Incoterms 2020 rules are the latest revision of international trade terms published by the International Chamber of Commerce (ICC). They are recognized as the authoritative text for determining how costs and risks are allocated to the parties conducting international transactions.
Incoterms 2020 rules outline whether the seller or the buyer is responsible for, and must assume the cost of, specific standard tasks that are part of the international transport of goods. In addition, they identify when the risk or liability of the goods transfer from the seller to the buyer.
There are 11 trade terms available under the Incoterms 2020 rules that range from Ex Works (EXW), which conveys the least amount of responsibility and risk on the seller, to Delivered Duty Paid (DDP), which places the most responsibility and risk on the seller. The Incoterms 2020 Rules summarizes the seller and buyer responsibilities under each of the 11 terms. The ICC has divided the 11 Incoterms into those that can be used for any mode of transportation and those that should only be used for transport by “sea and inland waterway.” That’s because companies were too often choosing Incoterms where risk and responsibilities were transferred at a point that made no sense in a non-ocean journey.
In this post we will discuss the Incoterm FCA, also known as Free Carrier. Under Incoterms 2020, FCA can be used for any mode of transport—air, courier, truck, rail, vessel or multi-modal shipments.
FCA Incoterms 2020 - Meaning
FCA stands for Free Carrier, where the buyer arranges the main carriage. As per the shipping terms under the free carrier system, the exporter is responsible for loading of goods at an agreed upon place in the exporter’s country and from that point onwards, the importer is in charge of all the risks and costs bearing factors.
FCA is known as a flexible rule which can be used for any transport mode, or where there is more than one transport mode. FCA is also considered a better rule for a buyer as compared to EXW (Ex Works), which requires the seller to organize the export documents and follow necessary procedures as per the rules of the exporter’s country, which a buyer from another country might not be aware of.
Free Carrier Responsibilities and Risk
Under the Incoterms 2020 rules, FCA means the seller loads the goods on the buyer’s transport at the seller’s premises, or the seller delivers them to another named place.
Despite being recommended in place of FOB (free on board) for cross-ocean container shipments this rule in practice is largely unworkable for them. This is because in such shipments the buyer wants to only take on the risk of damage or loss of the goods when they have actually been exported. They don’t want to be faced with any possibilities of having to deal with any problems whatsoever in the exporting country.
Most often, the buyer hires a transport that picks up the goods at the seller’s warehouse. The seller must load the goods on the buyer’s transport, at which point the risk for the goods transfers to the buyer.
Alternatively, the seller and buyer may agree that the seller transports the goods to a place other than the seller’s warehouse such as the freight forwarder’s warehouse or the carrier’s terminal. The risk or liability for the goods transfers from the seller to the buyer when the goods are made available at the named place. In this case, the buyer is responsible for unloading the goods from the seller’s transport.
In both cases, the seller should package the goods appropriately or as specified in the agreement between both parties. In addition, the seller is responsible for export clearance.
When Should you Use an FCA Agreement?
The only time a buyer would want to consider FCA is if most of the following parameters can be met:
- The cargo they are shipping is containerized
- They have existing knowledge of the logistics process and requirements in the sellers country, or they are using a shipping service
- Their seller equally prefers FCA over FAS (free alongside ship) or FOB.
- The cargo is being transported directly to the terminal for export, and not to the shipping service provider’s warehouse.
If the above four conditions can be met, FCA is a viable option to consider as an Incoterm.
Free Carrier and Bills of Lading
The most significant change in Incoterms 2020 rules relates to FCA. Under this term, the buyer can now instruct its carrier to issue a bill of lading (BOL) with an on-board notation to the seller so that the seller may satisfy the terms of a letter of credit.
Under an F-group rule, the “at a named place” is on the seller’s side, but the buyer hires the main carrier and freight forwarder. The seller does not control shipments under the F term, so the freight forwarder and carrier have no obligation to the seller.
This has caused problems in the past when selling under a letter of credit, because international carriers would have no reason to provide the bill of lading to the seller who would typically need it to get paid under a letter of credit.
The FCA Incoterms 2020 rule provides a potential solution—the buyer and seller may agree in the sales contract that the buyer must instruct the carrier to provide the seller with an on-board transportation document.
While the buyer may instruct the carrier to provide the required bill of lading to the seller, there is no guarantee the carrier will comply. Even if they do, they will not issue the document before the goods are actually loaded, which may cause delays for the seller to get paid under the letter of credit.
FCA Tips And Tricks
If the named place is a forwarder’s warehouse or some other terminal that is not the seaport or airport, the seller remains liable and responsible for loading the truck at their premises, with the carrier responsible for unloading the truck at the named place. The buyer is therefore liable and responsible for some tasks in the export country (transportation and terminal charges).
The named place can also be the supplier’s factory, making it similar to EXW, except the supplier is responsible for loading the truck. The buyer is therefore liable and responsible for some tasks in the export country (transportation and terminal charges).
Irrespective of where the named place is, the seller is still responsible for all export and documentation tasks. There’s one exception, which is relevant only for letter of credit payments: the buyer can now instruct the carrier to add the word “aboard” onto the Bill of Lading.
Bottom Line
As mentioned above, FCA is generally considered the best F-group Incoterm to use. However, those same experts will usually say FCA has some definite downsides for sellers:
- There are some challenges if using a letter of credit under FCA as described above.
- The seller may not be familiar with the freight forwarder being used.
- There is potential for diversion of the goods before they leave the United States, or to another county after they leave the U.S in violation of the Export Administration Regulations (EAR).
Some U.S. companies who sell to Mexico choose to use FCA. They deliver goods to the U.S. side of a border crossing, and then the buyer is responsible for transport over the border into Mexico.
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Tags: Incoterms, International
