FOB delivery of goods without bearing risks
Recently, a large international buyer of metal products applied to Interlegal lawyers for audit of the proposed delivery scheme and for mitigation of appropriate economic and fiscal risks. At the Client’s request, Interlegal experts analyzed the risks of product supply on FOB terms in compliance with Incoterms 2020. Hereby we provide an extract from the legal opinion.
FOB general rules
FOB (Free on Board) supply terms presume that the Seller’s obligations to supply goods have been fulfilled, while risks and costs shall be borne by the Buyer from the moment when goods are loaded on board of the vessel nominated by the Buyer.
Accordingly, at all stages of the route (till the moment of the goods actual shipment on board of the vessel), control over the goods shall still remain at the Supplier or the persons controlled by the Supplier, namely terminal and freight forwarder. Such delivery scheme involves several serious risks, which, however, can be mitigated or controlled.
Risks of using FCR
The proposed FOB delivery scheme stipulates that most payment for the goods shall be made against FCR issued by freight forwarder duly nominated by the Supplier.
FCR shall mean a certificate (receipt) of receiving the goods, to be issued by the freight forwarder acting as agent on behalf of the consignor or the consignee. It certifies acceptance of goods by the freight forwarder under its own liability/at its own disposal.
Under general rule, while issuing FCR, the freight forwarder shall certify that it has received a certain cargo, jointly with irrevocable instructions upon disposal of such cargo, namely for its delivery to a certain consignee.
At the legislative level in Ukraine, the concept of FCR, the rules for issuing thereof, the freight forwarder’s liability for violation of terms and conditions for issuing FCR are not regulated. The sole document governing relations between the parties upon issuing and using FCR in Ukraine are the Rules and Recommendations on Usage of FIATA Documentation and Forms, approved by Decision of the Board of the Association of International Freight Forwarders of Ukraine (Minutes No. 2 dd. 08.10.2009). Such rules contain general provisions regarding application of FIATA documentation by freight forwarding companies – members of the Association of International Freight Forwarders of Ukraine (AIFFU).
Given correct and fair usage of FCR, shipment of the goods shall not take place until obtaining the corresponding instructions from the original FCR holder.
In accordance with general rules, after issuing FCR no one can dispose of the goods, except for the original FCR holder. However, in practice, either cargo can be handed over/shipped by the freight forwarder without instructions granted by FCR holder, or shipping instructions will remain ignored. Such risk gets aggravated in case when FCRs are issued not on FIATA blank forms, but on the freight forwarder’s own blank forms. Formally, it is just a document not being legally subject to any rules and having no binding/evidentiary force, because if FCR is not issued on FIATA blank forms, the FIATA rules shall not apply thereto.
In order to mitigate such risks, we recommend the following:
1. Make sure that, while using its own FCR form, freight forwarding company will incorporate therein terms and conditions governing the procedure for issuing thereof, cargo shipment procedure (only in compliance with FCR holder’s instructions), freight forwarder’s direct liability for violation of FCR holder's instructions and other essential terms and conditions.
We strongly recommend you to incorporate into freight forwarding agreement the appropriate section governing the rules for issuing FCR, as well as the freight forwarder’s liability for non-compliance with FCR terms and conditions. Alternatively, a reference to FIATA rules can be implemented into freight forwarding agreement, showing that such rules shall cover all FCRs issued by the freight forwarder.
If there are no such provisions in freight forwarding agreement, it is quite problematic to bring the freight forwarder to liability in case of its non-delivery of cargo or delivery without compliance with FCR holder’s instructions.
2. Upon payment, make sure that you are the original FCR holder.
Under general rule, irrevocable instructions received for issuing FCR (in particular, in whose favour shipment of the goods shall be performed) can only get modified, if the original FCR is returned to the freight forwarder. If, at the moment of payment for the goods, payment shall be made against a copy of the appropriate document, while the original document is owned by the Supplier/another person, there is a risk that the original FCR will be returned to the freight forwarder, jointly with shipping instructions modified.
3. Conclude a trilateral agreement with freight forwarder
An alternative option for cooperation with freight forwarder can be a trilateral agreement with freight forwarder (between Supplier, Forwarder and Client), which shall govern the procedure for issuing FCR and shall prescribe freight forwarder’s liability. Such an agreement may serve as grounds for bringing freight forwarder to liability (including by means of obtaining an appropriate court decision).
4. Nominate your own freight forwarder
One of the best options certainly will be nomination of your own freight forwarder, in order to mitigate risks of the freight forwarder’s failure to follow instructions for shipment of goods. Meantime, nomination of your own freight forwarder shall not cancel compliance with the above recommendations, namely: a) make sure that both the procedure for issuing and using FCR and freight forwarder’s liability are governed by freight forwarding agreement; b) upon payment, make sure that the original FCR is under the Client’s control.
5. Request for consignment documents
Proposed terms and conditions of the supply agreement presume that payment for the goods shall take place at the moment when the goods are located at the shipment sea port under freight forwarder’s control, as certified by the issued FCR.
Meantime, in order to avoid risks correlated to actual absence of goods at the sea port, we recommend you to request for consignment documents (as confirmation) indicating arrival of the goods at the sea port (CMR in the present case), jointly with documents certifying acceptance of the goods by sea port/terminal (i.e. register, warehousing documents).
6. Conclude a trilateral agreement with sea port/terminal
Whereas the cargo handling agreement will be concluded with the Supplier, apart from the freight forwarder’s obstacles, there is a risk of facing obstacles at the terminal/sea port upon compliance with instructions for shipment of the goods. In order to mitigate such risk, it is important to understand exactly, how (i.e. which documents should be issued) the goods will be accepted by sea port/terminal.
In practice, there may be cases (and we have already faced such position of terminals) when, despite the facts of issuing FCR and granting freight forwarder’s instructions, the terminal, with reference to the cargo handling agreement, follows instructions of its Client – namely that one with whom the cargo handling and storage agreement has been concluded (Supplier in the present case).
Therefore, we recommend you to conclude a trilateral agreement with sea port/terminal, whereunder sea port/terminal shall, under certain conditions (e.g. in case of issuing the original FCR) be obliged to ship the goods in accordance with instructions granted by the Client/freight forwarder.
7. Make sure there clear instructions are granted to the terminal
If acceptance of the goods at the sea port is duly certified by warehousing documents, under the results of payment for the goods, it is important to make sure that instructions have been granted to the terminal for re-issuing warehousing documents in favour of the Client as depositor of the goods.
Apart from re-issuing warehousing documents, in practice, sometimes a trilateral act shall be signed (between Supplier, Buyer and Terminal), whereunder the parties shall agree on transfer of rights to the goods from the Supplier to the Buyer and shall fix the Terminal’s obligation to ship the goods in favour of the Buyer (in accordance with the Buyer’s instructions).
As we can see, there are lots of risks correlated to product delivery on FOB terms by using FCR. But only the key risks can be always preempted by means of competent negotiations and high-quality development of a trading scheme, with regards to all the nuances of legislation.