Free on Board (FOB)
Definition
Free on Board (FOB) is a shipping term used in international trade. It specifies the point at which responsibility, ownership, and risk for goods being shipped transitions from the seller to the buyer. The term is commonly used within Incoterms, the standardized set of international rules by the International Chamber of Commerce (ICC) that clearly communicate the tasks, costs, and risks associated with the transportation and delivery of goods.
Examples
Example 1: FOB Origin
A U.S. electronics retailer in Chicago orders a shipment of gadgets from a manufacturer in Shenzhen, China. If the contract stipulates “FOB Shenzhen,” the manufacturer’s responsibility ends when the goods are loaded onto the shipping vessel in Shenzhen. From that point on, the retailer assumes all risks, costs, and freight handling.
Example 2: FOB Destination
A clothing store in the U.K. orders merchandise from a supplier in India. If the terms are “FOB London,” the supplier retains responsibility until the goods arrive at the port in London. The supplier covers all costs and risks up to the point of delivery, after which the clothing store assumes control.
Frequently Asked Questions (FAQs)
Question: What is the main difference between FOB Origin and FOB Destination?
Answer: FOB Origin means the buyer takes on responsibility for the goods once they leave the seller’s premises. FOB Destination means the seller retains responsibility until the goods reach the buyer’s delivery location.
Question: Who pays for shipping under FOB terms?
Answer: It depends on whether the term is set as FOB Origin or FOB Destination. In FOB Origin, the buyer pays for shipping. In FOB Destination, the seller includes shipping costs until the goods reach the destination.
Question: How does FOB affect who files for insurance claims?
Answer: Under FOB Origin, the buyer is responsible for filing insurance claims after the goods leave the seller. Under FOB Destination, the seller must file for any insurance claims until the goods are delivered to the destination.
Question: Is FOB applicable to all modes of transport?
Answer: FOB is typically used for sea and inland waterway transport. Different Incoterms like CIF (Cost, Insurance, and Freight) or CIP (Carriage and Insurance Paid to) are used for air and other transport modes.
Question: How are delivery disputes resolved with FOB agreements?
Answer: Delivery disputes are resolved based on where the risk passed from seller to buyer. Detailed documentation and a clear understanding of where control transfers help resolve such disputes.
Related Terms
Incoterms
Definition: A series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) that are used for international trade transactions.
Cost, Insurance, and Freight (CIF)
Definition: A term similar to FOB but indicates the seller must cover the cost, insurance, and freight to bring goods to the port of destination.
Carriage and Insurance Paid to (CIP)
Definition: An Incoterm where the seller pays for the carriage and insurance up to a named place/destination.
Online References
Suggested Books for Further Studies
- “Incoterms 2020 by the International Chamber of Commerce (ICC)” - ICC, Latest Edition.
- “International Trade and Customs Law” by Petros C. Mavroidis.
- “Global Supply Chain and Logistics Management” by John Mangan and Chandra Lalwani.
Fundamentals of Free on Board (FOB): International Trade Basics Quiz
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