A container ship arriving in port on a very calm day.

In April, the Global Shippers’ Forum announced a new international program to explain how using the right commercial terms can reduce your supply chain freight costs. It will help shippers like you to understand matters of shipping liability, who is responsible for what and who should bear the risk consequences, all under modern commercial terms. The move stems from a growing global outcry over “unsubstantiated shipping charges, terminal fees and 20 other non-negotiable charges on shippers worldwide,” the Forum says.

Charges for both exporters and their customers have been rising, the Forum says. Among many other measures, Sean Van Dort of the Sri Lankan Shipper’s Council has called for both parties to make better use of the so-called Incoterms, which spell out the exact responsibilities for all participants in your supply chain.

And yet, the international standard set of Incoterms remain poorly understood by exporters and importers alike. “When was the last time you saw a truck floating?” asks Joy Nott, the president of the Canadian Association of Importers and Exporters. “I don’t think you have.”

But when Canadian companies import or export goods internationally, Nott estimates that 90 percent of them use the shipping code FOB—short for “Free On Board” or “Freight On Board.” The vast majority of Canadian international trade is by truck; international guidelines state that cargo sent FOB must be carried by a sea vessel. For international land and air transportation, shipping cargo FOB invites only confusion and possible legal headaches. Yet Canadian companies can’t seem to part with the term. Understanding shipping, and the terms that define it, is crucial for any business sending goods abroad.

Nott hopes an update of the International Commercial Sales Terms, known as Incoterms, could persuade Canadian businesses to look more carefully at what they’re agreeing to when they draw up shipping contracts with international suppliers and customers. The 11 revised Incoterms, which came into effect Jan. 1, 2011, are aimed at making the responsibility of buyer and seller even more clear in an era where multimodal transportation has become the rule, not the exception.

The terms, which take the form of three-letter codes such as FOB, FCA and DDP, are contractual shorthand for who is responsible for the costs and risks of each stage of transportation from seller to buyer. Created in 1936 by the International Chamber of Commerce, they are not law, but are recognized by shipping companies, border agencies and judiciary around the world. If there’s a dispute and a judge sees EXW on a contract, for example, there’s little question that the seller is responsible only for making the goods available to the buyer at the seller’s own premises and that the buyer assumes all costs and risks involved getting them to their final destination.

Read: You’ve Cracked the U.S. Now what?

The Incoterms are updated every decade or so and the 2010 revisions retire four terms and add two new ones that Nott says are both more flexible and more clear. For the new DAT (Delivered At Terminal) term, for example, the seller bears all the risks involved in the movement of the goods until they are delivered to an agreed-upon terminal, whether it’s a traditional port or elsewhere. Retiring terms like DES (Delivered Ex-Ship) and DEQ (Delivered Ex-Quay) were considered too marine-specific. The revisions also make Incoterms more applicable to domestic trade.

“These terms represent what actually happens in business today,” says Nott. “People want to ship to a terminal and they want their responsibilities to end there. They don’t want to deal with the buyer’s Customs, for example.”

In Europe and Asia, where trade occurs in all directions, Incoterms are better understood. But Canada’s close relationship with the United States has muddled things here. In 1952, the U.S. adopted the Uniform Commercial Code (UCC) to harmonize commercial transactions between its states. As luck would have it, the UCC also uses the term “FOB.” The U.S. meaning, though, is subtly different. It can apply to truck traffic (that isn’t floating). Businesses which think FOB makes sense in transactions between American and Canadian companies are often forgetting that their contracts are international. In many cases, they’re letting software designed for the domestic U.S. market automatically chose a mode of shipping that has little or no international legal standing.

“A lot of the paperwork between Canada and the U.S. is wrong,” says Nott. “If a dispute comes to court, a judge is going to pull out the real Incoterms and people are going to get a decision they weren’t expecting.”

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