|FOB In Detail
FOB is an initialism which pertains to the shipping of goods. Depending on specific usage, it may stand for Free On Board or Freight On Board. FOB specifies which party (buyer or seller) pays for which shipment and loading costs, and/or where responsibility for the goods is transferred. The last distinction is important for determining liability for goods lost or damaged in transit from the seller to the buyer.
Precise meaning and usage of "FOB" can vary significantly. International shipments typically use "FOB" as defined by the Incoterm standards, where it always stands for "Free On Board". Domestic shipments within the US or Canada often use a different meaning, specific to North America, which is inconsistent with the Incoterm standards.
North American FOB usage corresponds to Incoterms approximately as follows:
FOB shipping point or FOB shipping point, freight collect
FCA shipping point
FOB shipping point, freight prepaid
FOB destination or FOB destination, freight prepaid
FOB destination, freight collect
No Incoterm equivalent
International Commercial terms
This rule is to be used only for sea or inland waterway transport.
"Free on Board" means that the seller delivers the goods on board of the vessel, nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer pays all costs from that moment onwards.
The seller is required either to deliver the goods on board the vessel or to procure goods already so delivered for shipment. The reference to "procure" here caters for multiple sales down a chain ('string sales'), particularly common in the commodity trades. FOB may not be appropriate where goods are handed over to the carrier before they are on board the vessel, for example goods in containers, which are typically delivered at a terminal. In such situations, the FCA rule should be used.
FOB requires the seller to clear the goods for export, where applicable. However, the seller has no obligation to clear the goods for import, pay any import duty or carry out any import customs formalities.
Due to potential confusion with domestic North American usage of "FOB", it is recommended that the use of Incoterms be explicitly specified, along with the edition of the standard. For example, "FOB New York (Incoterms 2010)". Incoterms apply primarily to international trade, but can be used in domestic trade within a given country.
This use of "FOB" originated in the days of sailing ships. When the ICC first wrote their guidelines for the use of the term in 1936, the ship's rail was often still relevant, as goods were often passed over the rail by hand. In the modern era of containerization, the term "ship's rail" is somewhat archaic for trade purposes. The standards have noted this. Incoterms 1990 stated, "When the ship's rail serves no practical purpose, such as in the case of roll-on/roll-off or container traffic, the FCA term is more appropriate to use." Incoterms 2000 adopted the wording, "If the parties do not intend to deliver the goods across the ship's rail, the FCA term should be used." However in the most recent Incoterms 2010 ship's rail has been replace with the board of the ship. So the risk passes when the goods are actually on board of the vessel.
FAQ on INCO-Terms
Why Incoterms rules?
Incoterms rules are international rules that are accepted by governments, legal authorities and practitioners worldwide for the interpretation of the most commonly used terms in international trade. They either reduce or remove altogether uncertainties arising from differing interpretations of such terms in different countries.
What do they cover
Incoterms rules describe mainly the tasks, costs and risks involved in the delivery of goods – excluding intangibles -- from sellers to buyers.
What are the 13 Incoterms rules?
Each Incoterms rule is referred to by a three-letter abbreviation.
What does it take to use Incoterms rules correctly?
ICC recommends that "Incoterms 2000" be referred to specifically whenever the terms are used, together with a location. For example, the term "Free Carrier (FCA)" should always be accompanied by a reference to an exact place to which delivery is to be made. To prevent misunderstandings, parties need to make the intended effect of any variants of the three-letter Incoterms rules extremely clear in their contract.
Here are three examples of correct use of Incoterms rules:
FCA Kuala Lumpur Incoterms 2000
FOB Liverpool Incoterms 2000
DDP Frankfurt Schmidt GmbH Warehouse 4 Incoterms 2000
Why do Incoterms rules need revising periodically?
The main reason is the need to adapt Incoterms rules to contemporary commercial practice. For instance, in the 1990 version, the clauses dealing with the seller's obligation to provide proof of delivery allowed paper documentation to be replaced by e-mail for that purpose for the first time.
Can you name some main innovations in Incoterms 2000?
They take account of international traders' growing reliance on intermodal transport. Increased use of FCA (Free Carrier) prompted ICC to simplify delivery obligations under this term. A further advantage of the new Incoterms rules is that they clearly allocate the loading and unloading requirements of both buyer and seller.
Two other changes are worth mentioning:
Under FAS (FREE ALONGSIDE SHIP) the seller is required to clear the goods for export. This is a reversal from previous versions of Incoterms rules, which required the buyer to arrange for export clearance.
Under DEQ (DELIVERED EX QUAY) the buyer is required to clear the goods for import and to pay for all formalities, duties, taxes and other charges upon import. This is a reversal from previous versions of Incoterms rules, which required the seller to arrange for import clearance.
I keep reading about "E"-terms and "C"-terms. What does that mean?
Incoterms 2000, like its immediate predecessor, groups the terms in four categories denoted by the first letter in the three-letter abbreviation.
Under the "E"-term (EXW), the seller only makes the goods available to the buyer at the seller's own premises. It is the only one of that category.
Under the "F"-terms (FCA, FAS and FOB), the seller is called upon to deliver the goods to a carrier appointed by the buyer.
Under the "C"-terms (CFR, CIF, CPT and CIP), the seller has to contract for carriage, but without assuming the risk of loss or damage to the goods or additional costs due to events occurring after shipment or dispatch.
Under the "D"-terms (DAF, DES, DEQ, DDU and DDP), the seller has to bear all costs and risks needed to bring the goods to the place of destination.
All terms list the Seller's and the Buyer's obligations. The respective obligations of both parties have been grouped under up to 10 headings where each heading on the seller's side "mirrors" the equivalent position of the buyer. Examples are: Delivery, Transfer of risks, Division of costs.
This layout helps the user to compare the parties' respective obligations under each Incoterm rule.