FOB, or Free On Board, is an international trade term established by the International Chamber of Commerce (ICC) as part of its Incoterms. It specifies at which point the seller transfers ownership and responsibility for the goods to the buyer. The term has critical implications for cost, risk distribution, and logistics in international trade.
Key Features of FOB
Definition
- The seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment.
- The risk of loss or damage is transferred from seller to buyer once the goods are on board the vessel.
- The seller is responsible for the cost and risk of loading the goods on the vessel.
Historical Context
The term FOB dates back to the 1936 revisions of early Incoterms established to facilitate clarity and standardization in international shipping practices. Over time, FOB has evolved to adapt to modern shipping and trading realities.
Application in Trade
Types of FOB
- Risk and title transfer to the buyer once the goods leave the seller’s premises. The seller is not responsible for the goods during transit.
FOB Destination:
- Risk and title transfer to the buyer when the goods reach the buyer’s destination. The seller is responsible for the goods during transit.
Example Usage
Scenario 1: FOB Shipping Point
- A company in Shanghai sells goods to a company in Los Angeles under FOB Shanghai terms. The Shanghai company is responsible for transporting the goods to the port and loading them onto the shipping vessel. Once on board, the responsibility shifts to the Los Angeles company.
Scenario 2: FOB Destination
- A supplier in Hamburg ships goods to a buyer in New York under FOB New York terms. The supplier bears all risks and costs until the goods are delivered to the New York port.
Comparisons and Related Terms
CIF vs. FOB
Cost, Insurance, and Freight (CIF):
- Seller bears the cost of goods, insurance, and freight to the port of destination; however, risk transfers once the goods are loaded on the vessel.
- In contrast, FOB does not include insurance or freight costs, emphasizing a clearer division of financial responsibility after loading.
FOB vs. EXW
- The seller makes goods available at their premises, and the buyer bears all costs and risks of transport.
- FOB involves more seller responsibility up to the point of loading the goods onto the shipping vessel.
Frequently Asked Questions
What does “Free On Board” include?
FOB includes the cost of goods, packaging for transport, and any export duty charges. It does not cover insurance or freight costs after loading.
Who is responsible for insurance in FOB?
While FOB does not require the seller to provide insurance, the buyer may choose to insure the shipment once it’s on board the vessel.
Can FOB be used for any mode of transport?
FOB is specific to maritime and inland waterway transport. For other transportation modes, terms like FCA (Free Carrier) are more appropriate.
Summary
Free On Board (FOB) is a crucial Incoterm in international trade, providing a clear delineation of risk and cost responsibilities between sellers and buyers. Recognizing the types and applications of FOB can help businesses manage logistics, costs, and risks effectively in global commerce.
References
- International Chamber of Commerce (ICC). “Incoterms® 2020”.
- Understanding Free On Board (FOB). Investopedia.
- Russell, Michael (2019). International Trade Logistics. Routledge.
In reviewing and using FOB in contracts, stakeholders ensure clarity on shipping responsibilities, enhancing efficiency and minimizing disputes in international trade.
