FOB vs. Incoterms

CITT Webinar Series

• This material has been prepared for

CITT discussion purposes only and is not

intended as legal or professional

advice regarding selection of FOB

terms or other issues affecting liability,

obligations, or responsibilities, of buyers

and sellers regarding the sale of

goods.

• All content has been prepared for illustrative purposes only.

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FOB vs. Incoterms

CITT Webinar Series

• Why do companies use delivery terms?

– Provide a “shorthand” method for

assigning responsibilities to buyers and

sellers

– Indicate where cost, and risk of loss,

transfer from the seller to the buyer

– Simplify complexities of logistics

– Provide a standard, repetitive process for

trading partners

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FOB vs. Incoterms

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AFTD

(American Foreign Trade

Definitions)

Incoterms

UCC

(Uniform Commercial

Code)

FOB 1700’s

1919 (RAFTD in 1941)

(Recommended to use Incoterms in 1980)

1936 – Present

(Now recommended for

International trade worldwide)

1952 – Present

(Recommended to use

Incoterms in 2004)

All included a term for

“FOB” But North American

shippers have been

using these FOB terms

since 1952!

FOB vs. Incoterms

CITT Webinar Series 4-2

FOB: International vs Domestic Shipments

“FOB” as an Incoterm is now recognized worldwide for

international shipments …

… but in North America (Canada,

USA & Mexico) FOB is also used

domestically (originating from

AFTD and UCC “FOB” terms)

FOB vs. Incoterms

CITT Webinar Series 5

National Foreign Trade Council

(Developed AFTD in 1919 – Revised 1941)

• Adopted at a Conference participated in by

committees representing the:

• Chamber of Commerce of U.S.A.

• National Association of Manufacturers

• American Manufacturers Export Association

• Philadelphia Commercial Museum

• American Exporters and Importers Association

• Chamber of Commerce of New York State

• New York Produce Exchange

• New York Merchants Association

FOB vs. Incoterms

CITT Webinar Series 6

• The Uniform Commercial Code (UCC)

was developed to address two growing

problems in U.S. business:

– The increasingly unmanageable legal and

contractual requirements of doing business

– Differences in state laws that made it difficult

for business people from different states to do

business with one another

Developed under the direction of the

National Conference of Commissioners

on Uniform State Laws, the American Law

Institute, and the American Bar

Association (ABA)

FOB vs. Incoterms

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• First published in 1952, the UCC is

a "code" or a "collection of statutes¹”, not

a federal law, that seeks uniformity

among the states by providing legal rules

and regulations governing commercial or

business transactions

• Currently, the UCC (in whole or in part)

has been enacted, with some local

variation, in all 50 states and the District of

Columbia, and in some U.S. territories ¹Fullerton & Knowles

FOB vs. Incoterms

CITT Webinar Series 8-1

UCC Table of Contents

Article 1: General Provisions

Article 2: Sales (Covers the sale of goods)

Article 2A: Leases (Covers the lease of goods)

Article 3: Commercial Paper (Promissory notes and bank checks)

Article 4: Bank Deposits and Collections (Relationship between banks for

checks)

Article 4A: Funds Transfers (Covers modern electronic funds transfers)

Article 5: Letters of Credit

Article 6: Bulk Transfers (The "bulk transfer" of all of a business’ inventory)

Article 7: Warehouse receipts, Bills of Lading and other documents of title

Article 8: Investment Securities

Article 9: Secured Transactions (Covers security interests in personal

property, including accounts receivable, equipment and inventory)

The UCC concerns many commercial issues, including the sale of goods, banking and security interests. It does not apply to other areas including the sale of real estate, service agreements or employment contracts.

