Free Carrier – Meaning, Obligations, Benefits, Pros and Cons

Free Carrier or FCA is one of the Incoterms that buyers and sellers frequently use in international trade. A shipping agreement with FCA evenly (sort of) distributes the responsibilities between the buyer and the seller. In this situation, the seller is responsible for the goods only up till their delivery at a specific location that the buyer wants. A point to note is that the agreed location needs to be inside the seller’s country. Usually, the location is a seaport or airport. Or it can also be the seller’s factory or the forwarder’s warehouse. The mode of transport could be any, train, ship, truck, or air.

For example, seller A and buyer B agree to buy mobiles. Buyer B wants to use his shipper or forwarder, and seller A agrees to it. Now, seller A is responsible for delivering the items to buyer B’s shipper. After this, the liability of seller A ends.

We can say that the delivery on the seller’s side is complete once he or she puts the items at the disposal of the carrier. Or any other party that the buyer wants.

Specifically, in an FCA agreement, the seller has the responsibility to get export clearance and deliver the goods to the pre-decided location. On the other hand, the buyer has to unload the items from the seller’s carrier. Also, the buyer has to take care of all the transportation after unloading the items until it reaches his own place/location.

For example, suppose the two parties agree that the seller needs to deliver the goods to the buyer’s freight forwarder. In this case, the risk passes to the buyer once the goods arrive at that location. The risk stays even with the buyer during the unloading of the items from the seller’s transport.

Free Carrier: Obligations

Obligations of Buyers

Following are the obligations of a seller in an FCA agreement:

  • Seller needs to prepare invoice and documentation.
  • Take care of packaging and marking.
  • Responsible for export licenses and clearing customs formalities.
  • Arranging for pre-carriage to the terminal.
  • Ensure delivery of the items to the specified location.
  • Paying for pre-shipment inspection (if any).
  • Showing the proof of delivery.

Obligations of Sellers

Following are the obligations of a buyer in an FCA agreement:

  • Make payments for the items purchased in line with the contractual arrangement.
  • Unloading the items once the seller’s transport brings the goods to the set place.
  • Paying the loading charges.
  • Arranging for the main carriage, as well as for the discharge and onward carriage.
  • Clearing import formalities and duties.
  • Paying for pre-shipment inspection (if any) at the time of import clearance.

Pros and Cons of Free Carrier

Pros

The use of FCA gives buyers more control, as well as relieves them from some documentation work. Buyer is free to choose their preferred carrier or transport mode. This may also help to avoid delays, as well as cost-saving. Also, the buyer does not have to take care of the export formalities. Because these are the seller’s responsibilities in the FCA agreement.

Such an arrangement is also beneficial for the seller. The responsibility of the seller is limited to the delivery of the goods to the pre-specified place of the buyer within his country. Even in terms of cost, the seller’s responsibility is very minimum. He only has to pay the carriage charges for taking the goods to the specified location for delivery to the forwarding carrier/shipper. And that’s the end of his responsibility and cost.

One more important aspect is payment, which favors the seller in this case. The payment timeline can immediately start once the goods are delivered to the specified location of the buyer. Otherwise, the seller has to wait till the goods reach the final destination.

Cons

Talking of drawbacks, a major one is that the buyer still has a role at the port of origin. This results in terminal and loading costs for the buyer. Along with the costs, such a process may lead to a delay in the shipment if there is an issue. In such a case, the buyer may have to depend on the seller to clear the issue.

The International Chamber of Commerce (ICC), which is responsible for Incoterms, recommends the use of FCA only in case of containerized items. This is because the containerized shipment will move from the seller’s location directly to the terminal. So, by default, the agreed place is the terminal, and the risk passes to the buyer after items clear the export formalities.

But, if the agreed place is not the terminal, then the risk to the buyer passes only after the items reach that location. Now, the buyer would need to bear the cost of unloading the items at that place. Additionally, the buyer now would also have to clear the export formalities, bear carriage loading charges, as well as transport it to the terminal.

In the case of FCA, if the items do not go directly to the terminal, then FCA becomes more like EXW (another Incoterm Ex-Works). 

Another drawback is that in some countries (such as China) FCA is not much in use, or the parties are not aware of it. So, in case a foreign party insists on FCA, but the other party is not comfortable with it, then it could lead to confusion. Thus, it is always good to use the Incoterm that both parties are comfortable with.

When to Use?

Use of the FCA is most favorable in the following cases:

  • If a buyer regularly buys containerized items and have a reliable logistics partner, then the use of FCA could be very helpful.
  • If the buyer is confident that their logistics partner would be able to offer a better price than what the seller would charge.
  • Buyers must use FCA only if they have a good knowledge of the process and documentation in the seller’s country.
  • If the seller also prefers FCA (than FOB or FAS) then this shipping agreement is a win-win for both the parties.

Final Words

Free Carrier or FCA is a popular Incoterms that one can use for any transportation mode, including intermodal (air, ocean, and railway). Moreover, it is very flexible as it gives buyers more options to arrange for transport and thus negotiate well on the freight cost. Also, such an arrangement suits all the scenarios where the buyer is responsible for arranging the main transport. The seller need not devote his efforts and costs on further processing and ensuring the goods reaches the final destination of the buyer. 

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Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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