If you own any sort of business, there’s a high chance that you’ve come across the words FCA incoterms. What it means, you ask? It simply refers to an arrangement where the seller is under obligation to deliver the package to a pre-determined destination known as “Named Place”. The seller is responsible for all the steps that come in before the shipment is locked and loaded for delivery via a carrier.
The FCA rules have come to refer to a variety of forms of transport like air, sea, rail, and road freight. These terms entitle the buyer with much-needed flexibility to arrange a form of carriage that they deem necessary for the product ordered. It’s up to the buyer to make this decision after considering the fragility of the order. Hence, they can decide how the shipment process will take place.
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What exactly are Incoterms?
Incoterms describe the specifics of a shipment process and generally include important details like the time, place of delivery, the shipment costs, and, more importantly, the crucial point when the liability shifts from the seller to the buyer. These incoterms are recognized by the International Chamber of Commerce, a global organization set up for prescribing shipping standards.
The terms included in the tenth edition of the International Chamber of Commerce are:
- Ex-works (EXW)
- Delivered at place (DAP)
- Delivered duty paid (DDP)
- Free alongside (FAS)
- Free on board (FOB)
- Cost and freight (CFR)
- Cost, insurance, and freight (CIF)
- Free carrier (FCA)
There are only subtle differences between the different terms, but the definitions may vary from one country to another. Like for example, Ex-works (EXW) refers to a trade arrangement where the seller delivers the goods to the designated location, but the buyer bears the cost of transport.
But, on the other hand, free alongside (FAS) defines a stipulation where the seller must arrange for the package to be delivered to the designated location and also next to the delivery medium to make the transfer process much easier. So, it’s extremely important that both buyer and the seller read these agreements before signing. Let’s use an example to illustrate the FCA incoterms and their obligations.
How exactly do FCA incoterms work?
The seller delivers the package to the location requested by the buyer. It’s the shipping service that’s responsible for any lapses up until this point. At this crucial juncture, the buyer becomes responsible for handling the rest of the shipping process.
For instance, Joe (seller) ships a laptop to Beck (buyer). Beck decides to go with a third-party logistics company that she trusts to handle the shipping. Joe goes along with this arrangement and agrees to deliver the laptop to a pre-determined location. After the transfer of the package to the named place occurs, Beck has to handle the rest. This is hence the point where the transfer of liabilities takes place from Joe (seller) to Beck (buyer).
What are the obligations of the buyer and seller under the FCA delivery terms?
This section of the article will delve into the details of the responsibilities of the buyer and the seller under the FCA incoterms.
Responsibilities of the Seller
The seller is responsible for the following:
- Export packaging- The cargo obviously needs packaging first before they can send it out for export. While the standards for packaging are more or less similar across the globe, some regions do tend to have extremely specific requirements. This may range from unique markings to using a different form of packaging. The onus is on the seller is to ensure that the shipment adheres to such strict standards.
- Loading charges- The costs incurred while loading the shipment onto the carrier from the location where it’s made will be under the responsibility of the seller.
- Delivery to the Named Place/Port- It is the seller’s responsibility to ensure that the shipment gets delivered to the place that was agreed upon. Colloquially known as the Port, it refers to a seaport, rail port, or more obviously, an airport. Direct shipping and drop shipping are the most popular methods for delivering goods from seller to buyer.
- Export Duties, Taxes, and Customs Clearance- These are the costs associated with formally shipping a good outside of a country. Costs incurred are traditionally compensated by the seller himself/herself. Traditionally, sellers compensate the costs that are a part of the process.
So, the price quoted by the seller to a potential buyer is inclusive of all these costs. But, it’s pertinent to remember that a seller can be held in contempt of breaching the trade agreement when they claim monetary compensation for any of the responsibilities mentioned above.
List of documents required by seller:
- Commercial invoice– this furnishes important information regarding the shipment like the buyer, name of the freight forwarder, name of the customs brokers, and the bank carrying out the transaction. A commercial invoice is mandatory for all forms of sea freight, air freight, and shipments under FCA infoterms.
- Packing list– this essential document contains details regarding the exporter, the individual, or business to which the product is about to be shipped, the invoice number, the country of origin of the purchase, the country to which it is being shipped, the all-important terms of delivery, and last but not least the Authorized Signatory along with the date and stamp of approval.
- Bill of lading– essentially, evidence of the contract between the shipper and the carrier, which signifies the successful loading of the package. Like other documents on the list, it includes crucial information about the shipment like the destination, billing details, terms of payment, and special instructions to the shipper, if any.
