The most widely traded Incoterms in Kuwait and obligations of its parties
Transport & Insurance Focus
The “Incoterm” stands for International Commercial Terms where are essential guidelines that dictate responsibilities in shipping processes, including who handles customs fees and shipping mishaps.
Law Update: Issue 366 - Transport & Insurance Focus
Omar N. OmarPartner, Head of Transport & Insurance
Passant MansourAssociate,Transport & Insurance
They are a set of 11 standardized trade terms businesses as mentioned to be used globally to define the responsibilities of buyers and sellers in international trade transactions where it can provide a common language for international trade making it easier for parties to understand each other’s obligations and reducing the risk of misunderstandings.
The first incoterms were published by ICC in 1936, it is rules provide internationally accepted definitions and rules of interpretation for most common commercial terms used in contracts for the sale of goods where these terms are developed and maintained by the (ICC) and are updated periodically to keep pace with changes in the global trade environment where the latest version of the same was released in September 2019.
The incoterm includes aspects such as: delivery of goods, transportation, insurance, and the transfer of risks which are as below:
Delivery Point: The point where the seller’s responsibility ends, and the buyer’s responsibility begin.
Transportation: Who is responsible for arranging and paying for transportation.
Risk and Insurance: At what point the risk of loss or damage to the goods passes from the seller to the buyer.
Costs: Which party is responsible for various costs associated with the transportation and delivery of goods.
EXW (Ex Works): The seller's obligations do not include customs clearance of the export of goods and loading onto a truck. The buyer bears all risks and costs associated with and following the loading of the goods from the place of loading specified by the seller. The seller is not responsible for loading the goods onto the buyer's means of transport or for completing the customs export formalities (unless otherwise agreed in the sales contract).
DAP (Delivered at Place): Seller covers the costs and risk of transporting goods to an agreed address. Goods are classed as delivered when they’re at the address and ready to be unloaded. However, Risk transfers from seller to buyer When goods are ready for unloading at the agreed address.
DDP (Delivered Duty Paid): Seller takes almost all responsibility throughout the shipping process where they cover all costs and risk of transporting goods to the agreed address, they also make sure goods are ready for unloading, fulfils export and import responsibilities and pays any duties. However, the Risk transfers from seller to buyer when goods are ready for unloading at the agreed address.
CIP (Carriage and Insurance Paid To): Same seller responsibilities as CPT with one difference which is the seller also pays for the carriage and insurance to the named destination. Also, he is obliged to purchase the maximum level of insurance cover under Clause A (Institute Cargo Clauses), for the buyer’s risk. However, Risk transfers from seller to buyer when the buyer’s carrier receives the goods.
DPU (Delivered at place unloaded previously DAT): Seller is responsible for the costs and risk of delivering the goods to an agreed place of unloading where the place of unloading could be any place whether covered or not. Seller should organize for customs clearance and unloads the goods at the place of unloading. However, Buyer is responsible for import clearance and any related duties. However, The risk transfers from seller to buyer at the place of unloading.
FCA (Free Carrier): The seller transports the goods to the terminal agreed with the buyer (transport company) and the seller's obligations include customs clearance of the export of the goods. If the designated loading place is at the seller's location, the seller is responsible for loading the goods onto the truck. If the designated place of loading is a terminal of a transport company, the seller is responsible for loading the goods onto the truck but is not obliged to unload them.
CPT (Carriage Paid To): it is the same seller responsibilities as in FCA with one difference which is the seller covers delivery costs. As with FCA, it’s the seller’s responsibility to clear goods for export. However, Risk transfers from seller to buyer when the buyer’s carrier receives the goods.
FAS (Free Alongside Ship): Seller assumes all costs and risk until goods have been delivered to the ship, then the buyer takes the risk and take the responsibility of the export and import clearance. However, the risk transfers from seller to buyer when the goods have been delivered next to the ship.
FOB (Free on Board): Seller assumes all costs and risk until goods have been delivered on board the ship, also the seller should take the responsibility of the export clearance. However, the buyer assumes all the responsibility once the goods are on board. However, the risk transfers from seller to buyer when the goods have been delivered onto the ship.
