What is FOB? An Essential Guide to Incoterms 2020

In international trade, where goods traverse continents and currencies fluctuate, precision is paramount. Incoterms (International Commercial Terms) offer a standardised framework for defining responsibilities and risk transfer points between buyer and seller. FOB (Free On Board) is a frequently used Incoterm in global commerce.

FOB Defined: A Breakdown of Responsibilities

FOB stipulates that the seller is responsible for delivering goods to the agreed port of shipment and loading them onto the vessel nominated by the buyer. This delivery point is critical, as the risk of loss or damage transfers from seller to buyer at this stage. The seller must also clear the goods for export and furnish the buyer with the necessary export documentation.

The buyer then assumes responsibility for all costs and risks associated with transporting the goods from the port of shipment to their final destination. This includes insurance, freight charges, and any applicable import duties.

The Carrier's Role in FOB Shipments

The carrier, the vessel transporting the shipment, is vital in FOB transactions. While the seller arranges the carrier, the buyer selects the specific vessel. Clear communication between buyer and seller is essential for a seamless handover at the designated port. The seller must verify that the chosen carrier is suitable for the goods and that the vessel is available at the agreed time.

The Importance of Documentation in FOB Agreements

Comprehensive documentation is crucial in international trade, providing verifiable evidence of transactions and facilitating the seamless movement of goods. In FOB transactions, the seller provides accurate and complete documentation, including the Bill of Lading. This document serves as a receipt for the goods and a contract of carriage.

The Bill of Lading is crucial because it entitles the buyer to claim the goods from the carrier upon arrival at the destination port. Other essential documents include the commercial invoice, packing list, and certificate of origin.

FOB Compared to Other Incoterms: CIF and CFR

FOB is not the only Incoterm used in international trade. CIF (Cost, Insurance, and Freight) and CFR (Cost and Freight) are also standard terms. CIF differs from FOB because the seller arranges insurance and freight to the destination port. CFR requires the seller to arrange freight to the destination port, but not insurance.

The Incoterm selected depends on the specific transaction, considering factors such as the nature of the goods, the distance involved, and the buyer's risk tolerance.

Practical Considerations for FOB Agreements

While FOB agreements offer a straightforward framework, specific practical considerations are important. Delays or disruptions in shipping can lead to increased costs and potential disputes. Clear communication and careful contract negotiation are vital to mitigate these risks.

The seller must ensure that the goods are correctly packaged and labelled to prevent damage during transit. The buyer should be prepared to manage customs clearance and other logistical arrangements at the destination port.