INTERVIEW: Why fashion brands must walk the talk in ethical business practices

In an exclusive interview with Just Style, shipping and logistics professional Van Dort points out that in recent years fashion brands have put pressure on manufacturing partners to raise their game in terms of ethical and sustainable practices due to consumer pressure. However, he argues that many fashion brands have failed to level up their own performance in this front, adopting unfair business practices that put their suppliers at risk. Van Dort is also keen to explain how the use of incorrect terminology – specifically Free on Board (FOB) and Free Carrier (FCA) – in contracts by fashion buyers is adversely affecting their suppliers. Understanding the difference between FOB and FCA Van Dort explains there has to be an accepted guidance framework for international trade to function properly. Incoterms, which refer to international commercial terms of the International Chamber of Commerce (ICC), provide such a framework by clearly defining the responsibilities of buyers and sellers in international trade transactions. He says: "While these guidelines are not legally binding, adhering to these benefit both buyers and exporters/sellers or ‘shippers’ as they are referred to by the maritime industry, since these guidelines protect the interests of both parties." He adds: "Free on Board (FOB) and Free Carrier (FCA) are two such Incoterms, which outline the roles and responsibilities of buyers and sellers in the transport of goods from the seller to the buyer. These have nothing to do with the shipping line; these are the contractual terms between the seller and the buyer." Van Dort also makes the point that the term FOB has been used for decades. In fact, he says years ago, sellers used to transport the goods to the point where the ship was docked. This is reflected in FOB terms, according to which the seller is responsible for the cargo until it’s placed onboard the ship. After that, it becomes the buyer’s responsibility, and the point of transition also triggers the payment that the shipper is due. This is, however, no longer the case in the shipping industry. Due to security concerns, goods can no longer be transported to the port and loaded immediately. Also, freight forwarders now act as intermediaries, obtaining cargo from the seller and organising shipping on behalf of the buyer. The seller has no control over the freight forwarder, who acts as the buyer’s agent and makes critical decisions, including selecting the shipping line. Van Dort explains that FCA has been introduced to reflect this present reality. He says: "The cargo becomes the buyer's responsibility once it is delivered to a location specified in the contract, such as a warehouse, and the payment to the seller is also triggered at this point. "Notably, the Sri Lankan apparel industry advocated strongly through the Global Shippers’ Forum to introduce FCA as an Incoterm since they recognised early the risks of using FOB terms." How the current system places apparel exporters at unfair risk Van Dort suggests some apparel buyers still use FOB in their contracts instead of FCA, which can create issues for both parties and is unfair to the seller/exporter. Incoterms serve a clear purpose, and their correct use protects the interests of all parties. He adds: "From the seller’s viewpoint, if the cargo is lost or damaged after it’s handed over to the freight forwarder, the seller is held liable if the contract is under FOB terms since the seller’s responsibility only ends once the goods are on board the ship. This has created issues, such as in Bangladesh after the 2004 tsunami. Sellers had to bear the cost of cargo lost during the disaster, although it had been handed over to the freight forwarder." In saying this, he explains the freight forwarder is the buyer’s agent, and the seller has no control over the actions of the freight forwarder. He says: "This places the seller in a vulnerable position, potentially suffering even millions of dollars in damages. Apparel buyers and brands continuously push their manufacturers to be ethical and environmentally sustainable in production. Especially in countries like Sri Lanka, apparel manufacturers have responded, making massive investments to ensure high levels of ethics and sustainability." Van Dort believes it's only fair that buyers too reciprocate in kind and display the same level of ethical business practice that they expect from their manufacturers. Working within FOB rules during a pandemic The risk of using FOB terms for apparel exports increased during the pandemic, explains Van Dort. He says: "Since fewer ships were calling at ports, freight forwarders asked sellers to keep apparel consignments in their warehouses until a ship arrived. If the consignment was harmed in any way during this period, the seller would’ve been responsible. "Additionally, the price of raw materials skyrocketed due to the pandemic, as supply chains were disrupted. This created working capital pressure for many apparel manufacturers. This was worsened by the use of FOB terms since sellers had to wait longer to get paid by their buyers, as the cargo should be placed onboard the ship for the payment to be triggered." Van Dort states this affected all apparel manufacturers bound by FOB terms but probably hurt small and medium scale apparel manufacturers the most. Making the switch from FOB to FCA Van Dort believes it’s important the apparel industry makes the switch from FOB to FCA right now because fair and ethical business practices are essential for trade and for any industry to thrive and grow sustainably. He says: "Understanding this need, several major brands – particularly from the USA – have already amended their contracts with apparel manufacturers to replace FOB with FCA terms." Also, he explains, with the emergence of new risks, due to developments like the Russia-Ukraine conflict, we must take all possible measures to protect the interests of all parties in the apparel exporting process. "The conversion is also necessary in terms of adhering to local regulations and guidelines in many countries. For instance, trade authorities in Sri Lanka and Bangladesh have already impressed upon apparel buyers the need to adopt FCA terms. Other apparel exporting countries are also considering regulations along similar lines," he adds. The benefits for exporters Adopting FCA terms will help exporters/sellers who no longer have to face unnecessary risks that they have no control over, points out Van Dort. Plus, he explains they can also receive their payments earlier, easing cash flow pressure. He says: "Under FCA terms, payments are triggered once an apparel consignment is delivered to the specified location, instead of waiting for it to be put on board a ship, as in the case of FOB." The benefits for importers/buyers There are also benefits to switching to FCA for importers and buyers as it could provide them with better control over the shipping process since the freight forwarder will be completely in control and responsible for the consignment, he explains. "It’s important to understand that this is simply a change in terminology to reflect reality. There is no downside for the buyer since the point at which the freight forwarder takes charge of the consignment remains unchanged, meaning that buyers are already incurring the relevant costs." Making an official switch from FOB to FCA to improve fashion brands practices Van Dort points out the Sri Lankan apparel industry is engaging directly with buyers and brands, raising awareness of the importance of this transition. He concludes: "Other apparel exporting countries, too, can do the same. However, the framework already exists, and several buyers have already adopted FCA terms. All that remains is for apparel buyers and fashion brands to walk the talk in terms of adhering to ethical business practices." Last month Sharad Amalean, the chairman of the Joint Apparel Association Forum (JAAF), shared the body's vision for Sri Lanka's apparel industry, its resilience through the pandemic, and its potential for becoming a global manufacturing hub.