Free On Board (FOB) is a trade term that defines the exact point in a shipping transaction where the responsibility for goods transfers from the seller to the buyer. This designation is fundamental in global commerce because it dictates who pays for specific parts of the shipment and who is responsible for the risk of loss or damage. Understanding the application of FOB allows businesses to accurately calculate costs, secure appropriate insurance, and manage the logistics of international and domestic transactions. The term prevents disputes over liability and expense once the goods begin their journey.
Defining Free On Board (FOB) and Incoterms
Free On Board (FOB) is one of the eleven standardized trade definitions known as Incoterms (International Commercial Terms). The International Chamber of Commerce (ICC) publishes these terms, currently Incoterms 2020, to provide a common language for global sales contracts and prevent misinterpretations. FOB requires the seller to deliver the goods by loading them onto a vessel nominated by the buyer at a designated port of shipment.
The Incoterms framework standardizes the allocation of costs and risks between the buyer and the seller. The strict international definition of FOB applies exclusively to sea and inland waterway transport. The term is always followed by the name of the port where the goods are loaded, such as “FOB Port of Shanghai, Incoterms 2020,” which marks the geographic point of transfer.
The Critical Transfer Point: Risk and Responsibility
The distinguishing characteristic of the international FOB Incoterm is the precise moment when the transfer of risk and responsibility occurs. Under Incoterms 2020, this transfer takes place when the goods are physically placed on board the vessel at the named port of shipment. The seller retains all liability for the goods, including damage during transit to the port and the loading process, until they are secured on the ship.
Once the goods are successfully loaded onto the buyer’s nominated ship, the risk of loss or damage immediately shifts to the buyer. For instance, if a container is dropped into the water before being secured on the deck, the seller is liable. If the goods are damaged by a storm five minutes after loading, the buyer is liable.
This delineation separates the transfer of risk (liability for loss or damage) from the transfer of cost. While the seller pays costs up to the point of loading, the buyer assumes financial responsibility for the main international carriage and all subsequent expenses from the moment of transfer.
Seller’s Obligations Under FOB
The seller’s duties under FOB conclude once the goods are successfully loaded onto the vessel. The seller is responsible for the following:
- Providing the goods and the commercial invoice as specified in the sales contract.
- Handling all pre-carriage logistics, including transporting the goods from their premises to the named port of shipment.
- Managing export clearance formalities in the country of origin, including obtaining necessary licenses and paying all export duties and taxes.
- Bearing the costs and risks of loading the goods onto the ship nominated by the buyer.
Buyer’s Obligations Under FOB
The buyer’s obligations begin the moment the goods are loaded on board the vessel at the port of shipment. The buyer is responsible for:
- Paying the agreed-upon price for the goods as stipulated in the contract of sale.
- Securing and paying for the main international carriage, including contracting the vessel and paying ocean freight charges.
- Arranging and paying for insurance for the international transit, as the risk transfers at the port of shipment.
- Assuming responsibility for all import formalities upon arrival, including obtaining licenses and paying all applicable duties, taxes, and customs fees.
- Arranging and paying for the final inland transportation to the goods’ ultimate destination.
Distinguishing FOB Origin and FOB Destination
The international FOB Incoterm often causes confusion because the term is also widely used in domestic trade, particularly within the United States, with a different meaning. In domestic commerce, the phrases “FOB Origin” and “FOB Destination” designate who pays the freight and where the title and risk transfer. These domestic terms apply to all modes of transport, not just water, and are governed by commercial law and common business practice, not the ICC’s Incoterms 2020.
FOB Origin (Shipping Point)
FOB Origin, also called FOB Shipping Point, dictates that the transfer of title, risk, and responsibility occurs immediately when the goods leave the seller’s premises or are placed with the carrier. The buyer effectively owns the goods while they are in transit and is responsible for filing any claims for damage or loss during the journey. The seller’s obligation ends once the goods are packed and made available to the buyer’s carrier.
FOB Destination (Delivered)
Conversely, FOB Destination means the seller retains all title, risk, and liability for the goods until they are safely delivered to the buyer’s specified location. The seller pays for the freight and is responsible for the shipment’s safe arrival at the agreed-upon destination. The transfer of risk and ownership only happens when the goods are physically transferred to the buyer at the final delivery point. This structure makes it a “delivered price” contract.
Strategic Implications of Choosing FOB
Choosing FOB over other Incoterms, such as Cost, Insurance, and Freight (CIF) or Ex Works (EXW), offers specific advantages, primarily for the buyer. By using FOB, the buyer gains control over the main international carriage, which is often the most significant logistical expense. This control allows the buyer to negotiate freight rates directly with shipping lines or freight forwarders, potentially securing more favorable terms and lower overall costs.
The buyer can also select a carrier that aligns with their service requirements, such as transit time or preferred routes. Managing the main carriage allows the buyer to ensure better compliance with their country’s import regulations and security filings. Contracting parties must clearly specify the Incoterms version, the named port of shipment, and the phrase “FOB” in their sales contract.