Incoterms 2010 – Use FCA not FOB terms

Of the three terms contained within the F group two are intended for use only when the goods are carried by sea (but not containerised freight) or inland waterway transport, the other one FCA(Free Carrier … named place) is intended for use by any mode of transport. This differentiation between terms intended for one mode of transport rather than another leads to difficulties when parties confuse matters by using a sea freight term with an instruction to use air freight or deliver to an air freight forwarder at an airport or airport cargo centre. If the shipper air freights a consignment of goods which have been ordered as “Free on Board UK airport” then risk which should pass to the buyer when the goods cross the ships’ rail remains with the seller as there is no ships rail point for the passage of risk from one party to the other. Key points and responsibilities under F group terms. 1    Main carriage (or transportation) is the responsibility of the buyer who must nominate the carrier and be responsible for paying the freight costs from the named point in the country of departure to destination. By mutual agreement the seller can arrange the carrier and transportation but it will be at the buyers cost. Real life example :  In the early stages of supplier/customer relationship it should be made clear who is nominating the carrier and equally important identifying the place where the supplier meets his requirement for delivery under the contract of supply. All 11 Incoterms ® rules must be qualified by stating a specific place. In this example the supplier in northern England merely quoted his Japanese customer “FCA … UK”. This led to confusion as to whether the goods should have been delivered at the suppliers cost to a freight terminal or whether the buyer of the goods was required to collect from the sellers premises. Either of these options is valid under the FCA term but must be agreed at the outset. Vagueness should be avoided in order to prevent argument. 2    Risk (of loss or damage ) transfers from the seller to the buyer when the goods have been delivered to the carrier at the named point. In the 2010 set of Incoterms ® rules published by the International Chamber of Commerce (ICC) the rules relating to loading were made more logical,  ie under “Ex Works” the seller has no responsibility for loading  whereas under FCA (Sellers premises) the seller does have to load. Real life example:  Yorkshire exporter, failing to understand the loading obligation aspect of the FCA term, damaged the goods when unloading them at the nominated point which was a freight forwarders warehouse: by taking on a responsibility which was not incumbent under the term they found themselves liable for the damage incurred.   3    Cost responsibilities pass when the seller has delivered the goods to the carrier at the named place. Essential differences between the three “F” terms The broad characteristics of each of the 4 groups contained within the new 2010 set of Incoterms ® rules apply to the terms contained within it, eg under “F” group terms as described above the main carriage will be paid by the buyer, risk will pass to the buyer at the named point as will costs. This consistency within the group is vital to an understanding of how the Incoterms ® rules system is meant to work. It is, nevertheless, important to see the differences between the terms, with this in mind we will take a brief look at the 3 “F” terms to highlight their essential differences. First of all note that the FAS and FOB terms are intended to be used only for “conventional” sea freight whereas FCA can be used for any mode of transport FCA Free Carrier named place Main points are that this is a multimodal term used for any mode of transport, main freight is paid by the buyer and cost and risk pass at the named point. Export documentation suitable for clearing the goods for export is the responsibility of the seller.  It is important that the buyer gives clear instructions to the seller as to the point of delivery and that both parties agree the separation of any costs that may arise other than those considered normal in such transactions. Real-life example:  The UK seller of goods consigned via air freight FCA (Forwarder’s premises) to an Australian destination. The seller claimed that as they delivered to the forwarders warehouse with the appropriate documentation for customs clearance he should not be charged a ‘handling fee’ by the forwarder. A further question arose with regard to other potential fees for storage and aviation security charges. The dispute was resolved when after considering the wording of Incoterms ® rules it was felt that handling related to customs clearance and should be paid by the seller. Storage in the event of delays in consigning the goods should be to the buyers account as the forwarder is acting for the buyer. Aviation security is arguably a national restriction which should be to the sellers account.   FAS Free alongside ship named port of shipment Main points are that this term must only be used for conventional sea freight or inland waterway modes of transport, main freight is paid by the buyer, cost and risk pass to the buyer when the goods are delivered to the named point. Real- life example:  Seller of the goods delivers to the named port on a Tuesday despite the vessel not loading until the Thursday. On the Wednesday the goods are destroyed in a fire. Who had responsibility for the risk?  The simple fact of the matter was that the seller had not placed the goods alongside the ship as the term dictates, the ship was not there, in the absence of any other considerations such as port practice it had to be that the seller was at risk as delivery had not been achieved in line with the term. The buyer is responsible for giving proper instructions to the seller in respect of delivering the goods to the named point, if the seller is not clearly instructed clarification is required. FOB Free on Board named port of loading Main points are the same as FAS except that delivery takes place and cost and risk pass when the goods cross the ships rail at loading at the port of shipment. FAS and FOB are clearly intended for conventional sea freight (or inland waterway) modes of transport.   Finally the ICC have decided to get rid of the rather dated concept of the ship’s rail point of delivery as the named legal delivery point and where risk passes to the buyer.  These points (after 74 years) are now, under the Incoterms ® 2010 rules when the goods are loaded.  A very high proportion of world freight tonnages is containerised and not handled  by conventional sea freight techniques so other alternatives to the ships rail delivery point are available. Real-life example:  Lancashire seller of textile goods delivered to the port nominated by his USA client but found that the vessel nominated by the buyer was late arriving in port. The seller incurred considerable cost for storage and demurrage charges, the buyer refused to accept these charges and arbitration was called for. It was held that the buyer had failed in his obligation to inform the seller as to the time and place that the vessel was available for loading. The buyer was obliged to pay the additional charges. Those involved in the sale and purchase of goods internationally benefit enormously from having the comfort and protection of Incoterms ® rules, however there is still the need to take account of methods of transport, port practices and the possible advantage for the particular transaction of one Incoterms ® rule over another in terms of security under the contract and ability to meet the obligations of the individual term.