UCC vs. Incoterms: Which Terms of Sale Should Exporters Use?

When companies negotiate the sale of goods, they need to decide who is responsible for getting the goods from the seller to the buyer, who pays the transportation costs, and when the risk of loss shifts from one party to the other.

For domestic U.S. sales, companies often rely on familiar terms such as FOB Origin, FOB Destination, Freight Collect and Freight Prepaid. But when goods are sold internationally, exporters should usually use Incoterms 2020 rules to define delivery responsibilities, costs and risk between the buyer and seller.

That distinction matters. Domestic terms based on Uniform Commercial Code (UCC) and Incoterms rules are not interchangeable. Confusing them can lead to disputes, unexpected freight charges, insurance gaps, customs clearance problems and documentation errors.

Use UCC Terms Domestically and Incoterms Internationally

Which terms of sale should you use for your transaction? Use UCC-based domestic terms for U.S. domestic sales when they match your contract and freight practices. Use Incoterms rules for international sales when you need to define which party is responsible for delivery, transportation costs, export and import clearance, insurance and risk of loss.

In either case, be specific. Do not simply write “FOB” on a quote, purchase order or commercial invoice and assume everyone understands what you mean. State the named place and the legal framework or rules being used.

For example:

• FOB Origin, Freight Prepaid may make sense for a domestic U.S. shipment.

• FCA Seller’s Facility, Minneapolis, Minnesota, USA — Incoterms 2020 may make more sense for an international shipment.

The goal is to eliminate confusion before goods move, not argue about responsibility after something goes wrong.

What UCC Domestic Terms Cover

In the United States, many domestic sales use terms derived from a combination of the Uniform Commercial Code (UCC), the National Motor Freight Classification (NMFC) and long-standing industry usage.

Common domestic terms of sale include:

• FOB Origin

• FOB Origin, Freight Collect

• FOB Origin, Freight Prepaid

• FOB Origin, Freight Prepaid and Add

• FOB Destination

• FOB Destination, Freight Collect

• FOB Destination, Freight Prepaid

• FOB Destination, Freight Collect and Allowed

These terms are familiar to many U.S. companies and are commonly used in domestic quotes, contracts, purchase orders and invoices. 

For U.S. domestic transactions, these terms may be appropriate when both parties understand how they affect delivery, risk, freight payment and title. But they are not the best choice for most international sales.

What Incoterms 2020 Rules Cover

Incoterms rules are published by the International Chamber of Commerce (ICC). They were first published in 1936 and are now widely used in contracts for the sale and purchase of goods. Incoterms 2020 are the most recent version, which entered into force on January 1, 2020. 

Incoterms 2020 rules define the responsibilities of buyers and sellers in a sales transaction. They help answer practical questions such as:

• Who is responsible for arranging transportation?

• Who pays the freight charges?

• Who is responsible for export clearance?

• Who is responsible for import clearance?

• Who pays for insurance when the selected rule requires it?

• Where does delivery occur?

• When does risk of loss or damage transfer from the seller to the buyer?

• Which documents must each party provide?

The International Trade Administration explains that Incoterms rules clarify the tasks, costs and risks borne by buyers and sellers, including shipment, insurance, documentation, customs clearance and other logistical activities. 

That makes Incoterms rules especially useful in international trade, where the buyer and seller may be located in different countries, use different transportation providers, and have different assumptions about delivery and customs responsibilities.

What Incoterms Rules Do Not Cover

One of the most common misconceptions about Incoterms rules is that they determine when ownership of the goods transfers from the seller to the buyer.

They do not.

Incoterms rules define delivery obligations, costs and risk of loss, but they do not determine transfer of title or ownership. Title transfer should be addressed separately in the sales contract, quote, proforma invoice and commercial invoice.

Incoterms rules also do not cover every condition of the sale. They do not identify the goods being sold, set the contract price, determine the method or timing of payment, address breach of contract, or establish dispute resolution procedures.

That means you should not rely on an Incoterms rule alone to serve as your full sales agreement. It is one important part of the contract, not the entire contract.

Why FOB Causes So Much Confusion in International Trade

FOB is one of the most familiar trade terms, but it is also one of the most misunderstood.

In U.S. domestic trade, companies often use terms such as FOB Origin or FOB Destination. These terms are commonly understood in the context of domestic shipping and freight payment practices.

In Incoterms, however, FOB means Free on Board, and it is one of the four rules intended only for sea and inland waterway transport. FOB under Incoterms should be used with a named port of loading, such as:

FOB Port of Charleston, South Carolina, USA — Incoterms® 2020

That is very different from writing:

FOB Factory

or

FOB Origin

or

FOB USA

Those phrases may create confusion in an international transaction because they do not clearly state whether the parties intend to use domestic UCC terminology or Incoterms rules.

This confusion can affect more than transportation costs. It can create disagreement over who was responsible when goods were damaged, who should have arranged insurance, who was supposed to contract with the carrier, and which documents were required.

The safest approach is simple: If you use an Incoterms rule, identify the rule, the named place or port, and the version.

For example:

FCA Seller’s Warehouse, Dallas, Texas, USA — Incoterms® 2020

CIP Frankfurt Airport, Germany — Incoterms® 2020

DAP Buyer’s Facility, Toronto, Ontario, Canada — Incoterms® 2020

Learn more in our article FOB vs. FOB: Key Differences in Domestic and International Trade.

The 11 Incoterms 2020 Rules

Incoterms 2020 includes 11 rules. Seven may be used for any mode or modes of transport, while four are intended for sea and inland waterway transport. Learn more about each of these rules in our article An Introduction to Incoterms or download a free Incoterms Chart of Responsibilities. 

Rules for Any Mode or Modes of Transport

• EXW—Ex Works

• FCA—Free Carrier

• CPT—Carriage Paid To

• CIP—Carriage and Insurance Paid To

• DAP—Delivered at Place

• DPU—Delivered at Place Unloaded

• DDP—Delivered Duty Paid

Rules for Sea and Inland Waterway Transport

• FAS—Free Alongside Ship

• FOB—Free on Board

• CFR—Cost and Freight

• CIF—Cost, Insurance and Freight

Make Sure Your Documents Match Your Terms of Sale

Once you choose the correct term, use it consistently.

Your quote, proforma invoice, sales contract, purchase order, commercial invoice and other export documents should all reflect the same Incoterms rule and named place. Inconsistent documents can create confusion for buyers, banks, freight forwarders, customs brokers and carriers.

This is where export documentation software can help.

Shipping Solutions export documentation software helps exporters create accurate, consistent export forms, including commercial invoices, proforma invoices, packing lists and other shipping documents. By keeping transaction data organized and consistent, exporters can reduce manual errors and make sure the terms of sale shown on their documents match the agreement with the buyer.

Shipping Solutions also helps exporters streamline other trade compliance tasks, including restricted party screening, export controls checks and product classification, so documentation and compliance processes are managed together instead of in disconnected spreadsheets and manual files.

Check out these resources for a deeper dive into Incoterms:

• Incoterms 2020 In Practice (free webinar)

• Incoterms® 2020 Rules Chart of Responsibilities and Transfer of Risk

• An Introduction to Incoterms (free guide)

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This post is based on an article originally published in October 2006 by Catherine J. Peterson. It has been updated to include current information, links and formatting.