Incoterms are a globally recognised set of commercial terms that are put forward by the International Chamber of Commerce (ICC).
They are designed to prevent confusion and disagreements between buyers and sellers – especially during international trade – by helping to clarify the responsibilities and obligations of both parties when contracts and commercial agreements are being drafted.
If you’re a retailer that’s currently trading internationally – or plan to in the near future – it’s incredibly important to understand the common Incoterms such as FCA, which we’ll be looking at in detail today. By doing so, you’ll hopefully avoid pitfalls associated with failing to understand Incoterms, such as owing compensation, losing stock, and damaging your business’ reputation.
In this article
Understanding FCA Incoterms
FCA (Free Carrier) is a widely used Incoterm that defines the obligations of the seller and the buyer regarding the delivery of goods, particularly around the transfer of risk, the payment for transport during the various stages of a shipment’s journey, costs associated with Customs and Duties, and other costs.
The concept of Incoterms was first created in 1921 by the ICC, and the earliest Incoterms came into effect in 1936. Incoterms have been reviewed and updated regularly in that time, with FCA first being introduced in 1980 to address the growing use of containerised shipping and multimodal transportation.
Today, FCA can be used for all methods of transportation, including air, sea, road, and rail. FCA is one of the most commonly used Incoterms in the world, mainly because of its flexibility when it comes to accommodating different methods of transportation, as well as its suitability in trade arrangements as parties can specify specific delivery points, such as airports, warehouses, or places of business.
Responsibilities of the seller under FCA
Below we’re going to outline the top-level responsibilities of the buyer and seller under FCA. We’d recommend doing further research and to always refer to your contract for specific arrangements.
Under FCA, the seller (or exporter) is responsible for the following:
- Packaging: The seller must pay for the packaging and ensure that packaging will keep goods safe during transport.
- Conformity: Checking that the goods adhere to the conditions laid down in the contract, and meet the eligibility requirements for exporting.
- Delivery: Goods are under the responsibility of the seller until they have been safely delivered to the named place agreed in the contract, such as a port, airport, business, or other suitable location.
- Loading: The seller is responsible for loading the goods onto the buyer’s carrier at the named place.
- Shipping costs: The seller must pay all necessary shipping costs until the goods have reached the named place in the contract.
- Risk: The seller takes on the risk of loss or damage until the goods have been transferred to the named place in the contract. Then, responsibility passes to the buyer.
- Documentation: All documentation such as invoices, packing lists, and other documents must be provided to the buyer by the seller.
- Notice: The seller must provide the buyer with an estimated delivery date and time to the named place, so the buyer can arrange a collection.
Responsibilities for the buyer under FCA
On the other hand, the responsibilities of the buyer (or importer) under FCA are outlined below:
- Acceptance: A representative from the buyer’s company must be on-hand to accept delivery of the shipment to the named place.
- Shipping: The buyer is responsible for arranging and paying for shipping from the named place to the final destination.
- Import Customs: The buyer is wholly responsible for costs, documentation, and other matters related to moving the shipment through customs.
- Risk: The risk of loss or damage passes to the buyer once the goods have been loaded onto the buyer’s carrier of choice at the named place.
Pros and cons of FCA Incoterms
With over 30 years of optimisation, FCA is widely considered to be a beneficial Incoterm to both buyers and sellers. That said, the complex nature of Incoterms and commercial shipping in general means that there are some cons to consider when opting for FCA.
Let’s take a look at both the pros and the cons.
FCA is flexible, enabling parties to include all modes of transportation and adapt the term to any transportational needs. Whether FCA is used for a small domestic arrangement or large international trade deal, it’s an versatile Incoterm.
It makes things as clear as possible when it comes to commercially important matters such as the delivery of goods, risk transfer, and obligations of both the buyer and the seller. The ability to choose a named place for transfer means there can be no ambiguity in the contract.
FCA makes negotiations easier regardless of where in the world each party is based because of its global recognition. It also makes trading more accessible for companies with less experience in international trade.
Managing carrier costs is more straightforward under FCA as both buyers and sellers can choose their own carrier and method of transportation for the areas of the journey they are responsible for.
Under FCA, there can be potential misunderstandings if parties aren’t specific enough during the negotiation process, especially around carrier choices and the named place. Disagreements regarding responsibilities can be avoided if both parties avoid ambiguity wherever possible.
Coordinating transportation logistics, especially when multiple modes of transport are involved, can be complex and costly for sellers, particularly inexperienced exporters.
Although the ICC design Incoterms to be used and recognised internationally, local customs and practices vary widely, potentially leading to different interpretations of FCA terms in different regions and complicating international transactions.
When to use FCA Incoterms
As mentioned earlier in the article, one of the huge benefits of FCA is that it can be used very flexibly. As a result, there are lots of situations where both parties may agree to use FCA.
Firstly, FCA may wish to be used when both parties have a good understanding of what FCA entails. When all involved understand what’s expected of themselves and each other from the beginning, it can create a more efficient, more productive negotiation process.
From the buyer’s perspective, using FCA is beneficial if you have good relationships with preferred carriers and you view them as reliable. Additionally, this might mean as a buyer you can negotiate good deals with your carrier. You can then end up in a situation where shipping from the named place to your final destination is cheaper than the seller’s offer. This also applies if you have your own logistics fleet.
Conversely, from the seller’s perspective, FCA might be ideal if you’re shipping to locations that are hard to reach or you’re unfamiliar with. It gives you the opportunity to negotiate a named place that you’re comfortable with, and then transfer risk and responsibility to the buyer to continue to the end destination.
FCA vs other Incoterms
FCA is one of a large pool of Incoterms, all of which are designed for specific trade scenarios. It’s important, therefore, to have a good understanding of the different Incoterms so you can go into any business decision well-informed.
Below, we briefly outline the other commonly used Incoterms in commercial shipping agreements.
EXW (Ex Works)
Unlike FAC, EXW transfers risk to the seller as soon as it leaves the seller’s premises. That means the buyer is responsible for all transportation, risk, and customs clearance, making this Incoterm attractive to seller’s but significantly less so for buyers.
An example of when EXW may be used is during local short-distance, low-risk arrangements, or when the buyer has a strong logistics infrastructure.
CIF (Cost, Insurance, and Freight)
Under CIF, the seller covers insurances, costs, and freight to an agreed destination port. Risk transfers when goods are on board the vessel, however the buyer is responsible for import customs clearance and delivery to the final destination.
CIP (Carriage and Insurance Paid To)
CIP is very similar to CIF but with the added responsibility of the seller covering transportation and insurance to the named destination, rather than a port. The risk transfers when the goods are onboard the buyer’s carrier of choice.
DAP (Delivered at Place)
The seller is responsible for delivering the goods to the named place of destination, including transportation, but not import customs clearance, making it a term where the buyer assumes customs responsibilities.
DDP (Delivered Duty Paid)
The seller is responsible for delivering the goods to the named place of destination, including transportation, import customs clearance, and payment of import duties and taxes, with the seller shouldering maximum responsibilities and costs.
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