There are several consequences of using the incorrect Incoterms® and users need to fully comprehend what it means when they put a three letter Incoterms® rule into their sales contract..
The usage of incorrect Incoterms® rules happens most commonly due to
- Inappropriate rules being used for the chosen mode of transport;
- Lack of understanding of the allocation of costs and risks between the buyer and seller;
- The usage of incorrect version of the Incoterms® rules;
- The rules not being geographically specific;
- Not understanding what the Incoterms® rules does and does not do;
- Choosing rules that do not suit the requirement of the business;
Bob Ronai one of the experts invited by the International Chamber of Commerce to be a member of their Incoterms® Drafting Group to draft the new Incoterms® 2020, has compiled a series of short explanations of various matters critical to understanding and using the Incoterms® 2020 rules in the real world of trade based on various questions he has received about the correct application of the rules..
This article is the first in the series of these explanations..
FCA – Delivery and interaction with Letter of Credits
FCA stands for “Free Carrier” and should be shown as FCA (named place of delivery) Incoterms® 2020.. Under FCA, the seller delivers the goods to the buyer
- when the named place is the seller’s premises
- when they are loaded on the means of transport arranged by the buyer
- when the named place is another place having been loaded on the seller’s means of transport and the goods are ready for unloading from that seller’s means of transport when it reaches the named place and placed at the disposal of the carrier or of another person nominated by the buyer.
It is important to understand that for the FCA rule “delivery” does not equal “shipment.” The seller has no obligation to arrange when the goods are actually shipped. The seller must deliver on the agreed date or within the agreed period or at the latest date, but the actual shipment date is entirely separate from the delivery date and of no concern to the seller. For transport by road and rail, the two are very likely to coincide, but that is unlikely to be the case for transport by air or sea.
For transport by air, the seller delivers the goods to the buyer’s carrier, whether the carrier collects the goods from the seller’s premises [A2 option (a) loaded on the means of transport] or the seller delivers them to the carrier’s premises [A2 option (b) not unloaded from the seller’s transport]. Even if that carrier is the airline itself, in most cases the actual flight departure date is very likely to be one or more days after delivery. The possible exception to this is perishable goods. The seller has no obligation regarding this shipment, when it departs, on what flight it departs, or even if it departs the airport.
For transport by sea in a container, the seller delivers the goods to the buyer’s carrier, whether the carrier collects the goods from the seller’s premises [A2 option (a) loaded on the means of transport or loaded securely into the container if FCL] or the seller delivers them to the carrier’s premises [A2 option (b) not unloaded from the seller’s means of transport].
The date on which the container is loaded onboard the vessel is likely to be several days after delivery. The seller has no obligation regarding this shipment, when it departs, on what vessel it departs, or even if it departs the port.
Do FCA transactions and Letter of Credits play nicely together?
Assuming we are looking at the normal type of letter of credit with the latest shipment date, port/airport of loading, port or airport of destination and requirement to present an onboard B/L or an AWB, then the answer is “NO”.
A2 in FCA has two options for delivery, effectively:
- at the seller’s premises, loaded on the buyer’s/carrier’s truck, or
- at the terminal not unloaded from the seller’s truck
There is no obligation whatsoever for the seller to make any further arrangements with the buyer’s carrier as to when, from where, to where, and on what the goods are shipped. While the seller is the exporter for customs purposes, it is not the shipper.
But B6 says the buyer, if agreed in the contract, must instruct its carrier to issue a B/L to the seller. An interesting concept this, the only time in the 2020 rules that the buyer can arrange for their carrier, not a party to the sales contract, to do something, and if that carrier doesn’t do it or makes a mess of it, then the seller has no comeback on the buyer.
Anyway, why even have this provision, when the seller and buyer can agree on anything in their contracts anyway?
In such cases, it is recommended that the seller inserts into the sales contract certain specifics which are actually outside of the FCA rule.
- State the latest shipment date of at least 14 days, better still 21 days, after the contractual delivery date.
- State a broad-based port or airport of loading, for example, “any European port/airport” instead of naming say “Koper” or “Zagreb.”
- State a provision that in addition to B6 the buyer is responsible to ensure that their carrier follows the seller’s instructions regarding the B/L, including wording required by the LC, and that the carrier must provide the seller with the B/L or AWB within say 5 days maximum after shipment.
- State that no responsibility attaches to the seller if these three provisions are not achieved and remind the buyer that as per the provisions that A2 still applies to contractual delivery and B1 still obliges the buyer to pay the agreed price.
- State that if the seller is unable to comply with the terms of the LC because of the buyer’s failure to ensure points 1, 2 and 3, that payment is due immediately upon demand by the seller. Yes, it’s messy, and I’ll be happy to read other suggestions from members of this group.
FCA in LC transactions should be discouraged as the seller is not the contracting party for the freight forwarder. Thus the freight forwarder has no obligations to follow the instructions of the seller for specific instructions for the BL. If the forwarder refuses to enter a specific consignee or notify party, or by all means refuses to put the LC number on the LC, the seller will end up with a non-compliant document in your LC. With all consequences that come from that.
The question is also whether a seller should even give instructions to the buyer’s forwarder when that contractual link does not exist? Failure to show an LC number though, even if the LC requires it, is not a discrepancy as ruled by the ICC Banking Commission regularly over the years.
If the seller indeed wants to insert all these provisions in the contract, it may be a better idea to renegotiate the contract and that seller and buyer try to agree on a CPT or CIP Incoterms rule. This makes more sense when working with an LC since the seller pulls the strings. The seller controls the moment of delivery and is able to produce all the documents needed for the LC.
There are also some cases where the seller does not want to get involved in logistics, or the buyer might be consolidating various cargoes into an FCL or there may well be other reasons and scenarios justifying FCA.