FOB (Free on Board)

Incoterms, also known as international commercial terms, are set to eliminate or decrease confusions and conflicts between buyers and sellers in international trade and to facilitate the trade and commerce process globally. Incoterms were created by the International Chamber of Commerce (ICC) in 1936 and since then, they are updated on a regular basis to suit changing trade trends.
EXWFCACPTCIPDAPDPUDDPFASFOBCFRCIF
Free CarrierCarriage Paid ToCarriage Insurance Paid ToDelivered at PlaceDelivered at Place UnloadedDelivered Duty PaidFree Alongside ShipFree On BoardCost & FreightCost, Insurance & Freight
Charges/FeesEx Works
At a named place, the seller transfers the goods to the buyer; the buyer is responsible for all risks.1.) when seller loads goods to buyer’s carrier or 2.) when goods are at the buyer’s disposal & ready for unloading at a named placedwhen the goods are handed over to the seller’s nominated carrier at a named placewhen the goods are handed over to the seller’s nominated carrier at a named placewhen the goods are placed at the buyer’s disposal at a named place or agreed point within that placewhen the goods are delivered and unloaded at a named place or agreed point within that placewhen the goods are placed at the buyer’s disposal at a named place or agreed point within that placewhen goods are alongside the vessel nominated by the buyer at named portwhen goods are on board the vessel nominated by the buyer at named portwhen the goods are on board the vessel nominated by the seller at originwhen the goods are on board the vessel nominated by the seller at origin
Risks Transfer
Commercial InvoiceSellerSellerSellerSellerSellerSellerSellerSellerSellerSellerSeller
Packaging & QCSellerSellerSellerSellerSellerSellerSellerSellerSellerSellerSeller
Loading & DeliveryBuyerSellerSellerSellerSellerSellerSellerSellerSellerSellerSeller
Export Duty & TaxesBuyerSellerSellerSellerSellerSellerSellerSellerSellerSellerSeller
Origin Terminal HandlingBuyerBuyerSellerSellerSellerSellerSellerBuyerSellerSellerSeller
Cargo InsuranceNegotiableNegotiableNegotiableSellerNegotiableNegotiableNegotiableNegotiableNegotiableNegotiableSeller
Carriage ChargesBuyerBuyerSellerSellerSellerSellerSellerBuyerBuyerSellerSeller
Destination Terminal HandlingBuyerBuyerSellerSellerSellerSellerSellerBuyerBuyerBuyerBuyer
Delivery to DestinationBuyerBuyerSellerSellerSellerSellerSellerBuyerBuyerBuyerBuyer
Unloading at DestinationBuyerBuyerBuyerBuyerBuyerSellerBuyerBuyerBuyerBuyerBuyer
Import Duty & TaxesBuyerBuyerBuyerBuyerBuyerBuyerSellerBuyerBuyerBuyerBuyer
Incoterms 2020
FOB

The term “free on board” or “freight on board” is an international commerce term (Incoterm) that means “free on board” or “freight on board.” FOB helps identify when the seller’s obligation, risks, costs, and ownership of the products pass to the buyer. It establishes two crucial aspects: 1) where the title to commodities passes physically, and 2) who is responsible for transportation charges and duties.

What is the significance of all this? The FOB establishes the point at which responsibility is transferred. What happens if your goods are damaged during the shipping process? Who is in charge of processing insurance and claims? Who owns the products while they’re being investigated by customs? Any legal or communicative problems about possession and liability are resolved by the agreed-upon FOB.

4 Different Variations of FOB Terms

  • FOB Origin, Freight Collect
  • FOB Origin, Freight Prepaid
  • FOB Destination, Freight Collect
  • FOB Destination, Freight Prepaid

The first part of each term decides whether the buyer takes control of the items’ title and risk at the point of origin or at the point of destination.

FOB Origin:

The most common way of shipping is FOB Origin, in which the buyer acquires ownership of the goods when the freight carrier picks up and signs for the package. This means that the buyer is accountable for the products during their journey.

FOB Destination:

The seller maintains ownership of the goods until they are delivered to the buyer’s port in the event of FOB Destination.

The second part of each term specifies who will be responsible for the costs and fees associated with the shipping of the goods. Prepaid refers to when the seller has covered the costs; Collect refers to when the buyer is responsible for all freight costs. This will frequently decide who is responsible for risk and insurance. The most typical method is Freight Collect, in which the buyer is responsible for all freight expenses and takes all shipping risks.

However, FOB Origin, Freight Collect is the most popular FOB term. When the seller places the items on the freight carrier, the buyer instantly takes ownership and obligation. In fact, the seller can label the products as “complete” in their books and leave the remaining to the buyer. The buyer then pays for shipping, insurance, customs duties, and other expenses. All potential damages are the buyer’s responsibility.

Seller’s Responsibility Under FOB

  • Delivery of goods and documents
  • Packaging
  • Transportation of the goods in the country of origin
  • Customs handling fees in the origin country
  • Charges and expenses in the origin country

Buyer’s Responsibility Under FOB

  • Goods, Duties, and Taxes payment
  • Shipping
  • Charges and expenses in the destination country
  • Customs handling fees in the destination country
  • Transportation of the goods in the destination country

Cargo Insurance in FOB

The FOB Incoterm does not involve insurance. Obtaining insurance, on the other hand, is frequently done. To cover the full ocean freight journey, the buyer, seller, or both can provide the cargo with insurance.

 

To prevent problems, make sure your cargo insurance conditions are fully stated and detailed in your sales contract.

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