Incoterms 2020 for Bulk Cargo: FOB, CFR, CIF and DAP in Practice

Incoterms 2020, published by the International Chamber of Commerce, define eleven trade terms that allocate costs, risk and tasks between seller and buyer. Four of them carry most of the world's bulk commodity trade: FOB, CFR and CIF for seaborne cargoes, and DAP for delivery to an inland or port location. Each of them answers two questions precisely, where the risk passes and who arranges what, and leaves several others to the contract.

The maritime terms: FOB, CFR, CIF

These three are "sea and inland waterway" rules. In all of them the seller delivers the goods on board the vessel nominated at the port of shipment, and the risk of loss or damage passes to the buyer at that point. The difference is who pays for the voyage.

FOB (Free On Board)

The buyer charters or books the vessel, pays freight and insurance, and bears the risk from the moment the goods are on board. The seller loads at its own cost and clears exports. For tankers the delivery point is customarily the vessel's permanent hose connection; for dry bulk, the hold. FOB is the buyer's term of choice when it controls shipping or wants to combine parcels.

CFR (Cost and Freight)

The seller contracts and pays for carriage to the named port of destination, but risk still passes at loading. The buyer must insure the cargo for the voyage itself. CFR is common where the seller has freight contracts in place and the buyer has an open cargo policy.

CIF (Cost, Insurance and Freight)

As CFR, with the seller additionally procuring cargo insurance for the buyer's benefit. Incoterms 2020 kept the minimum at Institute Cargo Clauses (C) for CIF, while raising CIP to Clauses (A). For high-value cargo such as copper cathodes or refined sugar, the contract should require Clauses (A) explicitly, because (C) does not cover theft, shortage or wetting.

Rule: under FOB, CFR and CIF the risk passes at the loading port, not at destination. The inspection that decides quality and quantity for payment is therefore the one performed at loading, and the contract and the letter of credit must say so.

DAP (Delivered at Place)

DAP is a multimodal term. The seller bears cost and risk until the goods arrive at the named place, ready for unloading, and the buyer unloads and clears imports. In commodity trade DAP is used for truck and rail deliveries of fuel, cement, steel and fertiliser to a plant, depot or border point, and increasingly for container deliveries. Its sibling DPU (formerly DAT) adds unloading by the seller. Note that the old DES term no longer exists in Incoterms; LNG and crude trades that still say "DES" rely on their own contract definitions.

Comparison

What Incoterms do not decide

The rules are silent on matters that cause most bulk-cargo disputes. The sale contract must cover:

• Transfer of title. Incoterms deal with risk, not ownership. Title usually passes on payment or on release of the bills of lading.
• Payment. The letter of credit, standby or wire terms are separate.
• Laytime and demurrage. Loading and discharge rates, notice of readiness and demurrage rates come from the charter party and must be mirrored in the sale contract, otherwise an FOB seller may face demurrage it cannot recover.
• Quality and quantity determination. Which inspector, which sampling method, shore tank or ship's figures, and whether the certificate is final and binding.
• Tolerances. Plus or minus percentages on quantity, and who exercises the option.
• Force majeure and governing law.

Linking Incoterms to the inspection and the credit

For FOB, CFR and CIF cargoes, the quality and quantity certificate issued at loading by SGS, Intertek, Bureau Veritas or an equivalent inspector is the document the seller presents under the credit. A buyer who wants outturn protection at discharge has two options: negotiate a DAP or similar delivered term so that risk stays with the seller, or keep the maritime term and buy appropriate insurance plus a contractual outturn clause with a defined tolerance. Asking for a CIF price and then demanding payment against discharge-port analysis mixes two incompatible allocations.

Writing the term correctly

An Incoterm is incomplete without the named place and the version. "CIF Rotterdam" is ambiguous; "CIF Rotterdam, Incoterms 2020, one safe berth, discharge within 36 running hours" is a term. For FOB tanker cargoes, name the load port and terminal, the laycan window and the vessel acceptance procedure. For DAP, name the exact delivery point, as risk and cost change at that point and not a kilometre earlier.

Used precisely, the four terms let a buyer and seller price freight, insurance and risk separately and compare offers on a common basis. Used loosely, they turn a quality dispute at discharge into a dispute about who should have been responsible in the first place.