Why not to use a FOB factory with the Incoterms 2010: the RAFTD are to blame.

by admin on February 18, 2011

On several occasions we have received enquires as to why not to use a FOB factory, in the seller’s facilities with the new Incoterms 2010. Normally, individuals or companies that ask these questions are accustomed to using the RAFTD acronyms. These are trade operation terms created by the U.S Chamber of Commerce. RAFTD stands for Revised American Foreign Trade Definitions. In other words, they are the equivalent of Incoterms for the Unites States.

Blame RAFTD it is all its fault

Blame RAFTD it is all its fault

Under these rules, the term FOB could be used with collection from the seller’s factory, so therefore, it’s logical that some companies still follow this concept, especially those based in the United States or that have worked with companies there.

The RAFTD were created in 1941 and abolished in 1985, although many companies continue to use them, even in the Incoterms 2010. In fact, where an Incoterm was listed (when the Incoterms 2000 were in force), in contracts and official documents, the source had to be stated. In other words, it was obligatory to add Incoterms 2000 ICC (International Chamber of Commerce) in order to distinguish which terms were used and state their source, since there was more than one regulation.

In the new Incoterms 2010 things are different, because these are the only existing terms so it is not necessary to cite a source (International Chamber of Commerce).

According to the Incoterms 2010, the Incoterm FOB is a maritime Incoterm and can only be used for sea transport. The point of cession of risk and cost is the ship’s hold when it is moored in the port of origin. What’s more, this Incoterm should only be used for bulk goods and/or general cargo and not for containers.


{ 12 comments… read them below or add one }

swamy March 3, 2011 at 5:05 am

Dear sir,

Iam warking in aurobindo pharama ltd at hyderabad,we are somany exprt in every month on fob basess,but we are facaing one problem,

one air shipment we plane to desnatation on incheona- korea, on sv airline, but material reached in out of one box that means on boc is missing,

in the case who is clime in insurance policy(buyer or seller)

Reply

Remigi March 13, 2011 at 11:10 am

First of all, for air transport you should not be using FOB because this is an incoterm for sea transport. Therefore the correct incorrect to use in such an operation should be the FCA cargo terminal of the airport at origin.
This exact point is the point of cession of risk and delivery of goods. Therefore, in case of loss or theft, buyer is responsible for the costs and has to claim to the insurance company.

If you used a FOB (incorrectly) the point of cession is on board the plane.
If the loss occurred at the cargo terminal, seller is responsible for the costs and risks and therefore has to claim to the insurance company. If the loss happened after loading the goods, buyer is responsible. Possibly, it will be very difficult to determine where the loss or theft happened.

Reply

Holmes March 4, 2011 at 7:51 am

Dear Admin,
may I have the honour to know
“The RAFTD were created in 1941 and abolished in 1985″(abolished
in 1985 comes from?I cant find the information or material on this issue/tks

Reply

Remigi March 13, 2011 at 11:59 am

The RAFTD (Revised American Foreign Trade Definitions) were created in 1919 and revised in 1941. They were recommedations and they were not legally binding. They are trade terms of the US Chamber of Commerce and from 1985 they are not longer in use.

Reply

christian March 18, 2011 at 9:49 am

Hi all,

please could you tell me if we have to use incoterms for transactions into the same country or just for overseas sales?

Thanks
Christian

Reply

Remigi March 20, 2011 at 4:52 pm

Hi Christian,

You can use the incoterms 2010 for operations in your own country. In fact, CCI promotes this use of incoterms.

Thank you for your comment and regards.

Reply

Anthony April 21, 2011 at 8:33 pm

Hello,

How do you justify if your company is using the incoterms correclty in order to reduce costs and risks associated.

In other words, how would you correctly assign incoterms the maximize profits.

Regards,

Reply

Remigi May 25, 2011 at 8:31 pm

Hello Anthony,

There are several ways to reduce operating costs in international trading. In this case, the right choice of Incoterm plays a most important role.

First of all, you can reduce short-term costs right away, by taking into account some distinct variables:

- Avoid duplicating logistical costs between buyer and seller. For instance, loading and stowage are often included in the freight. In a FOB transaction the seller pays for this in the THC and the buyer pays for it again because they are included in the freight
- Costs triggered by unforseen circumnstances. In a FOB sale (container)* if the ship is delayed, the seller will have to pay the stay of the container in the port of origin, something probably not factored in the original cost estimation
- The costs arising from assuming risks we do not control
- Costs stemming from lack of transparency in the freight
- Costs associated with transport practices in certain geographic areas.

We also have medium and long-term costs derived from the choice of Incoterms:

- Failure to properly insure the goods
- Failure to satisfy the customer’s needs
- The cost of international litigation
- The risk of contracts not being honoured
- Costs arising from lack of knowledge
- Costs due to poor negotiation
- Risks and costs inherent to a poor agreement of Incoterms with terms of payment

Thank you for your comment and regards.

Reply

Frank Reynolds May 4, 2011 at 7:30 pm

I cannot determine exactly how/when the Revised American Foreign Trade Definitions were abondoned (the cover of the ICC Guide to Incoterms 1980 edition says s0). However, most informed U.S. traders have been using Incoterms internationally for years. The counterpart terms used in domestic trade (parts 2-319 through 2-324) were deleted from the U,S. Uniform Commercial Code in 2o04, and there is now growing use of Incoterms in U.S. domestic trade, particularly with the new 2010 revision.

Reply

Holmes May 18, 2011 at 3:17 pm

I agree with Frank reynolds,for in his book”INCOTERMS for americans”P13 still mentioned RAFTD 1941,”there are at least five things wrong with RAFTD 1941,RAFTD not abolished in 1985 or 1980,something likeCIF WARSAW-OXFORD rule who abolished it?
tks Frank.

Reply

Holmes May 19, 2011 at 3:24 am

Dear admin:
I didnt agree withyour opinion”If you used a FOB (incorrectly) the point of cession is on board the plane”.
In my opinion,it should be like INCOTERMS 1980 FOB airport,when the goods be handed over to the forwarder or airlines agent at the terminal the risk should be passed to the buyer.tks holmes

Reply

Diego May 8, 2012 at 7:14 am

FOB FACTORY DOES NOT EXIST.

FOB is just for maritime or fluvial transport and it’s always delivery ON BOARD.

The correct Incoterm 2010 to be used should be FCA FACTORY.

Reply

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