Introduction
International trade is an increasingly complex field, with new rules and regulations constantly emerging. To bridge the gap between one country and another or between one company and another in the international trade arena, certain trade terms are used as a means of communication. Three of the most commonly used trade terms are “FOB,” “FOB delivery location” and “Free on Board.”
Free On Board (FOB)
The term “FOB” stands for “Free on Board.” This refers to an agreement between the seller and buyer of goods where the seller will be responsible for the goods being loaded onto a shipping vessel and the buyer is responsible for the goods being received at the shipping vessel’s designated port of arrival. Under the terms of the FOB contract, the buyer takes on the cost and risk of goods transported overland until they are loaded on the vessel and the responsibility for the goods passing Customs at their port of arrival falls onto the buyer.
By ensuring its goods are shipped out FOB, the seller provides evidence that goods were delivered in good condition and the buyer can track their arrival and the condition under which the goods arrived. By pricing goods FOB, the seller is indicating they are responsible for all expenses up until the goods are loaded onto the vessel and the buyer is responsible for getting the goods from that point onward.
FOB Delivery Location
The FOB delivery location defines the place of delivery of goods, and the exact place where title and risk of loss (or any other damage to the goods) of the goods in transit shall pass. Hence, it is important to specify the port or shipping docks where goods are to be delivered by the seller. The FOB delivery location is usually a port, as vessels usually carry goods from one port to another.
If the FOB contract is between the shipper and the buyer, then the expenses related to the voyage, such as loading, demurrage, seaworthiness, insurance, etc., are the shipper’s responsibility. Similarly, the responsibility (both legal and economic) of the relationship between the buyer and the vessel transfers to the buyer at the FOB delivery location. Therefore, there must be a clear understanding about the FOB delivery location between the buyer and the seller.
Free On Board
Free on board (FOB) is a commercial term that almost every company involved in international trade should be aware of. The term FOB often appears on international transport documents, for example the commercial invoice.
In simple terms, free on board means the buyer of the goods pays for the transportation of the goods from the point of production to the port of export, at which point the buyer takes ownership and becomes liable for the goods. FOB is similar to the term “ duty unpaid” or “ duty unpaid - FOB export” in the sense that the buyer is responsible for the costs associated with importing and clearing goods at the destination port.
Conclusion
The three main trade terms involved in international trade, FOB, FOB delivery location, and Free on Board are very important and must be understood clearly when engaging in international trade. FOB means that the seller is responsible for the cost and risk of goods until they are loaded on the vessel, while the FOB delivery location defines the exact place where title and risk of loss or damage to the goods shall pass. Finally, Free on Board means that the buyer is responsible for the costs associated with importing and clearing goods at the destination port.