FOB vs. Incoterms

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¹American Foreign Trade Definitions 1919 ²Incoterms Rules History, International Chamber of Commerce ³Frecon, A. (1986) ‘Practical considerations in drafting F.O.B. terms in international sales’ ⁴UNIFORM COMMERCIAL CODE Act 174 of 1962, Michigan Compiled Laws Complete Through PA 346 of 2012

FOB vs. Incoterms

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FOB vs. Incoterms

CITT Webinar Series

• Domestically, the definition of these terms,

as well as a few others, derive from a

combination of:

(1) the provisions of the Uniform Commercial

Code (the UCC)

(2) the National Motor Freight Classification (the

NMFC)

(3) industry usage

• In other words, they have arisen over time

through their use by business people and

the transportation industry

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FOB vs. Incoterms

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The most commonly used domestic shipping

terms of sale in North America are:

1. FOB Origin, Freight Prepaid

2. FOB Origin, Freight Collect

3. FOB Origin, Freight Prepaid & Charged

Back

4. FOB Destination, Freight Prepaid

5. FOB Destination, Freight Collect

6. FOB Destination, Freight Collect and

Allowed

3

“Origin”

Terms

3

“Destination”

Terms

FOB vs. Incoterms

CITT Webinar Series 13-6

FOB ORIGIN TERMS

Key Point:

Title to the goods (in

transit) transfers to the

Buyer at the Seller’s

shipping dock (i.e. Buyer ‘owns’ the goods in

transit)

FOB vs. Incoterms

CITT Webinar Series 14-6

FOB DESTINATION TERMS

Key Point:

Title to the goods (in

transit) transfers to the

Buyer at the Buyer’s

shipping dock

(i.e. Seller ‘owns’ the goods in

transit)

FOB vs. Incoterms

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Which (UCC) FOB Term Should Be Used? Which FOB term should I use? The Buyer and Seller

should decide and agree between themselves

FOB vs. Incoterms

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What the Carrier Sees

FOB vs. Incoterms

CITT Webinar Series

Why (UCC) FOB is Still Customary

in the U.S. and Canada

• There are only 6 terms: 3 origin & 3

destination terms

• Long-standing use

• They clearly indicate for both buyer and

seller:

– Who pays for freight charges

– Who owns the goods in transit

– Who is responsible for filing freight claims

17-2

FOB vs. Incoterms

CITT Webinar Series

• Hesitation to make changes that might

upset or confuse customers, or send

customers to the competition

• Knowledge gap:

– Confusion about what FOB really means

– Many North American companies see

Incoterms as only for international use

– ICC recommends Incoterms DAT and DAP for

domestic use, but those terms make

reference to “Customs” and “vessel”,

causing many shippers to think they are still

for international use only

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FOB vs. Incoterms

CITT Webinar Series

• Ability to use UCC FOB terms throughout

the NAFTA region

• No mention of Customs brokerage fees,

duties or taxes (Note: NRI exception to

the traditional process of charging

Customs formalities to the inland Buyer)

• No mention of insurance or ancillary

charges

• Complemented by customary use of the

bill of lading with respect to billing terms,

cargo insurance and claims process

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FOB vs. Incoterms

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$

$

NRIs represent a likely exception to the use of FOB

as a shipping term for Transborder shipments due to

NRI payment of Customs formalities

FOB vs. Incoterms

CITT Webinar Series

INCOTERMS 2010

• Multimodal Terms

– EXW

– FCA

– CIP

– CPT

– DAP

– DAT

– DDP

• Ocean Terms

– FAS

– FOB

– CFR

– CIF

UCC FOB TERMS

• FOB Origin Freight Prepaid

• FOB Origin Freight Collect

• FOB Origin Freight Prepaid

and Charged Back

• FOB Destination Freight

Prepaid

• FOB Destination Freight

Collect

• FOB Destination, Freight Collect and Allowed

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FOB vs. Incoterms

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• FOB is confusing for many shippers

