A Forwarder’s Certificate of Receipt (FCR) facilitates international trade by offering the shipper of goods a possibility to advance receipt of payment, on the one hand, and providing the payer with the forwarder’s undertaking to ship the goods as indicated in the FCR, on the other. Despite its widespread use, the FCR remains an auxiliary document that is not regulated in many national law systems.
This article examines the FCR’s legal deficiencies and suggests some techniques to tackle them.
A bit of history
The initial format of the FCR was developed by the International Federation of Freight Forwarders Associations (FIATA) in 1955 to facilitate settlements for goods under the forwarder’s control. Apparently, the Federation aimed to enhance the role of the freight forwarder in the supply chain with a quasi-warehousing function. In the early 1990s, the FCR became extremely popular in East European countries, whose cash strapped producers required payments upon placing goods at a port of loading. Over the years, the growing use of the FCR in cross-border settlements revealed its shortcomings, which stem from the intrinsic conflict of interest.
FCR vs. Warehouse Receipt
Contrary to a warehouse receipt, whose release mechanism makes a warehouseman exclusively liable to the warehouse receipt holder, the FCR creates a situation whereby the forwarding agent assumes obligations to two principals. The first principal, the forwarder’s client under a forwarding agreement—and the source of the forwarder’s income—usually possesses the goods. The FCR consignee—usually a bank or a buyer in a sales contract with the first principal—becomes a de facto second principal. By issuing the FCR, the forwarder assumes certain obligations to the second principal (the FCR consignee) without fully repealing its obligations to the first one (the FCR consignor). For that reason, any dispute between the forwarder’s principals over the underlying sales contract leads to a legal impasse with respect to the goods blocked by the FCR. If such conflict occurs, the forwarder may receive contradictory instructions from its principals concerning the subject goods. In many cases, the forwarders followed the instructions of the FCR consignor on the premise that he was bound by the forwarding agreement, thus violating the obligations to the FCR consignee, who may had already paid for the goods. If the FCR is not regulated in the jurisdiction where it was issued, the disgruntled consignee may be unable to claim any damages from the forwarder.
Understanding the risk
The intrinsic deficiencies of the FCR provoked abusive and even fraudulent business practices, which may involve the following:
· FCRs issued on the basis of shipment declarations, without actually possessing the goods
· Several FCRs issued for the same cargo
· FCRs issued for noncompliant goods
· FCRs issued for goods that are not cleared for export
Confronted with these controversies, FIATA reacted by stripping noncompliant forwarders of FIATA membership but to no avail. In an action that speaks for itself, in 2001 FIATA officially prohibited the use of the FCR in steel shipments, where fraud occurred most often.
Nowadays, apart from acknowledging the authorship of the FCR, the FIATA website does not provide any guidelines as to the use of the FCR in international trade. By distancing itself from the FCR, FIATA implicitly acknowledged that it failed to regulate the market that evolved around this instrument.
Managing the risk
A party making a payment against the FCR should consider the following:
An FCR is not a Warehouse Receipt
The FCR should not be confused with the Warehouse Receipt, which is a document of title in some (but not all) jurisdictions and whose flow is generally well regulated. The FCR has neither of these qualities.
The Forwarder’s standing is paramount
Since the FCR may be issued by ANY forwarder—not necessarily a member of FIATA or similar national association—the forwarder’s standing should be verified with utmost vigilance. How many years has the forwarder been in business? Is the forwarder duly licensed? Who are the forwarder’s clients and shareholders? Is the forwarder a member of a national or international forwarders association? Does the forwarder provide references from banks, clients, and industry associations? How is the forwarder staffed? Answering these questions will help verify the forwarder’s credibility.
FCR formats may vary
In addition to the “official” FCR format backed by FIATA, national forwarders associations and individual forwarders may adopt their own formats reflecting national legislation, the forwarder’s standard terms of business, and more. It is advisable to negotiate the FCR format that would reflect each commercial agreement in the best way.
Validate the FCR with a relevant authority
When the FCR is issued at a port of loading or another transit point, nothing prevents the FCR holder from establishing direct contact with the relevant warehousing authority to confirm the availability of subject goods. A related sales contract may even mention the seller’s obligation to render reasonable assistance in such communications and grant the FCR holder a right to inspect the goods at any time. Unless the FCR is co-signed by the warehouse, in case of a legal dispute, the FCR holder may have recourse to the forwarder only.
Confirm that the cargo is ready for export
The current format of the FIATA FCR does not provide that the goods must be cleared for export. Accordingly, the FCR consignee should make sure that the goods have passed all customs formalities and are ready for export in all respects. Particular attention should be paid to availability of export licenses required by local regulations.
Whenever possible, one should avoid the FCRs issued by the order of intermediary companies as the forwarder’s principals. This structure significantly increases transactional risks, as the intermediary may depend on a payment from the FCR holder to settle accounts with the producer. Regardless of the forwarder’s undertakings in the FCR, including any “irrevocable instructions,” it is very unlikely that the cargo could be shipped without the producer’s approval. If such structure cannot be avoided, one should analyze the relationship between the producer and the intermediary and access related risks. Sometimes, only a tripartite agreement involving the producer may guarantee delivery of goods payable against the FCR.
The FCR gives no quality assurances
The FCR usually confirms receipt of goods in “external apparent good order and condition,” but it does not provide any assurances as to compliance of goods with the related sales contract. In case of any concerns about the quality of goods, one should have an independent surveyor inspect it prior to payment.
Verify cargo safety aspects
The FCR does not oblige the forwarder to insure the goods, so the FCR holder may end up owning a cargo that is not protected by any insurance, whereby the warehouseman’s professional liability insurance may be inadequate or nonexistent. Before making a payment, one should make sure that the goods under the FCR are insured against theft and other casualties.
Make title to goods transferable upon payment
A related sales contract should have a clear provision that title to goods is transferred from the seller to the buyer upon payment. Although the forwarder is not bound by the sales contract, such provision may help defend the FCR holder’s interests in case of a legal dispute. The title transfer does not exonerate the seller from his delivery obligations under the sales contract.
The issues outlined above are highly relevant to the parties making payments against the FCR. On the other hand, suppliers are also exposed to the risk of blocking the goods with the FCR and not being paid by the FCR holder. To avoid this possibility, they should consider engaging a financial intermediary:
· Issue the FCR to the supplier’s bank.
· Have the supplier’s bank issue an undertaking to release the FCR against payment, within agreed deadline, for the goods indicated in the FCR.
· Having received payment, make sure that the supplier’s bank returns the original FCR to the forwarder with instructions to release the goods to the payer or a party designated by the payer.
Should the FCR holder fail to effect the payment on agreed terms, the bank’s undertaking would expire and enable the supplier to regain control over the subject goods.
Despite the deficiencies outlined above, operational advantages offered by the FCR suggest that it will remain the exporters’ favourable payment option along with a letter of credit. The understanding of these deficiencies will help all parties concerned proactively manage related risks—especially in a new business relationship—without missing out on business opportunities.