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Domestic Use of Incoterms® 2010
A common misconception of Incoterms® is that they may only be applied to international transactions (those crossing international borders). Until Incoterms® 2000 was published in 1999, this was true. Prior to the 2000 edition, the provisions of the terms did not lend themselves to delivery of goods from seller to buyer where the buyer was in the same Zip code.
Over the years, U.S. businesses have become accustomed to the use of the American Foreign Trade Definitions, found within the Uniform Commercial Codes (UCC) of the several states. The UCC, the body of law enacted by each state that covers commercial transactions, incorporated American Foreign Trade Definitions because Incoterms® did not cover domestic trade. The most commonly used definition goes something like this: “FOB origin, freight prepaid” or “FOB destination, freight collect” or, variations on this theme depending on the creativity of the writer. This term meaning “Freight On Board” is never to be confused with the “FOB” rule found in Incoterms® which stands for “Free On Board.”
In the 2000 version, the International Chamber of Commerce adapted Incoterms® to meet the needs of businesses engaged in both international as well as domestic transactions and to those engaged solely in domestic trade. By domestic, we mean domestic anywhere in the world, not just the United States. In the 2010 version, a greater emphasis is placed on the use of Incoterms® domestically.
In the drafting of the provisions for each rule (in 2010, the terms are known as rules), qualifications have been included which impose upon one or the other party an obligation or a cost only if applicable when, by the nature of the delivery being undertaken, it is incurred. For example: Provision A2 under FCA requires the seller to undertake the obligation and associated cost for export clearance of the goods from the origin country. However, the very first words of this provision are, “Where applicable”. In other words, if the seller is in New Jersey and the buyer is in Ohio, there is absolutely no need for the seller to perform export clearance nor for the buyer (Provision B2 of FCA) to undertake import clearance and formalities. There are other instances of “where applicable” incorporated into the provisions of the Incoterms® 2010 rules.
How might one make the “translation” of an Incoterm® rule into a domestic transaction?
Let’s work through one of the more common domestic transactions…
First, take a look at the American Foreign Trade Definition “FOB”. It speaks to either origin or destination. Origin means that risk of loss shifts from seller to buyer at the origin of the shipment; destination means that risk shifts at the destination of the shipment. In domestic commerce, 99.9% of the time there is only an origin and a destination (What does the bill of lading state as the origin and the destination – there is usually only one B/L).
This Americanized FOB also addresses who will pay the freight (shipping) costs. “Prepaid” means the shipper will; “collect” means the buyer will. Sometimes we’ll see “prepay and add”. Of course, the shipping will be added one way or another – there is no free lunch for any buyer of goods. Even when freight costs are prepaid, the buyer is going to end up absorbing them – on a separate invoice line, embedded in the price of the good, or on a subsequent invoice.
Thus, you need to think about two critical elements within the provisions of the Incoterms® 2010 rules in order to make the “translation”. First, seller and buyer must agree at what point/place risk of loss will shift. Will it be at the seller’s premises (wherever the goods are shipped from – “origin”)? Will it be at the buyer’s premises (wherever the goods are shipped to – “destination”)? Second, which party is obligated to arrange and pay for the contract of carriage (who picks and pays the carrier to deliver the goods)?
Having established these elements, you then must move onto Incoterms® 2010 and locate the rule that associates the established elements within a particular rule. For example, a domestic seller customarily negotiates an “FOB origin, freight collect” Americanized term of sale, making the goods available at their premises; the buyer arranges and pays for the transport costs and bears the risk of loss while goods are in transit. If we look at the FCA rule in Incoterms®, the provisions clearly spell out this very arrangement. The citation would be “FCA Middlesex, NJ” (the seller’s premises are in Middlesex, NJ).
Look at provision A4 of FCA. “Delivery is completed a) if the named place is the seller’s premises, when the goods have been loaded on the means of transport provided by the buyer or b) in any other case, when the goods are placed at the disposal of the carrier or another person nominated by the buyer on the seller’s means of transport ready for unloading.” Look at provision A5. “The buyer bears all risks of loss and damage from the time the goods have been delivered” in accordance with A4. Look at provision A3. “The seller has no obligation to contract for the transport” (provision B3 says that the buyer does). This is exactly how the seller wanted the transaction to occur. Instead of “FOB origin, freight collect,” our seller could have cited “FCA Middlesex, NJ (Incoterms® 2010).”
U.S. businesses will find more and more that Incoterms® are migrating into the world of domestic transactions and should be prepared as the U.S. body of business laws eliminate American Foreign Trade Definitions and cite Incoterms® as the governing authority for terms and conditions related to the delivery of goods.
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It is vital for you to fully understand the changes to Incoterms® for you to negotiate the best deal.
The best and most efficient way to do this is through one of our one-day Incoterms® 2010 training seminars. For more information, check our website, download a .pdf brochure, or call 800-631-3098.
About Unz & Co.
Unz & Co. (Division of WTS Corp.) / 333 Cedar Ave., Building B, Suite 2 / Middlesex, NJ 08846