Incoterms Explained: Free on Board (FOB)
When goods are bought or sold “Free on Board” (FOB) it means that the seller delivers the goods to a ship at a port previously agreed to by the seller and the buyer. The seller loads the goods onto the ship. The buyer then takes care of the import formalities and transportation to the final destination. Free on Board is one of the oldest Incoterms. It dates back to when goods were carried by sailing ships and it was one of the terms when the Incoterms were first released in 1936. It is also one of the most used commercial terms.
Risks and Costs for the Seller
The seller is responsible for arranging and paying for transportation to the ship and is also responsible for loading the goods onto the ship. The risk used to transfer to the buyer when the goods go over the rail of the ship. This was confusing as the risk would transfer when the goods were midair, while the seller was responsible for loading them onto the ship. Since Incoterms 2010 the rail of the ship is no longer mentioned. The risk transfers when the goods are delivered, in other words, placed on the ship.
Risks and Costs for the Buyer
The buyer is responsible for transporting the goods to the final destination. The buyer is also responsible for arranging and paying for any import documents and taxes. The seller is obligated to hand over any documents or information needed to enable the successful import, at the cost of the buyer. Import duties and taxes also need to be paid by the buyer. Buyer is responsible for insuring the transport of the goods to the final destination.
Potential Issues for the Seller
Risk is transferred to the Buyer once the goods are loaded onto the ship. This means that until that time Seller is responsible for any damage or loss.
Potential Issues for the Buyer
As the seller is arranging transportation to and loading on the ship, he will charge these costs to the buyer. If he can charge all costs to the buyer, he may have little incentive to keep transportation costs low. This means a relatively higher end-cost for the buyer, compared to when the buyer arranges transportation of the shipment.
Use of Delivery at Place
FOB is used for transport via water.
FOB Under Incoterms 2020
The new Incoterms 2020, which were launched earlier this year by the ICC have been in effect since January 1 2020. Many buyers that were first using FOB are now using FCA, as under Incoterms 2020 it is now possible to ship goods with a Bill of Lading with an on-board notation. The Incoterms 2010, which you can find in our earlier post here, will still be valid. As long as both parties agree to the terms, they are. There are no changes to Free on Board under the Incoterms 2020.