A184: Bear in mind that the Incoterms Rules are an incomplete system; Incoterms exists within, and is subject to, the greater sales contract terms and conditions – to such an extent that if the sales contract contradicted the Incoterms rule in any regard, the conflicting sales contract term would be superior.
In replying to the question then, it is assumed that there is nothing in the sales contract terms that directly answers the question and that the Rules are the only source of resolution.
(I also need to stress that an unmodified FCA export contract is not permitted in South Africa in terms of Customs regulations.)
The sequence of events envisaged in Incoterms FCA in the case of default is discussed below. However, although Incoterms does not contemplate how or when the Seller is paid, the more practical approach to the question is that it is generally only asked by a Seller who has not been paid or has no certain security of payment.
For example, if the Seller was prepaid in the FCA model the commercial consequences of the Buyer’s default in the form of non-collection would be the Buyer’s challenge not the Seller’s, at least in the greater part.
In your copy of Incoterms, refer to 10 b). This requires that the Buyer nominates a specific ‘time’ within an agreed ‘period’ for their carrier to (in this case) collect.
I am uncertain how the word ‘time’ is meant to be interpreted. It would be the exception, I think, if the Buyer was as precise as to nominate a given hour, say. I would rather assume that this clause allows for the Buyer to nominate a ‘date’ – and let’s allow that this may be narrowed further but no greater than being AM or PM on that date.
This clause carries over firstly to A2 “Delivery” and then to B3 and the “Transfer of risks”.
In your model, contractual delivery (or at least the physical aspect of contractual delivery) is addressed in A2 point 3 a), that is to say the Buyer’s carrier comes to you. If you reference A2 point 1, this happens on “the agreed date” – thus the starting point in Incoterms is that the Buyer negotiates a date for this collection, with this date modified in point 2 of A2 to “the time” specified by the Buyer under the opportunity given to the Buyer at B10 b) if they choose to use this election. (In passing, I think the wording here should be ‘a’ time, rather than ‘the’ time.)
If the Rule has been used correctly then there is an exact and measurable moment of default. This is a key point. If the Seller is able to claim default, then the security of that claim flows from the exactness of the date (and perhaps time) agreed for collection.
It follows that inexact expressions such as “as soon as possible” or “on availability” are problematic, and B10 requires that there ‘must’ at least be a ‘period’, if not an exact date. (B10 begins “The Buyer must…” which is a very strong instruction).
We are now then at the point where there is no alternate guidance in the contract terms; the Buyer has exercised the option to nominate a measurable date and time; and this point has been reached, and yet the goods remain with the Seller.
Now refer to B3 and the “Transfer of risks”, where default triggers are established should delivery not take place under A2 through the fault or failure of the Buyer.
The default has a sequence of triggers. Firstly, default delivery takes place “from the agreed date” [refer B3 b) (i)]. Secondly, if no date is agreed then from the “time” nominated by the Buyer under B10 b). To me, this does not read well – if there is no agreed ‘date’ it is hardly likely that there was an agreed ‘time’ – but it depends, of course, on what the ICC intended by the word ‘time’. I read ‘time’ here as a date within the range of an agreed period.
In the event that no exact date or range of dates has been fixed then default delivery takes place from the end of any period agreed.
Simple.
Well, not quite.
We know that there must at least be a ‘period’ agreed – even though this is only implied in the wording of B10, but I still think there’s a challenge, a missing final trigger, in the event that the period has not been agreed, or perhaps cannot be measured with absolute certainty.
For example, if the period was “the second quarter” (which is a common loose expression I frequently see being used, if not this specific wording then at least this inaccurate concept/system of dating). This is vague: is that the second quarter of the year, or the second quarter after production or after the order is accepted – or is it a reference to phases of the moon?
Incoterms – like trade in general – thrives on certainty. You cannot be too precise.
In summary then: if there is a measurable date (and perhaps time) in the sales agreement, then once this is reached and exceeded the Seller may claim to have performed delivery by default and at that moment the contract ends, and the Seller will have acquired the right to be paid.
Although not stated in the Rules, it would be in the Seller’s interest to bring the default to the attention of the buyer, claiming delivery in the same notification.
But, as I mentioned earlier, having the right to be paid is not as pleasant a feeling as having already been paid – and there’s the rub. What will the unpaid Seller do with the ‘right’ that the Incoterms Rules and the sales contract grants them?
Contracts are wonderful. Money is wonderfuller.
Once and if default delivery takes place the Seller would be under a commercial obligation, I think, to preserve the goods, store and protect them, and so forth – with a reasonable claim against the Buyer for the costs incurred in doing so.
But what about the undoing of the export customs event?
Incoterms does not specify when export clearance must take place other than to make it the Seller’s obligation in terms of A7. However if we take a practical approach export clearance must take place before the goods are handed over to the buyer’s carrier.
If this was not the case, and clearance was arranged later, then the Seller would have lost physical control of the cargo before the FCA contract was completed – a precarious position to be in should something go wrong after handover.
Could the Seller claim that risks had already passed to the Buyer if they had not yet perfected delivery by arranging export clearance? I doubt it. Handover alone is not the completion of the Seller’s obligations.
Of course, in your model, where the FCA handover place is the Seller’s premises, the Seller retains physical control, but having arranged export clearance you are again exposed if the Buyer or the Buyer’s carrier fails to collect the goods as cancelling an export entry might attract penalties and fines. In will certainly involve costs.
Finally, if you have tried to follow this thread and do not have a copy of the Incoterms text in front of you to reference as you read through the reply, then my reply might be (most likely is) confusing – but then you shouldn’t really be trying to apply the Rules if you do not have a copy of the Rules.
If you can’t get a copy directly, the official ICC text is reproduced in full in Trading Words & Phrases, which you can order using the link below.