The Incoterm FOB or Free on Board is an international freight and legal term that determines the point at which the transport obligation shifts from the seller to the buyer. Created by the ICC, the FOB Incoterm is mostly used for international sea freight transport. Learn all about how does FOB work, the responsibilities of the buyer and seller and the difference between FOB Destination and FOB Shipping Point with our complete guide.
When drafting an international trade contract, the Incoterm FOB in export/import establishes the seller’s and buyer’s responsibilities and defines who is responsible for covering the transport of the cargo, loading and unloading, insurance and customs clearance.
FOB means Free on Board, and it is one of the 11 Incoterms used for the regulation of international trade. On its most basic meaning, the Incoterm FOB determines that the seller is responsible for the cargo until it has been loaded into the vessel at the port of origin.
The seller is also responsible for packing and transporting the cargo from their local depot to the port of origin, as well as paying for customs clearance on the country of origin (export clearance charges). Once the goods are cleared and loaded on the vessel, they become the buyer’s responsibility.
The buyer is liable for the goods during transit and must pay for customs clearance in the country of destination (import clearance charges), transport to the final destination and last-mile delivery, if applicable. The buyer is responsible for insuring the goods.
Originally, the Incoterm Free on Board was only used for sea or waterway freight, and that is why it belongs with the Sea Freight Incoterms. However, these days it can also be used for air cargo.
The FOB Incoterm has two main versions: FOB Destination and FOB Origin, also known as FOB Shipping Point. The main difference between FOB Origin and FOB Destination is the point where the cargo passes from the buyer to the seller, which directly affects the responsibilities of each party.
The seller and the buyer have to agree on these terms beforehand to define who is responsible for the cargo’s safety and shipping charges when using the FOB Incoterm. Read below how each of them works:
In FOB Origin, also known as Shipping Point, the seller is responsible and liable for the cargo until it arrives at the shipping point in the country of origin. The buyer pays for the transport and can add insurance coverage to their goods once they are on board. In this case, the FOB shipping point determines that the seller is liable for the goods between their depot and the port of origin, but not any further. For example:
Company A (the seller), located in Ireland, sells 1,000 units of merchandise to Company B (the buyer) in the US:
In FOB Destination, the seller is responsible and liable for the cargo until it gets to the port of destination. The seller is, therefore, responsible for paying export clearance fees, transport and insurance. The buyer must pay for the import clearance procedures. Following the same example:
Company A (the seller), located in Ireland, sells 1,000 units of merchandise to Company B (the buyer) in the US:
INSURANCE COVERAGE
The buyer is responsible for adding insurance coverage to marine cargo from the moment it is free on board. The seller must pay for the insurance of the cargo from their depot to the ship.
It is essential to know when the title of the goods changes from the seller to the buyer. Once the buyer gets hold of the goods, either at the port of origin (FOB Shipping Point) or at the port of destination (FOB Destination), the seller is no longer liable for any damages.
SHIPPING COSTS
Regardless of the party responsible for paying shipping and insurance under the FOB Incoterm, the shipping costs included in the contract are more or less the same. The Free on Board shipping costs are as follows:
It depends on the specifications modifying the FOB Incoterm. These specifications define who will pay for shipping costs and shipping to the port on FOB, as well as who is responsible for loading, unloading and customs.
See below the possible scenarios when using the FOB incoterm. Each of these can be combined with FOB Origin or FOB Destination, forming terms such as “FOB Origin, Freight Collect” or “FOB Destination, Freight Collect”.
In this version, the seller arranges the transport and pays the transportation fees upfront, but they bill it to the buyer afterwards. The seller owns the goods during transit and undertakes the risk of loss and damage during transit. The buyer gets the title of the goods at the port of destination.
In this version of the FOB Incoterm, the seller arranges the transport, and the buyer pays for the transportation costs when they receive the goods. The seller is liable for the goods during transit until the port of destination and must cover damage or loss if they occur.
In this case, the seller pays the transportation charges and owns the goods while they are in transit until they reach the destination point. The seller also assumes the risk of loss and damage in transit. The buyer gets the title of the goods at their business location.
The buyer pays for transportation costs but deducts the price from the final invoice. The seller is liable for the goods during transport until they reach the port of destination and must cover damage or loss if they occur.
CUSTOMS CLEARANCE
The seller is always responsible for paying export customs clearance in the country of origin when agreeing to use FOB, as they have to get the goods cleared and “free” for the buyer.
The buyers must pay for import customs clearance at the destination because even in FOB Destination, the seller is not responsible for unloading and clearing the goods for import. Even when the seller is responsible for paying for the shipping costs, this does not include customs clearance.
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