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What is FOB shipping? It's when the seller's responsibility ends as goods are loaded on the ship. How does it differ? From EXW, the buyer's control starts earlier. Unlike FCA for all modes, FOB is for sea freight. When to use it? When you have a favored ocean shipper and can manage post-shipment tasks.
International trade is a complex web of transactions. Despite the diversity of national laws, there are globally recognized standards for freight. For instance, the International Commercial Term (Incoterm) is a prime example of such standardization.
| Incoterms | Seller's Trans. Task | Buyer's Trans. Task | Seller's Main Responsibilities | Buyer's Main Responsibilities |
| EXW | None | Arrange from seller's place | Make goods available | All costs & risks after pickup |
| FCA | To carrier/nominated person | After handover | Deliver to carrier, export clear | Costs & risks after handover, import clear |
| CPT | To named dest. | At dest. | Pay for carriage, export clear | Risk after carrier, import clear |
| CIP | To named dest. (with insurance) | At dest. | Pay for carriage & insurance, export clear | Risk after carrier, import clear |
| DAP | To named dest. | After arrival | Deliver ready for unloading, export clear | Unload, import clear |
| DPU | To named dest. & unload | After unloading | Transport & unload, export clear | Import clear |
| DDP | To buyer's dest. (all duties paid) | None | Full delivery with duties paid | Take possession |
| FAS | To ship's side at port | After alongside ship | Goods alongside ship, export clear | Load ship, transport, import clear |
| FOB | Load on ship at port | After on board | Load on ship, export clear | Transport from port, import clear |
| CIF | To dest. port (with insurance) | At dest. port | Pay for goods, freight & insurance, export clear | Unload, inland trans., import clear |
| CFR | To dest. port | At dest. port | Pay for goods & freight, export clear | Insurance, unload, inland trans., import clear |
In the realm of international freight, there are 11 distinct incoterms in use.
Among them, Free on Board (FOB) takes the spotlight. It's the one you'll come across most often.
This guide is here to simplify things. We'll cut through the complex legal language.
The "free" in FOB means the supplier must get the goods to a set place and then pass them to the carrier. After that, the supplier finishes its main job.
"On board" means the goods are on the ship.
In FOB terms, the supplier controls the goods until loading them onto the ship. After that, the buyer takes over responsibility.
Let's say you buy from a Chinese supplier with FOB terms. Here's what happens:
The supplier packs your goods and puts them on a truck at its warehouse. This is on the supplier.
The truck drives the goods to the port. The supplier pays for this.
They load the goods onto the ship.
Once the goods are on the ship, you, the buyer, assume all responsibility. Any problems or extra costs during the trip are your responsibility.
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In the context of FOB shipping, the qualifiers of shipping point and destination play a significant role in defining the extent of the supplier's responsibility.
With FOB shipping point, ownership passes to the buyer when goods leave the supplier. Legal title then shifts from the supplier to the buyer. If transport issues arise, the buyer is responsible.This is their responsibility from that point until the goods reach them. This could include damage during transit, delays, or loss of goods.
With FOB destination, ownership transfers at the buyer's loading dock. The buyer gets the goods only after successful delivery to the specified destination. If issues arise during the journey to the buyer, the supplier is liable for any damage in transit. They must take appropriate action. This could mean replacing the damaged goods or compensating the buyer for any losses.
With FOB shipping point terms, the supplier's responsibility ends when the goods are shipped. After that, the buyer covers all freight costs to the final destination.
Let's consider an example to better understand this. Suppose Claire's Comb Company in the US decides to buy a container of The Wonder Comb from a supplier in China. They enter into an FOB shipping point agreement. Once the carrier in China receives the container, the supplier's responsibility is complete.
In international trade, four ocean freight terms reign supreme: FOB, FAS, CFR, and CIF.
Free Alongside Ship (FAS) is a simple ocean freight option. The supplier covers transport to the shipment port. However, they aren't responsible for loading the goods onto the ship.
Once the shipment is beside the shipping vessel, the buyer is now responsible. From that moment, the buyer must manage the next steps of the shipping process. This includes loading the goods onto the ship. It also includes handling any issues or costs that may arise.
Cost and Freight (CFR) is a trade term. It makes the supplier responsible for getting goods to the destination port. The supplier also covers the freight and export fees.
Transfer of Responsibility
Once the team unloads the goods at the destination port, the buyer owns the shipment. From now on, the buyer must handle all actions related to the goods.
What CFR Does Not Include
CFR does not cover insurance for goods in transit, delivery costs, or customs duties. The buyer must arrange and pay for these. The supplier does not cover these costs.
Cost, Insurance, Freight (CIF) is a trade term. It means the supplier covers transportation, insurance, and freight. The supplier also manages the shipment to the port and its loading onto the ship. Additionally, they must obtain insurance for the goods during transit.
The buyer still has some financial obligations. The buyer still has to pay for more fees such as those related to customs clearance. These costs are separate from what the supplier covers under the CIF agreement.
The delivery point of the goods can vary. It depends on the deal between the buyer and supplier. Delivery can be to the destination port or the final address.
In comparison to FOB (Free on Board), CIF is generally a more costly contract option for the supplier. It requires more effort and expense to manage the insurance and shipment. This may raise the buyer's price. But, it offers a more complete service package.
