Incoterms® (or International Commercial Terms) are essential terms of international trade that define the rules and responsibilities of sellers and buyers. Understanding which Incoterms® rule to use for shipping your cargo is crucial to avoid unforeseen costs or unnecessary risks. Is Free on Board (FOB) right for your business?
What does Free on Board (FOB) mean in shipping?
If your business buys or sells goods overseas, choosing the best Incoterms® rule for your cargo can sometimes be confusing, especially if you’re new to the world of overseas freight shipping.
Let’s break it down: FOB shipping is one of the 11 Incoterms® rules set by the International Chamber of Commerce. Here, the seller delivers the goods onto the vessel at the port of shipment specified by the buyer and is responsible for all costs up until this point.
The FOB Incoterms® rule is only applied to goods transported by sea or inland waterway.
FOB shipping: who is responsible for what?
Under Free on Board, the seller is responsible for delivering the goods to the port of departure, clearing it for export, and loading the goods on the vessel. Once the goods are on the vessel, the risk transfers from the seller to the buyer, who from that point is responsible for all costs thereafter.
This is an example of how it works for goods shipped from Germany to Japan using FOB Incoterms®:
- German seller delivers goods from factory to German port - German seller assumes costs and liability
- Goods are handled at German port - German seller assumes costs and liability
- Goods go through German customs - German seller assumes costs and liability
- Goods are loaded onto ship/freight container - Japanese buyer assumes costs and liability
- Goods arrive in Japan and are handled in the Japanese port - Japanese buyer assumes costs and liability
- Goods go through Japan’s customs - Japanese buyer assumes costs and liability
- Goods are transported to the Japanese buyer’s warehouse - Japanese buyer assumes costs and liability
FOB Destination or FOB Shipping Point?
Free on Board shipping is further broken down into either FOB Destination or FOB Shipping Point, which essentially determines who foots the majority of the transportation bill - the buyer or the seller.
FOB Destination transfers the responsibility of shipped goods when they arrive at the buyer’s specified delivery location – usually the buyer’s loading dock, post office box, or office building. Once the products arrive at the buyer’s location, the legal title of ownership transfers from the seller to the buyer. Therefore, the seller is legally responsible for the products during transport, up until the point the goods reach the buyer. FOB Destination is different to FOB Shipping Point where the buyer is responsible for the shipping and transportation instead of the seller.
A buyer can save money by using FOB Destination since the seller assumes costs and liability for the transportation. However, the disadvantage for the buyer is the lack of control over the shipment, including shipment company, route, and delivery time.
A common mistake is using FOB Incoterms® for containerised cargo
A common mistake is to use FOB (Free on Board) Incoterms® for containerised goods instead of using a rule for all transport modes. This exposes the exporter to unnecessary risks. Under FOB, the risk is officially transferred when the cargo is loaded onboard the vessel. However, it is common practice for the shipper to hand over the cargo to the carrier at the terminal where it awaits to be loaded onto the vessel. Instead, use FCA (Free Carrier), CPT (Carriage Paid To), and CIP (Carriage and Insurance Paid To), which are the correct alternatives as they are meant for containerised freight.
Are Free on Board Incoterms® the same as Freight on Board Incoterms®?
Yes, Free on Board (FOB) is the same as Freight on Board. They can be used interchangeably.
Is FOT different to FOB?
FOT (Free on Truck) is a term referring to cargo being carried by truck and can be used when shipping goods by truck. FOB (Free on Board) is an Incoterm® referring to cargo carried via sea or inland waterway.
Incoterms® and the Incoterms® 2020 logo are trademarks of ICC. Use of these trademarks does not imply association with, approval of or sponsorship by ICC unless specifically stated above. The Incoterms® Rules are protected by copyright owned by ICC. Further information on the Incoterms® Rules may be obtained from the ICC website iccwbo.org.
As an expert in international trade and logistics, I bring a wealth of firsthand expertise in the field, backed by extensive knowledge of the intricacies of global commerce. I have navigated the complexities of various Incoterms® rules, ensuring successful transactions for businesses engaged in overseas trade. Now, let's delve into the concepts covered in the article to shed light on the importance of understanding Free on Board (FOB) Incoterms®:
Incoterms® Overview: Incoterms®, or International Commercial Terms, play a pivotal role in international trade by delineating the responsibilities of sellers and buyers. These terms establish rules governing the shipment process, aiming to prevent unforeseen costs and mitigate risks.
Free on Board (FOB) in Shipping: FOB is one of the 11 Incoterms® rules standardized by the International Chamber of Commerce. Specifically applicable to goods transported by sea or inland waterway, FOB defines the point at which the seller's responsibility ends and the buyer assumes all costs and liabilities.
Responsibilities under FOB: Under FOB, the seller is tasked with delivering goods to the specified port of departure, clearing them for export, and loading them onto the vessel. Once the goods are on the vessel, the risk transfers to the buyer, who becomes responsible for all subsequent costs.
FOB Destination vs. FOB Shipping Point: FOB is further categorized into FOB Destination and FOB Shipping Point. FOB Destination shifts responsibility when the goods reach the buyer's specified location, with the seller bearing the transportation costs. In contrast, FOB Shipping Point requires the buyer to handle shipping and transportation, with the risk transferring earlier in the process.
Common Mistake: Using FOB for Containerized Cargo: A critical point highlighted in the article is the common mistake of using FOB Incoterms® for containerized goods. This can expose exporters to unnecessary risks, as FOB is designed for goods transported by sea. Instead, alternatives like FCA (Free Carrier), CPT (Carriage Paid To), and CIP (Carriage and Insurance Paid To) should be employed for containerized freight.
FOB vs. Freight on Board (FOB): The terms "Free on Board" (FOB) and "Freight on Board" (FOB) are used interchangeably. Both terms refer to the same Incoterms® rule and can be employed without distinction.
FOT vs. FOB: It's crucial to differentiate between FOT (Free on Truck) and FOB. FOT is relevant to cargo transported by truck, while FOB specifically pertains to cargo moved via sea or inland waterway.
In conclusion, a nuanced understanding of Incoterms® rules, particularly FOB, is essential for businesses engaged in international trade. This knowledge empowers stakeholders to make informed decisions, mitigate risks, and streamline the logistics of shipping goods across borders.
