Incoterm FOB: Definition
The FOB incoterm, or “Free On Board,” applies to transactions where the seller bears the costs and risks related to the goods until they are loaded onto the designated vessel. After that point, the buyer assumes all subsequent expenses and risks, including maritime transportation, insurance, and final delivery in the destination country.
Difference Between the FOB and CIF Incoterms
The CIF incoterm (“Cost, Insurance, and Freight”) differs from FOB by assigning the responsibilities and costs in exactly the opposite way. Under CIF, the seller covers all expenses until the goods arrive at the port of destination. The CIF incoterm is more common than FOB and generally more favorable to the buyer.
Incoterm FOB: Obligations for the Seller and the Buyer
An FOB incoterm contract sets forth specific obligations for both the seller and the buyer in an international transaction. These rules outline the steps each party must take, as detailed below.
Seller’s Obligations
- The seller delivers the goods to the agreed port of loading within the specified timeframe and according to the conditions outlined in the sales contract.
- The seller completes export customs formalities. They are responsible for all procedures required for the goods to legally leave the country of origin.
- The seller loads the goods onto the vessel designated by the buyer, ensuring they are properly packaged and ready for transport.
- The seller assumes all risks until the goods are loaded onto the ship.
Buyer’s Obligations
- The buyer selects and books the vessel for maritime transport and provides all necessary details to the seller (name of the ship, loading port, and loading date).
- The buyer pays for maritime transport costs, import and clearance fees, insurance, and any additional on-board expenses.
- The buyer assumes all risks (loss, damage) from the moment the goods are loaded onto the ship.
The buyer must retrieve the goods at the port of destination.
Why Choose the FOB Incoterm?
FOB clauses are recommended when the buyer wants to minimize logistics costs. Since the buyer handles the onward journey, they have greater flexibility regarding the transaction, particularly in choosing the carrier. This solution generally involves fewer incidental costs than other incoterms. However, it also requires administrative and logistical procedures that demand a certain level of experience and knowledge.
Incoterm FOB: Potential Pitfalls
All incoterms come with challenges. For FOB, these mainly involve stowage charges and demurrage fees. Stowage costs, for securing cargo on board, are typically the seller’s responsibility. However, it is advisable to clarify this aspect in the contract to prevent future disputes. Additional costs may also arise during unloading at the port if there are delays. These are known as demurrage fees.
To avoid delays or difficulties, it’s also important to consider potential documentation errors and communication issues with the seller.
The Different Categories of FOB
The FOB incoterm comes in several variations adapted to specific situations. There are four categories of FOB: point of origin, border, point of sale, and delivered duty paid (destination cleared).
FOB/Point of Origin
In this variation, the seller is responsible for the goods until they are handed over to the carrier at the point of origin. This point of origin is usually the seller’s production site or warehouse. From the moment the carrier takes over, the buyer assumes responsibility.
FOB/Border
FOB/Border means the seller’s responsibility ends at the country of origin’s border. The buyer then takes over all costs and risks. This category is often used in land-based trade involving multiple border crossings.
FOB/Point of Sale
Here, the transfer of risks and costs occurs at a point of sale (store, warehouse). The seller delivers the goods to this point, and the buyer then assumes all subsequent costs.
FOB/Destination Cleared
In this last variation of the FOB incoterm, the seller is responsible for delivering the goods to their final destination and handles import customs clearance. This option is generally chosen when the seller has better knowledge of the destination country’s customs and administrative procedures.
In conclusion, the FOB incoterm offers buyers valuable flexibility by allowing them to choose their own carrier and reduce logistics costs. However, it also places the risk on the buyer once the goods are loaded, and it requires careful management of administrative procedures. Clearly defining each party’s responsibilities in the contract is crucial for avoiding misunderstandings, especially concerning stowage or demurrage fees. Despite these challenges, FOB remains a popular choice for international maritime transactions.
