This is the second in a series of articles on the Uniform Commercial Code (UCC), Article 2 and Incoterms 2010. This series provides a basic understanding and working knowledge of what are known as terms of sale.
The Uniform Commercial Code, Article 2 defines the terms that have been adopted for use in the United States. Incoterms 2010 defines for the seller and the buyer:
- When RISK transfers?
- Who pays which COSTS?
- Who is RESPONSIBLE for forwarder & carrier selection?
- Who prepares DOCUMENTS?
Before you can calculate a sales price and negotiate a sales contract, you must determine what responsibilities and expenses are assigned to the seller and the buyer. This includes transporting and insuring merchandise from the time it leaves your plant or warehouse to the time it arrives at your purchaser's premises.
There is a generally accepted, readily understandable nomenclature called Incoterms 2010 that relates the trade term to the various transportation options. The trade terms do not identify where the transfer of title or ownership will occur. A separate statement regarding transfer of title should be made in the body of the contract, the quote, pro forma invoice, and commercial invoice.
Domestic and international trade terms are governed by two separate sets of rules. As explained in my first article of this series, the domestic terms are defined by the Uniform Commercial Code Article 2 as adopted by each state, the National Motor Freight Classification, and industry practice.
The international terms are defined and published by the International Chamber of Commerce (ICC). In order to implement the use of the international terms, it is necessary to have in your sale and purchase contracts’ language such as “the terms of sale herein are Incoterms 2010” or “governed by Incoterms 2010.”
Incoterms 2010 provide a common reference to establish the point at which risk of loss due to loss or damage transfers from the buyer to the seller and the attendant transportation costs for which each party has responsibility. Knowledge of Incoterms 2010 is essential for exporters and importers to prepare contracts with terms appropriate for their customers and to make sure those contractual terms are properly fulfilled.
Incoterms 2010 continue the tradition of establishing a relationship between the seller and buyer regarding the location where the seller will deliver the goods into the hands of the buyer for export. Each term is followed by the appropriate location. For example, the contract for goods sold Ex Works would state “EXW [seller’s facility, city, state, country],” while the contract for goods sold Free Alongside Ship would state “FAS [named port of shipment, state, country]”.
The 11 three-letter abbreviations would be used in place of domestic terms for sales outside of the United States. These 11 terms do not require the addition of a statement such as “Prepaid & Add” or “Freight Allowed” or “Freight Collect.”
As soon as a seller places the phrase “ExW Plant, Houston, TX USA - Incoterms 2010” on their quote, pro forma and commercial invoice, both parties know that the inland or air or ocean freight are collect and freight forwarding fees and customs clearance at destination are for the account of the buyer. It is international shorthand defined by the ICC.
These relative responsibilities divide the costs of arranging transportation, and in some cases insurance, between the parties. It also divides the risk of loss between them. Incoterms 2010 are not shipping terms, instead they are part of the sales contract and help the seller and buyer define the roles and the costs that each will have in the transaction.
The choice of terms appropriate to your transaction will depend on a number of factors, such as:
- Does your buyer have facilities in the United States to take possession of the goods and arrange transportation?
- Does your company regularly receive inland freight rate discounts for truck or rail transportation to the port of loading?
- Is your buyer new to international trade, without knowledge of how to arrange transportation?
It often depends on the volume of shipments that the buyer or seller controls in a year that will determine who is able to obtain a cost advantage when negotiating with air or ocean carriers or consolidators. There may not be any cost advantage for one or the other, but by utilizing a quote prepared with costs itemized by Incoterms 2010, the seller and the buyer are able to make that determination.
This article was adapted from Incoterms 2010 and the UCC: A Guide to International and Domestic Terms of Sale by Catherine J. Petersen and Brent WM. Primus.