This is the first in a series of articles on the Uniform Commercial Code, Article 2 (see www.law.cornell.edu/ucc/2/overview.html) and INCOTERMS 2000 (see www.iccwbo.org/incoterms/preambles.asp).

The goal of this series of articles is to provide a basic understanding and working knowledge of what are known as terms of sale. Perhaps the most familiar of these terms is FOB; however, there are several others. Such terms are also known as trade terms or mercantile symbols.

These terms have been in use for hundreds of years. They were developed by traders as a shorthand way of expressing the parties’ rights and obligations with respect to the shipping or transportation of goods being bought and sold.

They were originally developed when the primary means of freight transportation was by water on the rivers and oceans of the world, long before trains, trucks and planes were in existence. Thus FOB: freight on board (a ship) or FAS: freight along side (a ship).

With the development of rail, motor and air transportation, the terms are now also used for these modes for both domestic and international transactions.

Although there was a general consensus among traders on the meaning of the terms, a need arose to exactly and formally define the trade terms in common usage due to the explosive expansion of trade and shipping that began with the Industrial Revolution in the 19th century. Accordingly, in the first half of the 20th century, three organizations set about to create such definitions.

The first organization to tackle this task was the International Chamber of Commerce (ICC). The ICC first published what they called INCOTERMS in 1936. These were reviewed and revised in 1953, 1967, 1976, 1980, 1990 and, most recently, 2000. My next article will discuss INCOTERMS 2000.

Common Terms of Sale for Domestic Transactions in the U.S.

Most people recognize the terms of sale used for domestic transactions within the United States. Unlike the terms of sale used in international transactions, however, the domestic terms of sale are not defined in a single source or by an authoritative body. Rather, they have arisen over time through their use by business people and the transportation industry.

The most commonly used domestic terms of sale are:

1. FOB Origin;
2. FOB Origin, Freight Collect;
3. FOB Origin, Freight Prepaid;
4. FOB Origin, Freight Prepaid & Charged Back or FOB Origin, Freight Prepaid & Add;
5. FOB Destination;
6. FOB Destination, Freight Collect;
7. FOB Destination, Freight Prepaid;
8. FOB Destination, Freight Collect and Allowed.

These terms establish the contractual rights and responsibilities between a buyer and seller for delivery, risk of loss, title and payment of freight charges. 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), and (3) industry usage.

These terms are commonly incorporated into companies’ operating systems, quotes, contracts and commercial invoices for domestic transactions. This is clearly appropriate since the terms are supported by decades of use, case law and statutory law.

But U.S. companies need to be aware that the terms identified above as standard shipping and delivery terms are being written out of the UCC because they are inconsistent with modern usage.

The American Law Institute (ALI) and the National Conference of Commissioners on Uniform State Laws (NCCUSL) are rewriting the UCC. They issued their final UCC draft revision on February 19, 2004, and it does not include these terms. Instead, this final draft incorporates the use of the INCOTERMS 2000. (See the article written by Frank Reynolds in IOMA’s Report on Managing Exports, September 2004.)

These changes will not likely occur overnight since each state legislature must adopt the revised terms. However, when it comes to international trade, companies using best practices will switch to INCOTERMS 2000 in quotations, purchase orders, contracts, commercial invoices and other commercial documentation when dividing the responsibilities for risk transfer, costs and responsibility for carrier selection between the buyer and the seller.

In my next article, I will provide a snapshot of the 13 INCOTERMS that importers and exporters should use in their international transactions.