What is Free On Board (FOB)?
Free On Board (FOB) is a trade term that specifies that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment. It is exclusively used for ocean or waterway transport, making it a key term in maritime trade. Under FOB, the seller’s responsibility ends once the goods are loaded onto the ship, marking a clear transfer point of risk and liability.
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Responsibilities and Liabilities
Seller’s Responsibilities
When using FOB terms, the seller has several key responsibilities. These include arranging and paying for transportation to the ship, loading the goods onto the vessel, and clearing the goods for export. The seller is also responsible for any damage or loss until the goods are loaded onto the ship. This means that if anything goes wrong during loading or before the goods are on board, it falls under the seller’s liability.
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Buyer’s Responsibilities
On the other hand, the buyer’s responsibilities begin once the goods are loaded onto the ship. The buyer must arrange and pay for transportation from the port of shipment to the final destination. This includes handling import formalities, paying import duties and taxes, and insuring the transport of the goods to their final destination. Essentially, once the goods are on board, all risks and costs associated with their transit fall on the buyer.
Risk Transfer
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Historically, under FOB terms, risk used to transfer when the goods went over the rail of the ship. However, this ambiguity has been clarified in Incoterms 2010 and Incoterms 2020. Now, risk transfers from the seller to the buyer once the goods are loaded onto the ship. This clear demarcation helps in avoiding disputes and ensures that both parties understand their liabilities.
Costs and Freight Payment Terms
FOB terms can be further nuanced with different freight payment terms such as FOB origin (freight collect/prepaid) and FOB destination (freight collect/prepaid). These terms determine who pays for shipping costs and assumes liability for the goods during transit. For instance, under FOB origin, the buyer pays for freight costs from the point of origin to the destination, while under FOB destination, these costs are prepaid by the seller but charged to the buyer.
Potential Issues and Considerations
For the Seller
For sellers, using FOB terms can present some challenges. Since sellers may charge transportation costs to buyers without necessarily having an incentive to keep these costs low, it could lead to higher expenses for buyers. Additionally, once goods are loaded onto the ship, sellers have limited control over them, which can be a concern if issues arise during transit.
For the Buyer
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Buyers also face significant responsibilities and risks under FOB terms. They assume all risks and costs beyond the port of shipment, including unforeseen changes in transport costs. Buyers must also arrange and pay for import formalities and insurance, which can be complex and costly.
Comparison with Other Incoterms
FOB vs. FCA
Comparing FOB with Free Carrier (FCA) highlights some key differences. Under FCA, the seller prepares the goods for export, handles export formalities, and notifies the buyer when the goods are ready for collection at a specified location. Unlike FOB, where risk transfers when goods are loaded onto a ship, under FCA, risk transfers when goods are handed over to a carrier nominated by the buyer. This difference in risk transfer and cost responsibilities makes FCA more flexible but also more complex in terms of logistics.
Practical Applications and Examples
In practical terms, FOB is commonly used in international trade scenarios where goods are exported from one country to another via ocean freight. For example, if a company in China exports electronics to a buyer in the United States under FOB terms, the seller would be responsible for loading these electronics onto a ship at a Chinese port. Once loaded, all risks and costs associated with transporting these electronics to their final destination in the U.S. would fall on the buyer.
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