perspective:
FAS/FOB shifts most logistics and risks to the buyer, simplifying the seller’s role.
CFR/CIF provides additional services, appealing to buyers but requiring more coordination and cost management by the seller.
Case of Study:
Scenario: Exporting Electronics from China to the United States
Background:
Seller: A manufacturer in Shenzhen, China.
Buyer: A retailer in Los Angeles, USA.
Cargo: 2,000 electronic devices packed in crates.
Shipping Method: Sea freight.
Trade Route: From the Port of Shenzhen (China) to the Port of Long Beach (USA).
- FAS (Free Alongside Ship)
- Responsibilities:
Seller: Clears export customs and ensures the goods are delivered alongside the vessel at the Port of Shenzhen.
Buyer: Manages loading, sea freight, insurance, and all subsequent costs and risks.
- Example on This Route:
The seller places the crates at the dock next to the buyer’s contracted ship at the Port of Shenzhen. The buyer’s shipping company loads the goods and transports them to Long Beach. If a forklift accidentally damages the crates while loading them onto the vessel, the buyer bears the cost of the loss since the risk has already transferred at the dock.
- FOB (Free On Board)
- Responsibilities:
Seller: Clears export customs and loads the goods onto the vessel at the Port of Shenzhen.
Buyer: Arranges and pays for sea freight, insurance, and all costs beyond loading.
- Example on This Route:
The seller hires dock workers to load the electronic devices onto the vessel bound for Long Beach. Once the goods are safely on board, the buyer assumes all risks. If the ship experiences delays or a container is lost overboard during transit, the buyer is responsible for the loss, even though the seller handled the loading.
- CFR (Cost and Freight)
- Responsibilities:
Seller: Clears export customs, loads the goods onto the vessel, and pays for transport to the Port of Long Beach.
Buyer: Arranges insurance and assumes all risks once the goods are on board the vessel.
- Example on This Route:
The seller books a shipping line to transport the electronics to Long Beach and pays the freight cost. The buyer does not have to worry about arranging transport but needs to secure insurance. If the vessel is caught in a storm and some goods are damaged, the buyer must file an insurance claim because the risk transferred once the goods were loaded in Shenzhen.
- CIF (Cost, Insurance, and Freight)
- Responsibilities:
Seller: Clears export customs, loads the goods onto the vessel, pays for transport to Long Beach, and provides insurance coverage for the voyage.
Buyer: Handles unloading, customs clearance, and risks beyond the port of destination.
- Example on This Route:
The seller arranges sea freight to Long Beach and buys minimum insurance to cover potential losses during transit. If a portion of the shipment is damaged during the voyage, the buyer can claim compensation through the seller’s insurance. Once the goods arrive in Long Beach, the buyer is responsible for unloading, paying customs duties, and transporting the electronics to their warehouse.
How the Trade Route Influences Choice
Shenzhen → Long Beach:
A well-established and high-traffic route for electronics, making freight costs relatively predictable.
Buyers often prefer FOB or CFR terms to control insurance coverage and post-arrival logistics.
Sellers may propose CIF for smaller buyers seeking simplified arrangements.
- Other Considerations on This Route:
— Port Congestion:
The Port of Long Beach frequently experiences delays. Buyers might choose FOB to control scheduling and mitigate risks associated with delays.
— Weather Risks:
During typhoon season, buyers may favor CIF to ensure the seller provides at least basic insurance coverage.
Which Term Works Best?
| Buyer’s Needs | Recommended INCOTERM |
|---|---|
| Wants control of logistics and risk post-Shenzhen. | FOB or FAS |
| Prefers the seller to manage shipping costs. | CFR or CIF |
| Seeks seller-managed insurance during transit. | CIF |
Example related to multimodal transportation.
The following example includes a sea +rail scenario
Background:
- Seller: A machinery manufacturer in Berlin, Germany.
- Buyer: A construction company in Mumbai, India.
- Cargo: Industrial machinery packed in crates.
- Shipping Method: Multimodal (rail + sea freight).
- Trade Route:
- From Berlin to the Port of Hamburg (Germany) by rail.
- From Hamburg to the Port of Mumbai (India) by sea freight.
