Tuesday, June 19, 2012


There was a debate on LinkedIN about what the FOB delivery term means. As I thought people could learn from that, I wanted to share my response.

The Uniform Commercial Code, Article 2 defines FOB and allows both FOB Origin, FOB Destination terms. The UCC applies to only for the sale of goods on transactions within in the U.S. or where the applicable law is one of the States of the U.S.. The problem is the UCC definitions don't match INCOTERMS Definitions published by the International Chamber of Commerce.

In the UCC FOB term has nothing to do with ocean shipments. It could be free on board any carrier. Under INCOTERM FOB only applies to Ocean shipments. So what the UCC defines as FOB Origin, INCOTERMS refers to as Ex-Works.

To avoid conflicts and claims based upon different interpretations between the parties, when you specify the deliver term, you should always make reference to the specific source of the definition you want to apply. For example
"FOB Origin (Named Location) as defined under the Uniform Commercial Code" or
"FOB (Specified Port and Ship) as defined by INCOTERMS 2010."

My personal preference has always been to use the INCOTERMS.
1. They can be used both domestically in the U.S. and internationally.
2. They apply to everything that may be shipped not just goods.
3. Each term has a clear definition of the responsibilities of both parties for all the required activities.
4. They clearly establishes where the risk of loss transfers.

When I'm purchasing something of high value I want to select the right term so I can manage the risk. For example with a high risk item I probably want to use Ex-works so I can manage and control the selection of the carrier, the shipping lanes, as both of these may have different risk. I want to specify how the item will be packed and packaged to prevent loss. I also purchase the right insurance for the potential loss etc. as standard insurances may not cover the full value if its lost of damaged.


A waiver is the giving up of a right. You may have express waivers that are set forth in a contract. For example, many companies include a waiver of jury trial provision so that in the event there is a dispute between the parties, the dispute will only be heard by a judge who will make their decision based upon the law, the contract and the facts. Companies want waiver of jury trials as in many cases they feel that their will get a fairer decision as any personal prejudices of the jurors won’t be taken into account. They may also feel that the size of the awards will be less than what a jury might award.

Waivers can also occur through a party’s actions. For example. if you have a right, and fail to enforce it, in the future you may be prevented from enforcing that right by you previous failures to enforce it. Most of contracts will include Waiver clauses where they make the intent clear by stating that the failure to enforce a right shall not
constitute a waiver of future rights.

Waivers are also traditionally used in the settlement of claims where for a party to make an agreed payment of an agreed settlement amount, they require the other party to waive and release any future claims on the subject matter of the settlement.

Other types of waivers that you may find in contracting are:
1.Waivers of liability which may be used when a person is entering a business premise where there could be potential injury,
2. Waivers of fees. For example, a form of discount could be a waiver of certain fees to be paid for a period of time in the future.
3.Waiver and release of liens. This has subcontractors give up the right to file a mechanics or materialman’s lien against real property they performed work upon for which they have not yet been paid.
4.Insurances frequently have waivers. For example for certain losses there could be a waiver of deductible so the insurance company pays the entire loss.

Security Interests

A security interest is a method by which a supplier or financer can protect their interests in the equipment or goods until paid. It’s similar to a lien against the title to that item. It puts other parties on notice of that interest and makes any subsequent sale also subject to that claim. A buyer may also have what is called a Purchase Money Security Interest to the extent the supplier has taken or retained all or part of the price in the goods or equipment.

In the United States Article 9 of the “UNIFORM COMMERCIAL CODE - SECURED TRANSACTIONS; SALES OF ACCOUNTS AND CHATTEL PAPER” is the law that governs security interests. Security interests may be created by a separate agreement or the terms of an agreement could establish a security interest for the Supplier until the buyer makes complete payment.

Security interests are a form of credit protection where the seller is not relying upon only the credit of the Buyer but also wants to have the additional protection where other parties are put on notice of the fact that they have a legal interest in the item and as such the other party cannot transfer full interest or title to them until the security interest has been satisfied by payment and release of the interest.

In a number of negotiations I’ve dealt with suppliers that wanted to have security interests in the goods they sell until they receive payment. Assume you had sixty-day payment terms. What a security interest would do is prevent you from being able to sell the item you purchased for resale within that period with clear title. If you were using what you purchased in a higher level product what it would do is prevent you from selling that higher level product with clear title during that period. In these types of situations as a buyer it’s best to avoid providing a supplier with the right to have a security interest as it complicates the sales. It’s better to either make sure that they are willing to rely upon your credit ratings or even offer other assurances of payment if needed such as a letter of credit or bank guarantee. Situations where a security interest might be acceptable would be if you were purchasing a major piece of capital equipment under credit terms. In they situation where it is only for internal use, a cloud on the title in the form of the security interest would have no impact on your ability to use the equipment in the interim and it would protect the supplier against potential loss if your company were to file for bankruptcy.

Purchase Money Security Interests are provided for under the UCC and are restricted to goods and software. The advantage to a Buyer of establishing a Purchase Money Security Interest in goods or software, that they have paid for which have not been delivered, is in the event of Bankruptcy. Advanced payments are considered a form of financing and the UCC established PMSI as a super- priority that has precedence over other secured creditors. The priority in a bankruptcy would be first the payment of any taxes; then to any super-priority creditors; then to secured parties; then to ordinary creditors and lastly to any shareholders. So what a PMSI does is place you below any government claims for taxes, equal to other super-priority creditors and above secured creditors and unsecured creditors.

For paid finished goods being held at the Supplier, you would not rely upon a PMSI. Rather, once payment has been made they should be treated as goods that you own that are being consigned to them and have language in the agreement that establishes the consignment and their responsibilities as the consignee. The reason for that is simple, in the event of bankruptcy you as the consignor of the goods own them. As the owner you would have the right to enter the supplier’s premises to recover your owned material that is consigned to them. PMSI gives you a higher place in the line of creditors where you may be able to get the goods or recover some of the monies paid if there are any after taxes are paid and as long as other super-priority creditors get the same according to their share, whereas consignment allows to fully recover the goods.