Possession and ownership are two mutually exclusive topics that are often confused. For example: when borrowing your neighbor’s lawn mower, you possess it, but your neighbor still owns it.
When sellers and buyers neglect to separate the concepts of possession and ownership in their terms and conditions, misunderstandings often arise. This can be costly for both parties.
The Incoterms® Rules are written by the International Chamber of Commerce in Paris, France. They are trade terms that address the transfer of possession and risk from seller to buyer. Free Carrier (FCA) is one of the most commonly used Incoterms® Rules.
The following story is true. The details have been changed.
Mr. Salinas was in Sales. He worked for a small manufacturer of printed circuit boards in Montevideo, Uruguay.
Mr. Paloma, in Purchasing, worked for a large electronics manufacturer in Buenos Aires, Argentina and was one of Mr. Salinas’ largest customers; he enjoyed negotiating with his counterpart and friend.
One day Mr. Salinas negotiated a sale to Mr. Paloma for three pallets of printed circuit boards. Mr. Paloma wanted his trucker to pick up the goods at Mr. Salinas’ plant, so they agreed to the terms FCA Salinas plant, Montevideo, Incoterms® Rules 2020. It was also agreed that title to the goods would transfer from the seller to the buyer when the goods arrived at the buyer’s location in Argentina. The goods would be ready to pick up in two weeks.
Two weeks later a truck hired by Mr. Paloma arrived at Mr. Salinas’ factory shipping dock. The product was loaded onto the truck, and the truck drove away. Everyone was happy.
Then it rained. It poured. And something went terribly wrong.
The roof of the truck started to leak, the water soaked through the cardboard shipping boxes and the printed circuit boards were drenched. They were rendered useless.
Because title to the goods had not yet been transferred from Mr. Salinas to Mr. Paloma, from the seller to the buyer, Mr. Paloma complained to Mr. Salinas that Mr. Salinas had to provide a replacement shipment of product. In other words, because Mr. Salinas still owned the printed circuit boards, the fact that they were ruined in transit was his problem.
Who is responsible for replacing the damaged goods, and why?
The seller because he still owned the goods.
The deal was negotiated that title would transfer from seller to buyer when the goods arrived at the buyer’s facility in Argentina. The goods never arrived. While the goods were in transit, they were owned by the seller. Therefore, the seller must replace their own goods that were damaged in the storm.
The buyer because he ordered the goods.
Ordering the goods is often thought of as incurring a sense of responsibility for the goods in transit. For example: US Customs will hold importers responsible for imports they cause, even if the importer is only the ultimate consignee and not the importer of record. For this reason, the buyer is responsible for replacing the damaged goods.
The buyer because the goods were on his truck.
The Incoterms® Rule negotiated was FCA Seller’s plant. Under FCA, risk, or responsibility for the condition of the goods, transfers from seller to buyer when the goods are loaded on the first means of transportation, in this case the truck hired by the buyer. Thus, once the goods were loaded onto the buyer’s trucker’s truck, risk transferred to the buyer: the buyer was responsible for the goods.
Under the Incoterms® Rule FCA, all risk for loss or damage to the goods transfers from seller to buyer when the goods have been “delivered.” “Delivery” in this case means “…when they are loaded on the means of transport arranged by the buyer.” Therefore, when the goods were loaded on the truck hired by Mr. Paloma (the buyer), risk for the condition of the goods during transit transferred from Mr. Salinas (the seller) to Mr. Paloma regardless of who owned the goods. In other words, Mr. Paloma possessed and was responsible for goods he did not own.
Mr. Salinas sent to Mr. Paloma a copy of the ICC’s Incoterms® 2020, then he arranged for the two of them, while on the phone, to look in the book together. That’s when Mr. Paloma understood his responsibility for the damage.
Mr. Paloma has hired a new trucker. He is still Mr. Salinas’ largest customer, and the two remain friends. Occasionally they meet for a beer to recount this incident with laughter and the wisdom that can only come from experience.
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