Understanding Incoterms: Free on Board (FOB)

Here we’re reviewing the Incoterm “Free on Board,” abbreviated as FOB.

What is the Incoterm “Free on Board” (FOB)?

Free on Board (FOB) is an Incoterm which dictates the shared responsibility between buyer and seller. A standard FOB arrangement states that the responsibility for the goods remains with the seller as far as the port selected for shipping. At this point, full responsibility (and ownership) passes to the buyer and the seller records it as a completed transaction. After the goods leave the port, the buyer is responsible for the documentation necessary to complete a safe journey. This includes all customs documents, certificates of conformity (COC), and insurance coverage. If anything happens to the goods after the ship has left port, the responsibility stands with the buyer.

Seller’s responsibility

While not on the scale of an Ex Works agreement, the FOB shipping arrangement still puts the majority of the responsibility on the buyer. It is the seller’s job to make sure that the goods are packaged appropriately and correctly labeled. Once this task is finished, it’s then the job of the seller to make sure that the goods are transported safely to the port and loaded on the correct ship ready for transportation abroad. Once these tasks are completed, the job of the seller is over, although he/she can offer advice and help to the buyer (with shipping and freight companies or insurance, for example). Regardless of any advice offered, once the ship is loaded, the responsibility of the seller ends.

Buyer’s responsibility

After the goods are loaded onto the ship, the whole responsibility of the transit and freight belongs to the buyer. If the goods are damaged, it is the responsibility of the buyer to make sure that they are adequately insured and to make the appropriate claim as the buyer has a title (ownership) to the goods during this period. It is also the responsibility of the buyer to make sure that the correct customs clearance documents are attached to the goods. In some cases, a correct certificate of conformity for the goods is needed. The documents required differ from country to country, so due diligence and research are needed to prevent complications.

Seller’s benefits

The benefit to the seller of the FOB arrangement is that after successfully packaging, labeling, and transporting the goods to the port terminal, the balance of responsibility changes to the buyer completely. Now that the seller’s job has been completed, he/she can help the buyer with expertise and information, but such actions are not obligatory.

Buyer’s benefits

The main benefit to the buyer is that he/she does not have to arrange any packaging, labeling, or freight to port. This is a particular advantage because it saves the buyer from having to travel, or employ an agent, in a foreign country to complete these tasks. FOB arrangements also allow the buyer to control the shipment of the goods and the safe passage into home territory.

Buyer’s difficulties

As has been written above, under a FOB agreement the majority of the responsibility falls to the buyer. It is the job of the buyer, especially the unexperienced buyer, to make sure that the right documents are in place in order for them to receive the goods at their home port. It is also the responsibility of the buyer to make sure that any insurance chosen covers the goods appropriately if they are damaged. It is also the job of the buyer to clear the goods at port (making sure they have the appropriate paperwork) and to organize freight to their warehouse. There are thousands of cases every year where goods cannot get through customs because of incorrect paperwork or certificates of conformity. This is normally due to inexperienced buyers using the FOB system and buyers that haven’t properly researched what is needed to successfully import goods with FOB.

FOB compared to other shipping methods

FOB is quite similar to an Ex Works shipping agreement in that the majority of the responsibility falls to the buyer. The difference is that with EX Works, the buyer’s responsibility starts at the seller’s door when the goods are loaded on the truck. With FOB, the buyer’s responsibility begins when the goods are loaded at the port terminal.

A Free Carrier Agreement (FCA) is almost completely opposite to FOB. In an FCA shipping arrangement, the seller is totally responsible for delivering the goods from the place of origin to the final customer. The seller will now take all the responsibility and risk for the safety of the goods as well as organizing all the paperwork needed to make the delivery.

Conclusion

A FOB shipping arrangement is probably the most popular agreement, especially if shipping from China. As a partnership, it often makes the most sense to the parties involved to have the seller be responsible for the goods when they are on his/her home soil, and then the buyer takes over for the overseas transit. FOB can be useful or even necessary when dealing with goods from countries that have complicated bureaucratic systems for releasing goods for export, as it leaves the responsibility with the experienced seller who is, in most cases, a person from that country with extensive experience with the documents needed. Many buyers prefer this method in order to deal with the necessary documents to clear the goods at his/her own port, as it’s much easier to troubleshoot any problems locally.