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.
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.
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.
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.
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.
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.
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.
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
FAS—Free Alongside Ship
FOB—Free on Board
CFR—Cost and Freight
CIF—Cost, Insurance and Freight
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.
Terms of sale are more than shorthand on a quote or invoice. They define important responsibilities between the buyer and seller, including delivery, costs and risk of loss.
For U.S. domestic transactions, UCC-based terms such as FOB Origin and FOB Destination may be appropriate. For international transactions, exporters should generally use Incoterms rules and clearly identify the selected rule, named place and version.
Most importantly, do not assume that everyone interprets terms like FOB the same way. A few extra words in your quote, contract and commercial invoice can prevent expensive misunderstandings later.
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
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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.