CFR (Cost and Freight): Seller has the same responsibilities as FOB. But he should pay the cost of bringing the goods to the port. However, the buyer will be responsible as soon as the goods are on board. Bearing in mind that the risk will be transferred from the seller to the buyer when the goods are on the ship.
CIF (Cost, Insurance, and Freight): The Seller has the same obligations as CFR. However, he should cover insurance costs. Also, the buyer is obliged to purchase the minimum insurance cover which is 110% of the invoice value, in the currency of that invoice and contract and if the buyer requires more comprehensive insurance, the seller must arrange the additional cover at the buyer’s cost. At that case the risk transfers from the seller to the buyer when the goods are on the ship.
After we generally defined the above 11 types of incoterms and explained the differences between them in terms of when and how the risk, freight, insurance cost, and obligations can be transferred from the buyer to the seller and vice versa in the marine sales contract. we will see how the Kuwaiti law defined and used the incoterms in its laws:
As per Kuwait Commercial Law No. 68 for the year of 1980” Commercial Law” there are only two main Marine contracts which are divided into: 1- Sales at the port of shipping. 2- Sales at the port of discharge. However, we will focus of the marine sale contract at the port of discharge which according to the above-mentioned law are divided into two types first is CIF and second is FOB where the similarity between of both contract are the ownership of the goods which in the CIF or FOB is transferred from the seller to the buyer at the port of shipping which means that the buyer will be responsible for any loss occurred to the shipment onboard during the transportation process and until the arrival date which meant the exchange point of goods responsibility will be ended by the seller from the moment he loaded the shipment on the vessel which meant that whatever will be happening to the shipment will be liable for the buyer.
CIF: Article 141 of the Commercial Law stipulated that: Sale is the sale of goods exported by sea to a certain specified destination against a lump sum consideration covering the price of the goods, insurance, and freight (by vessel) which meant that such sale contract is requiring several obligations and providing several rights for each party of that contract.
By applying the above-mentioned article in terms of the seller obligations, we will find that the seller is holding the obligations of the cost of the good itself, the insurance cost, and the freight. Also, the seller is responsible of the safe delivery of the shipment till the moment of the goods will cross the barrier of the vessel as per Article 144 of the Commercial Law which stated that: The vendor shall bear the consequences of the damage which may be sustained by the goods up to the moment when the goods cross the barrier of the vessel; such liability shall thereafter devolve on the purchaser. However, it does not mean if the seller responsibility of the shipment will be ended once the shipment crossed the barrier of the vessel that the seller can breach any of his obligations against the safe delivery of the same. As the goods should be delivered to the buyer with the same quantity, quality or as described earlier by the buyer unless otherwise has been agreed on something else. As such, the buyer will be having the right to request for a termination of the contract because the seller did not comply with what they agreed on.
Adding to the above, that the seller is responsible for shipping the goods which meant that he responsible of every single cost to complete such process and to make sure as well that the vessel which will carry the goods will be fully equipped with the required equipment such as cooling / ventilation devices to maintain the status of the goods as is if needed.as well to make sure that the delivery of the shipment will be in reasonable time and to inform the buyer with such information where Article 143 of the Commercial Law came and supported the same by stipulated that: 1. The vendor shall ship the goods at his own expense on the vessel and at the port of shipping on the date specified in the contract of sale; or where the contracting parties have not specified a date for shipping, on a reasonable time. 2. The vendor shall obtain, at his expense, the statutory licenses needed to export the goods from the place of shipping; he shall further bear the expenses of packing, measuring, weighing, counting or ascertaining the quality of the goods where such operations are an incumbency for shipping; furthermore, he shall pay such taxes and dues as are due on the goods by reason of the export or shipping.
The last but not least in terms of the seller obligation is to buy a marine insurance policy covering the risks of the voyage and in the case that the goods are shipped in lots, each shipment should have a separate insurance policy, or we can say it should be insured separately. Also, the insurance sum shall not be less than the price of the goods mentioned in the contract of sale, plus ten per cent.
