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FOB vs. Incoterms This material has been prepared for CITT - - PowerPoint PPT Presentation

Sep 21, 2022 792 likes •1.09k views

FOB vs. Incoterms 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,

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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,

  • bligations, or responsibilities, of buyers

and sellers regarding the sale of goods.

  • All content has been prepared for

illustrative purposes only.

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  • 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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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!

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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)

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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
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  • 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

  • n Uniform State Laws, the American Law

Institute, and the American Bar Association (ABA)

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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

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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.

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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

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  • 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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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

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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)

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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)

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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

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What the Carrier Sees

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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

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  • 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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  • 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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$ $

NRIs represent a likely exception to the use of FOB as a shipping term for Transborder shipments due to NRI payment of Customs formalities

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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 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

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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)

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Presented by:

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  • 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/

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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-
  • .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).

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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).