Client Question:

Why do my suppliers insist on quoting Incoterms FOB and not FCA, even though my orders are in full containers?

Answer:

I assume this question has come about because your seafreight orders are containerised, and the Incoterms Rules state that using the (limited and limiting) Incoterms definition of FOB for containerised traffic might not be appropriate. But this alone does not prohibit its use.

Stating that the term is not necessarily ‘appropriate’ is a caution, not a prohibition. And, of course, Incoterms has no authority over the meaning of the many other versions of the term that are commonly applied throughout the world.

But, in all matters, law comes first, and in a transnational sale this means at least two laws (origin and destination) would need to be addressed.

Remember, the commercial term is a private agreement between the seller and the buyer, and Incoterms, for example, have no special place at law – they are just a system of definition that the merchants voluntarily elect to use.

If a law directs one thing and Incoterms directed another, the law would always be the superior direction. The first consideration then is that there may be a legal reason why your suppliers quote FOB.

In certain countries – and in most countries for certain goods – the exporter of record (as the resident entity) must ensure that the supply is shipped, either for tax reasons or simply as a matter of border control and accountability.

The supplier must therefore show that they had contractual control up to the point of shipment, the FOB point (or more likely the customs free onboard point, which I address, below).

Habit might also be the driver. Change is not driven by Incoterms, rather Incoterms should be driven by change. The fact that the ICC decided (unilaterally) to make FCA available is irrelevant if the supplier sees no merit in using the term.

To put this another way; the supplier might feel that as they used FOB yesterday and nothing went wrong, then there’s no motive to change, and they’ll use FOB tomorrow. This is reactive, but it is a common approach.

Most people don’t know that they don’t know, until it goes wrong.

And this brings me to the more probable reason you are encountering this situation.

The chances are that (perhaps like you) the first expressions your suppliers were exposed to in international trade were ex-works, f.o.b., and c.i.f.

It happens to most of us, and in our naïve enthusiasm we take these expressions as lodestars and navigate our (sometimes very long) careers reciting these three terms like a mantra.

But look at how the expressions I have just cited are written –
ex-works, f.o.b., c.i.f.
They are each lower-case, with a hyphen in ex-works and full stops to break the other acronyms.

These are the standard customs valuation symbols. This is to say that ex-works is the name of a price, it is not the name of a contract.

Unlike commercial terms, customs valuation methods and the terminology employed to describe values are legislated, although in saying that, there is no customs value f.o.b., but rather a customs value ‘free onboard’ which is informally written f.o.b.

You can go your entire cross-border career avoiding commercial terms, but (unless you are part of a Columbian drug cartel) from day one, you can’t avoid Customs.

Your suppliers – wherever they are based – will be familiar with the customs values ex-works, f.o.b., and c.i.f. In their ignorance, they might be transferring these expressions to the contract negotiation.

It is a common mistake, fuelled by the erroneous (but oft repeated) advice that commercial terms should be expressed on commercial invoices. This is a nonsense, but it happens that if something is said often enough, however wrong, it starts to sound like the truth.

And, in the kingdom of the blind, what you see is what you get.

Customs valuation expressions appear on commercial invoices. Commercial terms (electively) appear in (elective, and if elected, written) sales contracts.

Note that, if you were using Incoterms, an FCA contract gives rise to an ex-works value – unless it is international road freight where the cargo is routed directly from supply straight over the border (i.e., without an intervening consolidation process), in which case FCA would equate to the customs value ‘free onboard’, possibly expressed f.o.b.

So, in summary – your suppliers may be bound by local law to sell using a particular term (arising from a particular physical obligation); or, they may be using a commercial term that is not an Incoterms rule; or (and I’d say this final point is the probable cause), they are quoting you f.o.b. customs values, then they are making the mistake of believing this equates to an FOB contract.

But finally, look to where you are drawing the information from.

If you are looking to the commercial invoice only, then the expression FCA should never appear there, and the expression “FOB” or “f.o.b.” (however written), if shown on the invoice, is a reference to the value of the supply for customs purposes, it was never the contract term.

If, however, your supplier is offering you an Incoterms Rule FOB arrangement as part of a written sales contract, then what they are doing is not appropriate and you might wish to renegotiate an FCA transaction, bearing in mind that it would alter any f.o.b. price to an ex-works price, (which is a material change to be taken account of when you calculate your landed costs).

You may, of course, agree to modify the FCA term to allow for a customs f.o.b. price – it is quite acceptable to separate the division of risk (as expressed by the term FCA) from the division of cost (as expressed by the customs valuation term).

“Most people don’t know that they don’t know.”

Source: Freight Training

 

Note: For South African individuals and businesses exporting from South Africa, your VAT implications are here.