• FOB should be stated completely

• Domestic shipments simply marked

“Prepaid” are presumed to be “FOB

Origin, Freight Prepaid”…but you never

know what a shipper does, or does not,

know about the appropriate use of FOB

• In North America some shippers use FOB

as a domestic term, some use it as an

Incoterm, and some just don’t want to

know

FOB vs. Incoterms

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In Summary:

Incoterms “FOB” is used worldwide for international shipments …

… but in North America (Canada,

USA & Mexico) it is also used

domestically (originating from

“UCC” FOB terms)

FOB vs. Incoterms

CITT Webinar Series

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FOB vs. Incoterms

CITT Webinar Series 25

• Cornell University Law School (n.d.) S. 2-319. F.O.B. and F.A.S. terms

[Online]. Available from: https://www.law.cornell.edu/ucc/2/2-319

(Accessed: 6 October 2015).

• Duke Law (2015) Uniform Commercial Code (UCC) [Online]. Available

from: https://law.duke.edu/lib/researchguides/ucc/ (Accessed: 4

October 2015).

• Frecon, A. (1986) ‘Practical considerations in drafting F.O.B. terms in

international sales’, Berkeley Journal of International Law, 3 (2), Winter,

pp.346 -367 [Online]. Available from:

http://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?article=1037&

context=bjil (Accessed: 3 October 2015).

• Fullerton & Knowles (2015) Uniform Commercial Code Sale Of Goods

[Online]. Available from: http://www.fullertonlaw.com/construction-law-

survival-manual/uniform-commercial-code-sale-of-goods.html

(Accessed: 5 October 2015).

• Incoterms 2010: The US view. Available from:

http://www.incotermsexplained.com/the-incoterms-rules/the-us-view/

FOB vs. Incoterms

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• INC.com (n.d.) ‘Uniform Commercial Code (UCC)’, [Online]. Available

from: http://www.inc.com/encyclopedia/uniform-commercial-code-

UCC.html (Accessed: 1 November 2015).

• Incoterms Rules History, International Chamber of Commerce. Available

from: https://iccwbo.org/resources-for-business/incoterms-

rules/incoterms-rules-history/

• Johnson, W.P., Analysis of INCOTERMS as Usage under Article 9 of the

CISG. Available from:

http://cisgw3.law.pace.edu/cisg/biblio/johnson02.html

• M-O (n.d.) ‘Bill of Lading’, [Online]. Available from: http://www.m-

o.com/pdf/bill_of_lading.pdf (Accessed: 1 November 2015).

• Mantissa (n.d.) Incoterms 2010: The U.S. view [Online]. Available from:

http://www.incotermsexplained.com/the-incoterms-rules/the-us-view/

(Accessed: 6 October 2015).

• National Foreign Trade Council (1919) American Foreign Trade

Definitions [Online]. Available from:

http://babel.hathitrust.org/cgi/pt?id=mdp.35112203732872;view=1up;se

q=5 (Accessed: 2 October 2015).

FOB vs. Incoterms

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• Ramberg, J. (2011) ICC Guide to Incoterms 2010. Paris: ICC Services

Publications.

• Shipping Solutions (2015) Terms of Trade: Uniform Commercial Code and

Incoterms 2000-Part 1 [Online]. Available from:

http://www.shippingsolutions.com/blog/terms-of-trade-uniform-

commercial-code-and-incoterms-2000-part-1 (Accessed: 4 October

2015).

• State of Michigan (2015) Uniform Commercial Code [Online]. Available

from:

http://www.michigan.gov/documents/entireuccbook_18831_7.pdf

(Accessed: 6 October 2015).

• Uniform Commercial Code, U.S. Small Business Administration. Available

from: https://www.sba.gov/category/navigation-structure/starting-

managing-business/starting-business/understand-business-law-7

• USCIB News (2004) UCC revision drives use of Incoterms for domestic

commerce [Online]. Available from:

http://www.enewsbuilder.net/uscib_news/e_article000300934.cfm?x=b1

1,0,w (Accessed: 6 October 2015).