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05March2024
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In our ongoing series on International Trade Terms, we dive deeper into the intricacies of Incoterms® 2020—a globally recognized set of standards defining the responsibilities of buyers and sellers in international transactions. Building upon our previous post that introduced Incoterms, this article focuses on the first three terms suitable for multiple modes of transportation: EXW (Ex Works), FCA (Free Carrier), and CPT (Carriage Paid To).
EXW (EX Works):
What is EXW?
Ex Works, abbreviated as EXW, represents the minimalistic end of the Incoterms spectrum. When a contract specifies EXW, the seller fulfills their delivery obligations and the risk of loss transfers when the goods are made available for pickup at their own premises or another named place. All other obligations are those of the buyer. The seller’s primary duty under EXW is to ensure the goods are ready for pick-up. They are neither obliged to load the goods onto the buyer’s transport, nor are they responsible for export clearance. The buyer shoulders the burden of arranging transport, handling export and import documentation, and covering all associated costs, including freight charges, insurance, and import duties.
Common Mistakes:
- Incomplete Understanding of Costs: Buyers often underestimate the total cost of an EXW transaction. Beyond the product cost, they must factor in transportation, insurance, and customs duties, which can lead to unexpected financial burdens.
- Loading and Loss on Seller’s Premises: A seller’s obligations end and the risk of loss transfers when goods are made available for pickup. Buyers should be aware that, depending on the industry, sellers often insist on loading goods on their premises. Unpleasant situations often arise under EXW where a seller damages inventory while loading goods but buyer is liable for the loss.
FCA (Free Carrier):
What is FCA?
Free Carrier, denoted as FCA, is slightly more comprehensive than EXW. Under the term, a seller is obligated to deliver the goods to a named location in the seller’s country, such as a carrier or other place nominated by the buyer. This may be the seller’s premises, a terminal, or any other agreed-upon location. If the location is the seller’s premises, delivery is complete and risk of loss transfers when seller loads the goods onto the means of transport provided by buyer. If the location is anywhere else, delivery is complete and risk of loss transfers when seller places the goods at the disposal of the carrier or anyone else nominated by buyer. The primary duty of the seller under FCA is to ensure the goods are ready for transportation. This includes handling export clearance, loading the goods or making them available, and assuming the costs until that point. The buyer takes over from the moment the goods are delivered, covering all subsequent costs, risks, and arrangements.
Common Mistakes:
- Ambiguity in Nominated Place: FCA requires specifying a precise location for the delivery of goods. Parties commonly fail to clearly define this point, leading to confusion and potential disputes. In such instances, sellers have a right to pick the point that best suits their purposes—a potentially inconvenient outcome for many buyers.
- Bills of Lading: Sellers now can receive onboard bills of lading when goods are delivered to a buyer’s carrier under FCA. The previous edition of Incoterms—Incoterms® 2010—did not offer this option.
CPT (Carriage Paid To):
Carriage Paid To, or CPT, significantly increases a seller’s responsibility compared to EXW and FCA. Under CPT, two delivery location matter: the place where the risk of loss transfers and the location to which seller will ultimately cover transportation. The seller is ultimately obligated to arrange and pay for the carriage of the goods to the second destination. This also includes securing export clearance and loading the goods. But while sellers may be responsible for the bulk of transportation under FCA, they do not guarantee delivery. Once the seller delivers the goods to the carrier (first location), the risk transfers to the buyer, who is responsible for any further transportation, unloading, import duties, and other associated costs in their home country.
Common Mistakes:
- Neglecting Unloading Responsibilities: Buyers may overlook their obligation to unload the goods at the destination, assuming it is solely the seller’s responsibility. Clear contractual communication regarding unloading duties is essential to preventing misunderstandings.
- Misunderstanding the Transfer of Risk: Buyers may mistakenly assume the risk of loss remains with seller throughout the entire journey of goods under CPT. In fact, risk transfers from seller to buyer when the shipment is handed over to the main carrier. The risk is thereafter held by the party who did not select the main carrier—the buyer. Carriage insurance is strongly recommended.
Conclusion:
Understanding the nuances of EXW, FCA, and CPT is crucial to executing successful international transactions. Each Incoterm delineates specific duties and obligations for both the seller and the buyer, shaping the terms of trade and influencing the overall cost and risk distribution. The next article will discuss CIF, DAT, and DAP, offering a comprehensive view of these widely used international trade terms.
If you engage in international transactions, there is a strong likelihood that you or your contracts have touched Incoterms. We strongly recommend you connect with your corporate international attorney to confirm such terms are correct.
