FOB (Free On Board) is an Incoterm used in international trade. It specifies that the seller fulfills their obligation to deliver once the goods have passed the ship’s rail at the named port of shipment. At this point, the risk of loss or damage to the goods transfers from the seller to the buyer.
Definition and Legal Context
FOB is defined by the International Chamber of Commerce (ICC) as an Incoterm governing the international sale of goods. Under FOB terms, the seller is responsible for the cost and risk involved in delivering the goods to the port of shipment, loading them onto the vessel, and providing the necessary export documentation. Once the goods have crossed the ship’s rail, the buyer assumes all risk and expense for the transportation of the goods.
Types of FOB
FOB Shipping Point
In FOB Shipping Point, the buyer takes responsibility for the goods once they leave the seller’s premises and are loaded on the shipping vessel. The buyer is liable for the costs and risks from that point forward.
FOB Destination
In FOB Destination, the seller assumes responsibility for the goods until they are delivered to the buyer’s specified location. The seller covers shipping costs and bears the risk during transit.
Special Considerations
Transfer of Risk
The key aspect of FOB terms is the transfer of risk from seller to buyer. This transfer occurs when the goods cross the ship’s rail (under traditional Incoterm rules) or are loaded onto the vessel (under newer interpretations).
Insurance and Liability
The buyer should ensure that adequate marine insurance is in place from the point of transfer to cover any potential loss or damage during transit.
Example of FOB Transaction
Suppose a company in China sells electronics to a retailer in the United States using FOB Shanghai terms. The Chinese company is responsible for transporting the goods to the port of Shanghai and loading them onto the shipping vessel. Once the goods are loaded, the risk and responsibility shift to the U.S. retailer, who will handle the shipping, insurance, and other related costs from that point onwards.
Historical Context
The FOB term has a long history in international trade, dating back to practices established in the maritime industry. Its standardization by the ICC helped to clarify responsibilities and reduce disputes in international transactions.
Applicability
International Trade
FOB terms are widely used in international shipping, especially in agreements involving bulk and containerized goods. It is one of the most common Incoterms used in global trade.
Domestic Trade
While primarily used in international transactions, FOB terminology can also apply to domestic shipping agreements to clarify the point of risk transfer between seller and buyer.
Comparisons
FOB vs. CIF
Cost, Insurance, and Freight (CIF) terms require the seller to cover the cost of insurance and freight to the port of destination, unlike FOB where the seller’s responsibilities end once the goods are loaded on the shipping vessel.
FOB vs. EXW (Ex Works)
Under EXW (Ex Works) terms, the buyer assumes responsibility for all logistics and costs from the seller’s premises onwards, which is a broader scope of responsibility compared to FOB.
Related Terms
- Incoterms: Trade terms published by the ICC defining responsibilities and obligations of buyers and sellers in international trade.
- CIF (Cost, Insurance, and Freight): An Incoterm where the seller pays for the cost, insurance, and freight to the destination port.
- EXW (Ex Works): Describes a scenario where the seller makes goods available at their premises, and the buyer covers all transportation costs and risks.
FAQs
What does FOB mean in shipping terms?
Who pays for shipping in FOB terms?
What is the difference between FOB Shipping Point and FOB Destination?
References
- International Chamber of Commerce – Incoterms 2020.
- U.S. Customs and Border Protection – International Commercial Terms (Incoterms).
- World Trade Organization – International Trade Statistics.
Summary
FOB (Free On Board) is a crucial term in international trade, outlining when and where the seller’s responsibility for goods ends and the buyer’s begins. Understanding FOB terms is essential for both buyers and sellers to manage their risks and responsibilities effectively.
