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Trade terms or Incoterms, what is the difference?

September 20, 2017

In North America trade terms such as FOB and C&F are often used to simply specify who, between the vendor and the purchaser, pays for transportation and up to where. The terms are generally used very loosely and without much knowledge or expectation about their implied obligations for the parties.

Many shippers are under the impression that when they use a term such as "FOB" when selling goods to a buyer in North America, their "FOB" is governed by the Incoterms definition as published by the International Chamber of Commerce (ICC).

Not quite. Under its Incoterms definition, FOB (Free On Board) means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment. Vessel. Port of shipment. As an Incoterm, FOB can only be used for maritime shipments.

Incoterms are international trade terms created by the ICC and are used to specify, within other things, when delivery costs and property of sold merchandise is transferred from the vendor to the purchaser. Each Incoterm has a very narrow definition which specifies a lot of parameters.

In order to use Incoterms in a transaction in a way to bind the parties they have to be used correctly (never FOB for land shipments...) and the word "Incoterms" should be mentioned in the invoice or contract (The current version is Incoterms 2010).

As for the use of FOB when shipping by truck, in the event of a conflict between the parties the term will have to be defined by local commercial law and jurisprudence.

In the United States the Uniform Commercial Code (UCC) provides definitions for certain trade terms but it applies only to domestic U.S. sales.

An interesting Wikipedia article further outlines the differences between the usage of trade terms and Incoterms at this link.

A summary of the ICC's Incoterms can be consulted at this link.

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