When a product is purchased from a seller, it usually has to be shipped to the buyer unless it is picked up by the buyer or delivered by the seller. It is important to be clear about what costs relating to shipping the buyer and seller respectively have to bear. The freight term of a purchase order addresses the responsibilities of each party as well as risks while the goods are in transit. Understanding them will prevent miscommunication and conflict due to unclear or undefined responsibilities.
They are two common standards for freight terms used in North America: one is based on the Uniform Commercial Code (UCC) which is commonly used in North America and the other is Incoterms which are more widely accepted internationally.
Common UCC Terms
FOB Origin, Freight Prepaid – Seller pays and bears freight charges, buyer owns goods in transit
FOB Origin, Freight Collect – Buyer pays and bears freight charges, buyer owns goods in transit
FOB Origin, Freight Prepaid & Charged Back – Seller pays the freight, buyer bears freight charges, the buyer owns goods in transit
FOB Destination, Freight Prepaid – Seller pays and bears freight charges, seller owns goods in transit
FOB Destination, Freight Collect – Buyer pays and bears freight charges, seller owns goods in transit
FOB Destination, Freight Collect and Allowed – Buyer pays freight charges, seller bears freight charges. Seller owns goods in transit.
FOB (Free on Board) location determines where the title of the goods are transferred. This is important because the owner of the goods while in transit has to bear the risks of damage and is responsible to file any eligible claims for it. Please note that FOB is also an Incoterm but they do not have the same meaning. Do not confuse the two and be clear about the context FOB is used.
Incoterms
Incoterms were developed by the International Chamber of Commerce to facilitate trade. They have been updated many times and Incoterms 2020 is the most recent edition. There are 11 terms and each distributes responsibility differently. They cover more scenarios than the UCC terms above and there is a trend to increase the use of Incoterms because there are more thorough (UCC terms may not be adequate for international shipments) and widely accepted. For example, Incoterms considers loading costs, taxes and breaks carriage costs into three different legs. For specific interpretation refer to the ICC website for Incoterm terms at https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-2020/
The chart below shows a high-level breakdown of responsibilities of each Incoterm:
