Incoterms 2010 – The versatility of FCA (Free Carrier)

One of the most intriguing questions raised about Incoterms 2010 came during a training course, run by the ICC (International Chamber of Commerce), in 2010.   A fellow delegate asked whether it was possible, since the wording seemed to allow it, for the FCA (Free Carrier) incoterm to be used with contracts where the risk passed from seller to buyer in a country other than the country of export.  In other words, could a contract shipping from Felixstowe to San Paulo have the term FCA San Paulo?

At first sight this appeared to be a rather strange question.  In a previous article (Incoterms 2010 – Ex-Works) I pointed out that shipments could usually be divided into segments.  The first segment, consisting of the physical movement of the goods from the point of shipment origin to the port or frontier of export, is traditionally associated with what is colloquially  F-terms (FAS, FOB and FCA).  FCA, unlike FOB and FAS, can be used with all forms of transport, including container traffic carried by sea or inland waterways.  The risk (of loss or damage) passes to the buyer from the seller when the goods are physically delivered to the buyer’s nominated carrier, or another party nominated by the buyer, at an agreed point on either a specific date or within an agreed period.  The ICC stress the importance of accuracy when naming this place, since it is the point where the risk passes from the seller to the buyer.

The seller has a number of responsibilities.  They are responsible for physically making available or supplying the goods (packed) to a named place, arranging all export documents and for paying all the costs related to these actions.  They are also responsible for the export customs clearance (but not the import customs clearance).  The buyer is responsible for everything else although they can ask the seller for information in order to obtain licences and import permissions.  (By the way, under the FCA term, there is no mention in Incoterms 2010 for the seller to procure goods which caters for multiple sales down a chain, such as in commodity shipments).

Therefore, to suggest that the FCA term could also be used at a point beyond the initial port or frontier of export, seemed very unusual.  It would require that the shipper be responsible for the goods beyond the normal ‘export’ port, without actually being responsible for the shipment of the goods to the final destination.

Yet, in practice, this is precisely what does happen (at least in the UK).  I have organised a number of airfreight shipments where there are no direct flights to the final destination from the United Kingdom.  Usually what happens is that the goods are trucked to an airport in Europe (for example Schiphol Airport) and then flown direct from there to the final destination.  Yet in every single case the incoterm used in the contract was FCA London Heathrow.  It should have been FCA Schiphol Airport because this was the actual physical point at which the risk passed from the seller to the buyer.  This is especially the case when the shipper paid for, and was responsible for, the shipment until it reached Schiphol, because this had been what was agreed with the buyer.

So why don’t we use the correct phraseology more often?  Lots of people will have different explanations.  I happen to believe that this is partially due to continuing misunderstandings about incoterms, but also about convention.  The “understanding” across a wide swathe of the international trade community is that the F-terms are only to be used for shipments where the risk from seller to buyer passes at the frontier or the port of export.  Yet theoretically (and practically) FCA can be used legitimately at a whole range of points during the shipping process, from outside the door of the point of origin, all the way to a port in the country of import.  It is the most versatile of the incoterms in this respect.

Especially since Section A3, in the FCA section of Incoterms 2010, clearly states that the shipper can (but only if they wish) make a contract of carriage, at the buyer’s risk and cost.  Yet we rarely take up this offer.  In those cases where the shipper is asked to arrange the transport, it is more likely that one of the C or D incoterms are used.

So does it matter if we use FCA London Heathrow when we should be using FCA Schiphol?  As long as the shipment goes off OK, does it really matter?

Actually, it does.

The function of incoterms is simple.  They act as a type of shorthand, to describe to all parties involved in the transaction, exactly who is responsible for risks and costs at each part of the shipment.  Because incoterms are governed by the ICC (which is a private member organisation) incoterms have no legal meaning on their own.  This means there is no legal obligation anywhere for international trade contracts to make reference to an ICC incoterm.  However, once any incoterm is incorporated into a contract, it establishes a legal framework, which, if not countered in any way by the wording in the contract, will carry sway in a Court of Law.  For example, if you use an incoterm in your contract, but fail to state which version is being used, then the Courts (world wide) will automatically assume that the version being used is the most recent i.e. 2010.

Because of this, if the wrong incoterm is used, it can have rather wide-ranging consequences when things go wrong – and please, never assume that nothing will go wrong.  It can cause ‘goods in transit’ insurance to be invalid.  It can result in unnecessary costs if something goes wrong with the shipment and the shipping company cannot legally identify at the time who is responsible for the goods at that point.  Most importantly, it could cause confusion between buyer and seller as to who is responsible for what, if the terms used fail to match what is happening on the ground.

This should be avoided because it increases the potential for confusion and misunderstanding between the buyer and the buyer’s nominated carrier or agent about collecting the goods from the seller.  Please note that one of the greatest risks for the seller (under the FCA incoterm) is if the carrier or other party nominated by the buyer fails to take the goods into their charge, thereby preventing the seller from completing his obligation.

Therefore, when using the FCA term, it is important that the buyer makes clear the actual location where they want the seller to pass the goods to their carrier or nominated agent (otherwise the seller can choose a point of delivery that best suits their purpose) and that this is stated in full in the contract.  It is additionally important that this point is the actual point where the goods will physically pass from the seller’s responsibility to that of the buyer.  This physical place can be anywhere in the transport chain, up to the port of import, as long as both the seller and buyer agree.

Oh, and for those who are curious – the answer given by the ICC presenter to the delegate who asked the question in the first place, was Yes.

 

Maria Narancic from Point to Point Export Services is an independent international trade adviser who assists organisations world wide with their international trade projects, documentation, Documentary Credits and import/export training.  She is based in the United Kingdom.  If you require any further assistance with the matters mentioned above, please do contact us by e-mail on info@point-point.com or check out the Point to Point Export Services website at www.point-point.com for more information on International Trade matters.

 

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