Free On Board
Definition and Explanation: "Free On Board" (FOB) is a shipping term used in international trade to indicate the point at which the ownership, costs, and risks associated with the goods being transported transfer from the seller to the buyer. It is one of the Incoterms (International Commercial Terms) established by the International Chamber of Commerce (ICC) to simplify and standardize global trade.
Purpose: The purpose of FOB is to clearly define the responsibilities of the buyer and seller regarding the transportation of goods, and to avoid misunderstandings and disputes between parties involved in the trade transaction.
Role: In an FOB agreement, the seller is responsible for delivering the goods to a designated port, loading them onto a vessel, and clearing them for export. Once the goods are on board the ship, the risk and cost transfer to the buyer, who then assumes responsibility for the shipment, including transportation, insurance, and import duties.
- Designated Port: The specific port where the seller must deliver the goods.
- Point of Transfer: The moment when ownership, risk, and costs transfer from the seller to the buyer, typically when the goods pass the ship's rail.
- Transportation and Insurance: The buyer is responsible for arranging and paying for transportation and insurance from the point of transfer onward.
Importance: FOB plays a crucial role in global trade by providing a standardized and widely understood set of rules for the transfer of goods, facilitating smoother and more efficient trade transactions between parties from different countries.
History: The concept of FOB dates back to the 18th century in British maritime law. It was later adopted and standardized by the ICC through the creation of Incoterms, with the first version published in 1936. Incoterms have been updated periodically to accommodate changes in global trade practices, with the latest version (Incoterms 2020) being in use since 2020.
- Clarity: FOB provides a clear understanding of the responsibilities and obligations of the buyer and seller.
- Risk Management: By clearly defining the point of transfer, FOB helps parties manage their risks associated with transportation and handling of goods.
- Cost Allocation: FOB enables parties to allocate costs fairly and transparently, avoiding potential disputes.
- Simplicity: FOB is easy to understand and implement in contracts.
- Universality: FOB is widely recognized and accepted in international trade.
- Flexibility: FOB can be used for various modes of transport, although it's primarily used for sea and inland waterway transport.
- Limited Scope: FOB does not cover all aspects of the shipping process, such as unloading, storage, and onward transportation.
- Inapplicability: FOB is not suitable for air, rail, or road transport, as the risk transfer point relies on the goods passing the ship's rail.
- A US-based company buys electronic components from a Chinese manufacturer. In their FOB contract, the Chinese seller is responsible for delivering the goods to the port of Shanghai and loading them onto a vessel. Once the goods are on board, the US buyer assumes responsibility for the shipment, arranging transportation and insurance to the final destination in the United States.
- An Indian textile exporter agrees to an FOB contract with a European buyer. The exporter delivers the textiles to the port of Mumbai and loads them onto a ship. After the goods cross the ship's rail, the buyer takes over responsibility for the transportation, insurance, and import duties in their destination country.