Example: if the goods costed 10,000 KWD, then the insurance amount should not be less than 11,000 KWD.
However, it must be noted that the seller cannot act as the insurer to the buyer. However, he supposed to buy the marine insurance policy from a third party and such policy should be a negotiable instrument in accordance with the condition of the usage at the shipping port to enable the buyer to sell such shipment to other party to trade it if he has the desire to do so.
FOB: Article 151 of the Commercial Law which stated that: A FOB sale is one by which the goods are delivered at the port of shipping on board of the vessel designated by the purchaser for their carriage.
We can notice as well that such type of marine sale contract is executed also at the shipping port. However, the seller is not liable to arrange or pay for any cost related to the insurance or transportation which mean that the buyer who will be responsible for arranging the carrier and should inform the seller with the relevant information so that the seller can start the process of the shipping whereas per article 153 from the Commercial Law will be responsible for the expenses of packing and the costs of checking, measuring, weighing or counting relevant to the shipping of the goods.
Adding to the above the seller should notify the buyer that the goods have been shipped and dispatch to him the relevant papers, in which case the buyer shall bear the costs of the notice and dispatch the papers. However, the seller should be responsible for the expenses and costs related to the export permit which related to the shipping of the said good.
We can say that the seller will be as well responsible for any damage occurred the goods shipment till the moment of the goods will cross the barrier of the vessel as per Article 144 of the Commercial Law as exactly the case in the CIF marine sale contract.
On the other hand, the most important role/ obligation of the seller is when it comes to providing the buyer with the related documents of the shipment such as a clean Bill of Lading which might enable the buyer to sell or mortgage the shipment ( even before the actual shipment is arrived at the port of discharge) which meant that we need to highlight a very interesting point in the CIF marine contract which is that what matters in the delivery of the shipment is the actual receipt of the relevant documents – B/L and not the actual delivery of the goods itself.
As we mentioned earlier, that both contracts are being executed at the shipping port where in both contracts the seller will be liable for any damage/loss occurred to the shipment till the moment of that such goods will crossing the barrier of the vessel then, the buyer will be liable from that point. However, the CIF and FOB contracts are different in several obligation which are as below:
Firstly, In the FOB contracts, the seller will not be liable for arranging for a carrier or insurance which accordingly effect the price of the goods itself because it will not be including the cost of transportation or the freight. However, the buyer will be arranging directly from his side a carrier or/and an insurance company.
On the other side, in a CIF contract, when the seller is contracting with a carrier to ship the cargo from the shipping port to the port of discharge and arrange as well for an marine insurance for such cargo, this type of agreements are a part of the main CIF contract where if the seller will fail to comply with such obligation, the buyer will have the total right to terminate the contract. However, in the FOB contracts, essentially, the seller is not obligate for such agreements but if he will arrange for the same, we cannot consider any of these agreements as a main part of the FOB contract, but we can say that the seller represented the buyer. Hence, any breach or failure in implementing any of the agreements, the buyer will not have the right to terminate the contract.
Secondly, In terms of the importance of the documents related to shipment itself, as we mentioned earlier, any relevant document in CIF contract is very important to be delivered to the buyer before the shipment itself, particularly, the Original Bs/L in order to enable the buyer to trade or deal with the shipment even before its actual arrival date. However, in FOB contracts because such arrangement is being done by the buyer himself where for sure he will be having such documents in his hands because he is arranging for the carrier will be responsible for issuing the B/L which will be handed over to the buyer immediately,
We are always keen to request either the buyer or the seller companies to be aware when exactly the responsibility of each one starts and when it ends according to Kuwait law because by understanding the obligations of each party of the sale contract will definitely be easy to avoid any future risks.
Therefore, Al Tamimi & Company is always happy to assist you in reviewing such contracts and to make all parties fully aware of their rights and obligations to avoid any risks and financial loss in the marine trade.
For further information,please contact Omar N. Omar and Passant Mansour.
Published in March 2024
