KNOW YOUR TRADE TERMS

By on March 7, 2014
Business Advice Q&A

Q. What is a trade term?

A. A trade term is a transportation term describing the manner of transportation or delivery and the party responsible for arranging and/or paying for the transportation. A trade term also indicates whether the contract price for goods includes the cost of the transportation and insurance on the goods. Finally, the trade term defines when the risk of loss of the goods passes from the seller to the buyer. A trade term should be used in every transaction for the sale of goods if delivery is necessary.

Q. How many different kinds of trade terms are there?

A. There are two main categories of trade terms: shipment contracts and destination contracts. In a shipment contract, the seller’s responsibility ends at the seller’s place of business or nearest port once the goods have been delivered to the common carrier and the carrier has accepted responsibility to deliver the goods. If the seller has delivered conforming goods, then the seller’s performance is complete. In a destination contract, the seller’s performance is not complete until the goods actually reach the destination point, either the buyer’s place of business or, more typically, the nearest port to the buyer.

The commonly used terms are “free on board shipment,” “free on board destination,” and “cost, insurance and freight,” or “cost and freight.” However, in addition to these, there are many other individual trade terms. Trade terms that look identical do not always have the same use and meaning, depending on the legal source used to define the trade term. You should never use or agree to use a trade term with which you are not familiar.

Trade terms are usually stated in shorthand form. Thus, F.O.B., C.I.F., and C&F. Often this is all you see, but the trade term is incomplete in this form. Unfortunately, many people are sloppy in the use of the shorthand. This can cause ambiguity, making the contract difficult or sometimes impossible to enforce. Here is an example of a complete trade term: F.O.B. shipment (name of port) (name of vessel if known; otherwise simply state “vessel”) (source of law defining the trade term).

Q. Where can I find trade terms?

A. Trade terms are defined in the Uniform Commercial Code (U.C.C.) and in INCOTERMS, published by the International Chamber of Commerce. These two sources are widely known and respected in international trade. Trade terms defined under civil or common law of individual countries are not generally used in international transactions. Trade terms are not defined in the United Nations Convention for the International Sale of Goods.

Q. What is risk of loss?

A. Risk of loss determines whether seller of buyer will have the responsibility to deal with the loss, theft, damage or destruction of the goods at any time from when the contract is made to the time the goods are delivered into the possession of the buyer. The trade term precisely defines the point at which the responsibility shifts from the seller to the buyer. In shipment contracts, the risk of loss shifts to the buyer at the shipment point as defined in the trade term. In destination contracts, the risk of loss shifts to the buyer at the destination point. Most contracts are shipment contracts, including C.I.F. and C. & F. contracts.

Q. Is risk of loss the same as liability?

A. No. Liability is a completely separate concept. Liability determines legal responsibility for causing the loss, theft, damage or destruction to the goods. Risk of loss does not involve fault. For example, say the goods are on the vessel “Peerless.” The vessel “Inept” negligently collides with “Peerless” on the high seas and sinks it. The liability for causing the accident is with “Inept.” In a shipment contract, the risk of loss of the goods is with the buyer because the risk passes from the seller to the buyer at the shipment point, the port from which “Peerless” sailed. However, goods are usually insured, so that the party having the risk of loss can be made whole by the insurance without having to determine liability. The insurance company then has a subrogated claim and can seek recovery from the party that has liability for the loss.

John W. Tulac is an international business attorney practicing in Claremont, adjunct professor of law at University of La Verne College of Law, and Lecturer Emeritus (retired) at Cal Poly Pomona.  He can be reached at (909) 445-1100.