- FAS (Free Alongside Ship)
Responsibilities:
- Seller: Clears export customs and ensures the machinery is delivered alongside the ship at the Port of Hamburg.
- Buyer: Oversees loading onto the ship, arranges sea freight to Mumbai, and handles all subsequent logistics and risks.
Example on This Route:
The seller arranges rail transport from Berlin to Hamburg. Once the machinery arrives and is placed next to the ship, the buyer’s freight company takes over. If the machinery is damaged while being lifted onto the vessel in Hamburg, the buyer assumes responsibility because risk transferred at the dock.
- FOB (Free On Board)
Responsibilities:
- Seller: Clears export customs, arranges rail transport to Hamburg, and ensures the machinery is loaded onto the vessel.
- Buyer: Oversees sea freight and handles risks after the goods are on board the ship.
Example on This Route:
The seller coordinates with dockworkers to load the machinery onto the ship at Hamburg. Risk transfers to the buyer once the machinery is safely on board. If the machinery is damaged at sea due to improper lashing, the buyer is responsible for the loss.
- CFR (Cost and Freight)
Responsibilities:
- Seller: Clears export customs, arranges rail transport to Hamburg, ensures loading onto the vessel, and pays for sea freight to Mumbai.
- Buyer: Handles insurance and assumes risks once the machinery is on board the ship in Hamburg.
Example on This Route:
The seller manages logistics from Berlin to Mumbai, including rail transport and sea freight costs. If a storm damages the shipment during sea transit, the buyer must file a claim with their own insurer since the risk transferred at Hamburg when the goods were loaded onto the ship.
- CIF (Cost, Insurance, and Freight)
Responsibilities:
- Seller: Clears export customs, arranges rail transport to Hamburg, ensures loading onto the vessel, pays for sea freight, and provides insurance coverage for transit to Mumbai.
- Buyer: Handles unloading, customs clearance, and any risks after the machinery reaches Mumbai.
Example on This Route:
The seller takes full responsibility for logistics up to Mumbai, including purchasing insurance for the machinery. If the machinery is damaged during sea transit, the buyer can claim compensation through the seller’s insurance policy. However, once the shipment arrives at the Port of Mumbai, the buyer assumes all risks, such as during unloading or onward transportation by truck.
How Multimodal Factors Affect INCOTERM Choice
- Rail-to-Sea Coordination:
In multimodal shipments, the seller often manages rail or truck transport to the port of departure. For example, under FOB, the seller ensures the goods arrive at the port and are loaded onto the vessel.
- Port of Discharge Challenges:
The Port of Mumbai is known for potential congestion and delays. Buyers might prefer CFR or CIF to reduce logistical burdens and ensure the seller handles coordination up to the destination port.
- Insurance in Multimodal Shipping:
Under CIF, the seller’s responsibility includes insurance coverage during the sea leg of the journey. However, damage occurring during rail transit in Germany may not be covered unless explicitly stated in the contract.
Comparison Table for This Multimodal Scenario
| Term | Seller’s Responsibilities | Risk Transfer | Buyer’s Responsibilities |
|---|---|---|---|
| FAS | Rail to Hamburg, customs clearance, dockside delivery. | Alongside the ship at Hamburg. | Loading, sea freight, insurance, unloading. |
| FOB | Rail to Hamburg, customs clearance, loading. | Onboard the ship at Hamburg. | Sea freight, insurance, unloading. |
| CFR | Rail to Hamburg, customs clearance, loading, sea freight. | Onboard the ship at Hamburg. | Insurance, unloading, destination transport. |
| CIF | Rail to Hamburg, customs clearance, loading, sea freight, insurance. | Onboard the ship at Hamburg. | Unloading, customs, destination transport. |
Which INCOTERM to Use in Multimodal Shipping?
- Buyer’s Considerations:
FAS or FOB: If the buyer wants control over logistics from the port of departure.
CFR or CIF: If the buyer prefers the seller to handle most of the shipping arrangements.
- Seller’s Perspective:
Sellers offering CIF often appeal to smaller buyers with less logistical expertise.
For large buyers managing their supply chain, FOB may provide better flexibility.