Free On Board – Meaning, Qualifiers, Obligations, and Benefits

Free On Board or FOB is a type of shipping contract and is one of the most popular Incoterms. Simply put, under this arrangement, the seller has to deliver the goods’ free’ ‘on board.’ This means, in this shipping contract, the seller is responsible for delivering as well as loading the cargo onto the ship at the agreed departure port. Moreover, the seller is also responsible for clearing the cargo for export. And of course, the entire costs up till loading the cargo on the ship need to be borne by the seller. 

The responsibility, both in terms of cost and risk, passes to the buyer after the seller loads the cargo onto the ship at the set port.

In simple words, we can say that the seller is responsible for transporting the goods to the port and loading the goods. Also, the seller bears all the costs until the loading of the cargo onto the vessel. On the other hand, the buyer has to bear the ocean freight and insurance charges. Also, the buyer has to pay for unloading the cargo at the destination and transporting the cargo to the final destination.

Free On Board Qualifiers

Sometimes the parties can use two types of qualifiers to lower or raise the responsibilities of the seller in case of a FOB contract. These two qualifiers are – shipping point (or origin) and destination.

In the case of FOB shipping point or origin, the ownership transfers from buyer to seller once cargo leaves the seller’s shipping point. So, the seller’s responsibility ends once they ship the cargo.

And, in the case of FOB destination, an ownership transfer from the seller to the buyer happens at the buyer’s destination. Or, the transit risk remains with the seller until the cargo reaches the buyer.

Additionally, FOB destination may also accompany words – freight collect or freight prepaid. In ‘FOB destination, freight collect,’ the seller is responsible until the delivery of cargo to the buyer. But freight cost has to be paid by the buyer. In the case of ‘FOB destination, freight prepaid,’ the seller also has to pay the freight cost.

Free On Board – When to Use?

Buyers and sellers can only use FOB in the case of ocean or inland waterway transport. The parties can not use this term if the main carriage is through air, ground, or rail. The seller generally goes for this type of agreement if they have direct access to the ship.

Also Read: FOB Meaning

Moreover, parties commonly use FOB in the case of bulk and non-containerized cargo. In the case of containerized cargo, the parties should go for the FCA contract. There is another Incoterm that is similar to FOB, and it is FAS (Free Alongside Ship). In FAS, the seller is responsible for delivering the cargo at the agreed port of shipment (not loading the cargo onto the vessel). So FOB gives one more responsibility to the seller as compared to FAS, get loaded the cargo on the ship.

FOB Incoterm is from the ICC (International Chamber of Commerce). This ensures standard terms and conditions for every FOB contract. However, the companies shipping to the United States need to follow the UCC (Uniform Commercial Code). This results in more than one set of rules for FOB. Thus, it is possible that FOB rules may differ from nation to nation. So, it is important for parties to take into account all the rules when undertaking a FOB contract to ensure a smooth shipment.

Buyer and Seller Obligations

These are the responsibilities of a seller in a Free On Board contract:

  • Preparing the goods, as well as keeping invoices and documents ready.
  • Packing and marking the cargo properly.
  • Obtaining export licenses, as well as clearing customs formalities.
  • Making proper arrangements for pre-carriage, as well as for delivery.
  • Bearing the loading charges and transportation charges for moving the goods from the warehouse to the port.
  • Delivering the goods onboard on the named ship at the named port of departure and paying the loading charges.
  • Getting the delivery proof and paying for pre-shipment inspection (if any).

These are the responsibilities of a buyer in a Free On Board contract:

  • Paying for the goods as per the sales agreement.
  • Making arrangements for the main carriage, as well as for the discharge and onward carriage.
  • Clearing import formalities, as well as paying relevant duties.
  • Paying for the pre-shipment inspection at the time of import clearance.
  • Arranging, as well as paying for insurance.

Free On Board – Advantages and Disadvantages

FOB is popular amongst both – buyers and sellers. This is because it gives both parties control over the cargo as long as it is in their territory. However, in such an arrangement, buyers generally get more control over the logistics and shipping costs. And this helps them to save on costs, as well as choose the shipping method that they are comfortable with.

Moreover, FOB also lowers the buyer’s dependence on the supplier as the former is free to select their freight forwarder to facilitate the shipment. It also ensures that the buyer has one point of contact (freight forwarder) to manage the whole transportation process. This reduces the chances of delay and miscommunications, as well as gives better control to the buyer.

Additionally, the FOB agreement could prove cost-effective for the buyer as well. Since the buyer is responsible for the most part of the transportation, it is in their interest to select the shipping method that is economical as well as reliable.  

For sellers also, FOB is beneficial as their responsibility (both in terms of risk and cost) ends once they load the cargo onto the vessel.

Talking of drawbacks, there are not any major ones for both buyers and sellers. However, if a buyer is new or so far has only relied on sellers for the delivery, the use of FOB may complicate things a bit. This is because buyers now have to perform additional functions to get the delivery of cargo to the final destination as well as insurance. However, buyers can easily overcome this issue by selecting a reliable freight forwarder.

Final Words

Free On Board or FOB is surely one of the most popular Incoterms in international trade. It more or less puts both the parties in an equal position with regard to the movement of goods in their countries. However, this contract could be confusing at times because of the use of qualifiers. Thus, it is very important that buyers and sellers clear all the terms and conditions before entering into the agreement.

Sanjay Borad

Sanjay Bulaki Borad

MBA-Finance, CMA, CS, Insolvency Professional, B'Com

Sanjay Borad, Founder of eFinanceManagement, is a Management Consultant with 7 years of MNC experience and 11 years in Consultancy. He caters to clients with turnovers from 200 Million to 12,000 Million, including listed entities, and has vast industry experience in over 20 sectors. Additionally, he serves as a visiting faculty for Finance and Costing in MBA Colleges and CA, CMA Coaching Classes.

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