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In our ongoing series on International Trade Terms, we dive deeper into the intricacies of Incoterms® 2020—a globally recognized set of standards defining the responsibilities of buyers and sellers in international transactions. Building upon our previous post that introduced Incoterms, this article focuses on the first three terms suitable for multiple modes of transportation: EXW (Ex Works), FCA (Free Carrier), and CPT (Carriage Paid To).
EXW (EX Works):
What is EXW?
Ex Works, abbreviated as EXW, represents the minimalistic end of the Incoterms spectrum. When a contract specifies EXW, the seller fulfills their delivery obligations and the risk of loss transfers when the goods are made available for pickup at their own premises or another named place. All other obligations are those of the buyer. The seller’s primary duty under EXW is to ensure the goods are ready for pick-up. They are neither obliged to load the goods onto the buyer’s transport, nor are they responsible for export clearance. The buyer shoulders the burden of arranging transport, handling export and import documentation, and covering all associated costs, including freight charges, insurance, and import duties.
Common Mistakes:
- Incomplete Understanding of Costs: Buyers often underestimate the total cost of an EXW transaction. Beyond the product cost, they must factor in transportation, insurance, and customs duties, which can lead to unexpected financial burdens.
- Loading and Loss on Seller’s Premises: A seller’s obligations end and the risk of loss transfers when goods are made available for pickup. Buyers should be aware that, depending on the industry, sellers often insist on loading goods on their premises. Unpleasant situations often arise under EXW where a seller damages inventory while loading goods but buyer is liable for the loss.
FCA (Free Carrier):
What is FCA?
Free Carrier, denoted as FCA, is slightly more comprehensive than EXW. Under the term, a seller is obligated to deliver the goods to a named location in the seller’s country, such as a carrier or other place nominated by the buyer. This may be the seller’s premises, a terminal, or any other agreed-upon location. If the location is the seller’s premises, delivery is complete and risk of loss transfers when seller loads the goods onto the means of transport provided by buyer. If the location is anywhere else, delivery is complete and risk of loss transfers when seller places the goods at the disposal of the carrier or anyone else nominated by buyer. The primary duty of the seller under FCA is to ensure the goods are ready for transportation. This includes handling export clearance, loading the goods or making them available, and assuming the costs until that point. The buyer takes over from the moment the goods are delivered, covering all subsequent costs, risks, and arrangements.
Common Mistakes:
- Ambiguity in Nominated Place: FCA requires specifying a precise location for the delivery of goods. Parties commonly fail to clearly define this point, leading to confusion and potential disputes. In such instances, sellers have a right to pick the point that best suits their purposes—a potentially inconvenient outcome for many buyers.
- Bills of Lading: Sellers now can receive onboard bills of lading when goods are delivered to a buyer’s carrier under FCA. The previous edition of Incoterms—Incoterms® 2010—did not offer this option.
CPT (Carriage Paid To):
Carriage Paid To, or CPT, significantly increases a seller’s responsibility compared to EXW and FCA. Under CPT, two delivery location matter: the place where the risk of loss transfers and the location to which seller will ultimately cover transportation. The seller is ultimately obligated to arrange and pay for the carriage of the goods to the second destination. This also includes securing export clearance and loading the goods. But while sellers may be responsible for the bulk of transportation under FCA, they do not guarantee delivery. Once the seller delivers the goods to the carrier (first location), the risk transfers to the buyer, who is responsible for any further transportation, unloading, import duties, and other associated costs in their home country.
Common Mistakes:
- Neglecting Unloading Responsibilities: Buyers may overlook their obligation to unload the goods at the destination, assuming it is solely the seller’s responsibility. Clear contractual communication regarding unloading duties is essential to preventing misunderstandings.
- Misunderstanding the Transfer of Risk: Buyers may mistakenly assume the risk of loss remains with seller throughout the entire journey of goods under CPT. In fact, risk transfers from seller to buyer when the shipment is handed over to the main carrier. The risk is thereafter held by the party who did not select the main carrier—the buyer. Carriage insurance is strongly recommended.
Conclusion:
Understanding the nuances of EXW, FCA, and CPT is crucial to executing successful international transactions. Each Incoterm delineates specific duties and obligations for both the seller and the buyer, shaping the terms of trade and influencing the overall cost and risk distribution. The next article will discuss CIF, DAT, and DAP, offering a comprehensive view of these widely used international trade terms.
If you engage in international transactions, there is a strong likelihood that you or your contracts have touched Incoterms. We strongly recommend you connect with your corporate international attorney to confirm such terms are correct.
