Supply Chain Survival Series: Shipping Terms Under the UCC and Incoterms (Article #17)

In previous articles, we discussed risk of loss and transfer of title under Article 2 of the Uniform Commercial Code (the “UCC”). While the UCC contains default contractual terms for sales of goods in U.S. states where it has been adopted, certain issues relating to shipment of goods are not directly addressed by the UCC, and in many cases (particularly in international contracts) parties prefer to agree on different shipping terms. In these cases, contracting parties often use “International Commercial Terms”, also known as Incoterms.

What are Incoterms?

Incoterms are international trade terms for sale of goods contracts that are published by the International Chamber of Commerce.¹ Incoterms have eleven terms, seven of which cover rules applicable to any mode of transport and four that cover only carriage by sea and inland waterway.

• Rules applicable to any mode of carriage include:
• EXW (Ex Works).
• FCA (Free Carrier).
• CPT (Carriage Paid To).
• CIP (Carriage and Insurance Paid To).
• DAP (Delivered at Place).
• DPU (Delivered at Place Unloaded).
• DDP (Delivered Duty Paid).
• Rules applicable to carriage by sea and inland waterway only² include:
• FAS (Free Alongside Ship).
• FOB (Free on Board).
• CFR (Cost and Freight).
• CIF (Cost, Insurance and Freight).

Incoterms can cover the allocation of responsibility for some things that the UCC does not explicitly address, such as export and import clearance, duties, and taxes. While the UCC may automatically apply to transactions within its purview regardless of whether it is referenced in an agreement, Incoterms will only be binding on parties if they are expressly incorporated into an agreement. Incoterms were created as a set of standardized international trade terms; however, domestic contracts can also contain Incoterms.

Importance of Specifying Incoterm or UCC in an Agreement

Three Incoterms utilize the same abbreviations as UCC terms³: FOB (Free on Board), FAS (Free Alongside Ship for the Incoterm abbreviation and Free Alongside for the UCC abbreviation), and CIF (Cost, Insurance, and Freight). In order for Incoterms to apply, it is important to specify that it is an Incoterm. To demonstrate the importance, it is helpful to take a specific example. Consider a Massachusetts-based manufacturer shipping widgets to a Florida-based customer. If the contract simply states “FOB,” what are the terms of the contract?

If the contract is governed by Incoterms, the term “FOB” should be followed by the name of the port of shipment, such as “FOB Port of Boston Incoterms 2020”. This would mean:

• The manufacturer must deliver the widgets to a ship that is selected by the customer at the Port of Boston;
• The manufacturer bears the risk of loss until the goods are loaded onto the vessel, and the customer bears the risk of loss thereafter; and
• The customer is responsible for selecting the ship and for all shipping freight charges, as well as ground transportation from the destination port to the customer’s facility.⁴

On the other hand, if the contract is governed by the UCC⁵, the term “FOB” should be followed by the location where the manufacturer is responsible for seeing the widgets to, such as “FOB manufacturer’s dock” or “FOB customer’s dock.” This would mean:

• The manufacturer must transport the widgets to the specified location at its own expense and risk;
• The manufacturer may use any mode of transportation that the manufacturer selects (not limited to water transport); and
• If the FOB location is a specific vessel or vehicle, the manufacturer must load the widgets on board at its own expense and risk.

Given the difference in terms depending on whether Incoterms or the UCC is applied, how do you know which should be applied? In domestic contracts in states that have adopted the UCC, the UCC is the set of default rules governing contracts for sales of goods. If in the above example the agreement just states “FOB Port of Boston,” the UCC terms would be applied. If, however, you want Incoterms to apply, you must explicitly state that Incoterms apply. For example, if you want Incoterms to apply to the situation above, you should note “FOB Port of Boston (Incoterms 2020®)”.

Importance of Specifying the Version of Incoterms

Even if you specify that the term is an Incoterm, it is necessary to state which version of the Incoterms apply. For example, if you are a manufacturer selling widgets and the contract with the customer states CIP (Incoterms), what cargo insurance would you be required to obtain? Under Incoterms 2010, you would be required to obtain cargo insurance under Institute Cargo Clauses “C” (minimum coverage). On the other hand, if Incoterms 2020 apply, you would be required to obtain broader cargo insurance coverage under Institute Cargo Clauses “A” (maximum coverage).⁶ It is important to note in the agreement which version of the Incoterms apply because the same Incoterm may require significantly different obligations based on the version of Incoterms.

Avoiding Confusion

Shipping terms are often misused, and may at times even conflict with other express terms of a contract. For example, a contract might include a DDP Buyer’s Dock Incoterms (2020) shipping term, but also include legal terms and conditions which specify that the buyer is responsible for shipping costs, and the risk of loss transfers to the buyer at the seller’s dock. It is important for supply chain professionals to understand the differences between various shipping terms, both under the UCC and the Incoterms, to ensure that they are being used properly and the other contractual terms are consistent with the chosen shipping term.

Key Takeaways:

• When using Incoterms, always state the full term, the named place/port, and the version year (e.g., “DAP Buyer’s Facility, Milwaukee, Wisconsin (Incoterms® 2020)”).
• Avoid mixing Incoterms with inconsistent freight, insurance, or risk-of-loss provisions elsewhere in the contract. 
• Do not use maritime-only Incoterms (FOB, CIF, CFR, FAS) for ground or air transport.
• Confirm insurance obligations align with internal risk-management expectations and your cargo policy.

If you have any specific questions on this article, please contact your Quarles attorney:

• Patrick Taylor: (414) 277-5523 / patrick.taylor@quarles.com
• Brandon Krajewski: (414) 277-5783 / brandon.krajewski@quarles.com
• Liz Lacey: (608) 283-2643 / elizabeth.lacey@quarles.com

Quarles attorneys Hannah Schwartz and Lauren Rosso also contribute to the Supply Chain Survival Series.

END NOTES

¹ See Incoterms® 2020, Int'l Chamber of Com.

² Using these Incoterms for land-based transport is a common mistake that can create legal ambiguity.

³ See UCC §§ 2-319 and 2-320.

⁴ See Miguel Angel Bustamante Morales, Incoterms® 2020: FCA or FOB?, ICC Academy (Nov. 19, 2024).

⁵ See UCC § 2-319.

⁶ See Incoterms® 2020, Int'l Chamber of Com., and Miguel Angel Bustamante Morales, Incoterms® 2020: CPT or CIP?, ICC Academy (June 20, 2025).