- Marine insurance– said to cover the damages that incur during the shipping process. The term marine insurance primarily refers to the transportation of goods across the sea. Although, it can also extend to other forms of transport like air, in which case it’s collectively referred to as marine cargo insurance.
- Industrial License – It is issued by the government otganisation to allow organisations for establishing an industry, manufacturing new products and to perform some particular functions.
- Export License– some specific items like live birds or animals, endangered species of flora, and fauna do require a special export license. But, these limitations may vary from one country to another.
Responsibilities of the Buyer
As soon as the delivery of cargo completes to the named place, the risk of liability shifts to the buyer. Some of the factors that they are responsible for are:
- Origin terminal charges– charges associated with the loading up of cargo onto the vessel from the designated shipping terminal.
- Loading on Carriage– associated with loading the cargo onto the carriage in question.
- Carriage charges– charges that incur while the order is moving from the point of exchange to the port of its own destination.
- Destination terminal charges– associated with unloading, transferring, and the handling of the shipment during the import process.
- Delivery to the destination– getting the package from the port of destination to the actual location of the buyer.
- Unloading at the destination– cost of unloading the cargo at the buyer’s location.
- Import Duty, Taxes, and Customs Clearance– the costs that incur while importing the goods into the country of their residence are paid for by the buyer.
Coming down to insurance, the unique thing about FCA is that neither the buyer nor the seller is contractually obligated to avail cargo insurance. But, it is traditional practice for buyers and sellers to procure their insurance policies. In some cases, one of them takes up the responsibility of arranging insurance for the other party. So, it might be a smart idea to have a conversation about the terms of insurance while negotiating the trade contract.
Pros and Cons of FCA delivery terms
Here we are going to tell you the advantages and disadvantages of FCA delivery terms,
Pros of FCA delivery terms
Unlike the traditional EXW (ex-works) model, FCA incoterms offer the buyer some control with regards to what happens to their shipment. The handling of logistics is the responsibility of the seller. It gives them a lot of flexibility in deciding the method of shipment that they deem fit.
For instance, the FCA incoterms let the Seller pick a shipping service that they trust to handle all the logistics. This trusted third party would then find the best deals for you and ensure a smooth, hassle-free experience.
Cons of FCA delivery terms
Most business owners swear by the FOB (free-on-board) model and for the right reasons. FOB, unlike FCA incoterms, does not require the Buyer to shell out extra bucks for terminal and loading costs. Moreover, the Buyer bears the additional responsibility of handling any issues that may pop up during the shipping process.
Since it’s also a relatively newer term, not a lot of businesses might be familiar with it. Chinese sellers, for instance, might not be willing to do business under FCA incoterms and prefer to quote prices according to the FOB model. Even if they’re familiar with the trade agreement, they might not enjoy a great working relationship with the shipment fulfillment service of your choice. There is a dangerous possibility of your precious cargo experiencing diversion before they even leave US soil, or to a different country after they leave the States in violation of the rules laid down under the Export Administration Regulation (EAR).
When to consider invoking the FCA shipping incoterms?
These are some of the instances where it makes logistical sense to consider opting for FCA as opposed to the more traditional EXW model.
- When the buyer has some knowledge about the process of shipping in their respective country.
- When the cargo is being transported directly to the terminal for the purposes of getting it exported and not to the seller’s warehouse as usual.
- When the seller is confident that their shipping service will cost lesser than the prices quoted by the buyer.
- The cargo being shipped is containerized, in accordance with the guidelines of the International Chamber of Commerce.
Some important things to remember
- In case the named place of significance happens to be the forwarder’s warehouse or a terminal that is not a seaport or an airport, then the seller continues to be liable for the cost of loading the truck at the premises, while the carrier is responsible for unloading the truck at the mentioned place.
- Circumstances dictate that the named place of significance can simply be the supplier’s factory, which makes the entire arrangement similar to EXW, the only difference being that the supplier is ultimately responsible for loading the truck.
- Whatever the arrangement might be, the onus is still on the seller to take care of the export and documentation. The only exception to this statement is in the case of a letter of credit payments.
The FCA incoterms are one of the new definitions in the list of incoterms identified by the International Chamber of Commerce. It effectively tries to build upon the disadvantages of the standard EXW model and is, all around, a better agreement for customers. It offers sellers flexibility for choosing their own shipment service and hence, the manner of handling of their precious shipment. The only crutch to its widespread usage is the fact that not all businesses are aware of the stipulations of the FCA incoterms and that it might take a while for everyone to get familiar with.