Export ABCs: Whither FOB Factory?

Export ABCs: Whither FOB Factory?

The sales term "FOB Factory" is about as American as baseball and apple pie. Just about all product price lists are set up on an FOB (Freight On Board) Factory basis, with the cost of freight from the factory addressed as a suffix such as prepaid, prepaid and charged, collect, etc. In fact, there are actually six versions of the FOB term found in Article 2 of the Uniform Commercial Code, the body of law we Americans use for domestic sales of tangible goods. We use FOB for all means of transportation, and with a variety of places - (factory, destination, carrier, what have you).

The International Chamber of Commerce Incoterms also contains an FOB term, but this has a much narrower definition than its UCC namesake. It can mean only one thing - on board a vessel at a departure port.

This similar terminology with very different definitions has long been a source of confusion for both Americans and our overseas trading partners. It also provides some odd situations when combined with government regulations, such as squaring the American FOB Factory valuation point found in the North American Free Trade Agreement with an appropriate Incoterm.

This term is so imbedded in our commercial culture that it came as a shock to learn from Emerson Process Management's Deb Thompson that domestic trade terms (including our beloved American FOB) may be dropped from a revised version of the UCC. She pointed out in an excellent article that both the National Conference of Commissioners of Uniform State Law and the American Law Institute have approved proposed changes deleting all U.S trade terms.

Although the UCC is titled "uniform," each state has its own version. Fortunately, with the possible exception of civil-code Louisiana, they are so similar that interstate business is quite predictable. However, each state must consider these revisions, and each has its own legislative agenda. For this reason, proposed UCC changes may be enacted or at least approved on a patchwork basis.

Does this mean that we will stop using the American FOB? I'm no lawyer, but my guess is probably not. This term is used in too many documents such as industry standard contracts, purchase orders and quotation forms to be summarily dropped. What it could mean is that we'll have to establish trade term definitions outside the UCC, and incorporate them into our sales contracts. This is the situation with Incoterms, which are not law and must therefore be specified in order to apply to a given contract.

Just who will draft such definitions, and where they will come from present interesting questions. Possible platforms include mirroring current UCC usage (which the proposed UCC amendment called "inconsistent with modern commercial practices"), reaching way back to the Revised American Foreign Trade Definitions of 1941 (which definitely are inconsistent with modern practices), Incoterms, or something entirely new.

There's something to be said for removing trade terms from the governing law. For instance, as Incoterms are not law, they can be revised whenever the International Chamber of Commerce determines that they no longer reflect the way trade is actually conducted. Revisions are handled by the very people who use them (sellers, buyers, transportation service providers, lawyers, insurers), rather than by legislators. By following trade practice rather than attempting to shape it, these practitioners provide user-friendly results.

Frank Reynolds is president of International Projects, Inc., an export management company. His column appears exclusively in The Journal of Commerce Online.