IS THE SHIP'S RAIL REALLY SIGNIFICANT?

Abstract

The development of containerisation has not only simplified the carriage of goods but has also changed the legal relationship between seller and buyer. As a consequence some of the INCOTERMS 2000 such as Free on Board (FOB) are now often used incorrectly. Traders instead should make use of the more suitable multimodal term, namely Free Carrier (FCA). A comparison of the two terms on the basis of risk transfer indicates that differences occur and significant implications arise if parties incorporate the ‘wrong’ term into their contract. For instance, FOB’s risk transfer point of the ‘ship’s rail’ is synonymous with shipping and should not be misapplied to transactions involving containerisation where the risk transfer is not the ‘ship’s rail.’ The risk transfers when the first carrier takes charge of the goods. This simple fact alone requires a clear understanding of the two terms in order to avoid unnecessary legal complications in case of lost or damaged cargo. It is common knowledge that an incorporation of any INCOTERMS 20001 term into an international contract requires specific reference in the contract. The main functions of INCOTERMS, being a code of acronyms, are to facilitate intentional trade by eliminating uncertainties and differences in interpretation of trade or shipping terms.2 However merely agreeing to transact under INCOTERMS is not enough to finalise a transaction. INCOTERMS do not cover all aspects of the sale of goods contract and to facilitate a smooth transaction, parties should include provision as to transfer of title of the goods, remedies for breaching the contract, exception or limitation clauses, exemptions from liability, and any other duties the parties may wish to include in the sale contract.3 Parties further have the choice of incorporating an INCOTERM as well as making additional provision in the sales contract for ‘the export customs clearance, carriage from warehouse (works) to port of export, contract of affreightment (carriage), contract of insurance, import customs clearance, and local delivery in country of import’.4 This paper will compare the operation of FOB and FCA, two frequently used International Commercial Terms. The question of risk transfer from seller to buyer is used to demonstrate the significance of the ‘ship’s rail’, and the consequences of choosing the wrong term.