What is the FOB Incoterm (Free on Board)?
In ocean freight, the FOB Incoterm, or “Free on Board”, is an Incoterm that’s exclusive to ocean freight shipping. It states that the seller must load the goods onto the ship chosen by the buyer. The seller is also responsible for all costs and risks up until all goods are loaded on board the vessel, at which point the risks are transferred to the buyer.
The FOB Incoterm is similar to the FCA Incoterm, the only difference being the risk transfer point upon complete loading of goods is not specifically mentioned in the FCA Incoterm. As such, unlike FCA, FOB is not recommended for shipping containerized cargo.
Seller’s obligations under the FOB Incoterm
- Delivery of goods and documents required
- Packaging and wrapping
- Inland transport in the country of origin
- Customs handling fees at origin
- Origin charges
Buyer’s obligations under the FOB Incoterm
- Payment of goods
- International freight
- Destination charges
- Customs handling fees at destination
- Inland transportation in the destination country
- Payment of duties and taxes
Insurance coverage isn’t mandatory under the FOB Incoterm. However, it is common practice to obtain insurance. This may be done by the buyer, seller, or both, to cover the entire ocean freight journey or their respective responsibilities.
Make sure cargo insurance terms are clearly defined and specified in your sales contract to avoid problems.
FOB unsuited for containerized cargo
While it is very common to see FOB being used for containerized imports (especially from China), note that this is an incorrect Incoterm to use for containerized shipments. Under FOB, risk is only transferred from the buyer to the seller when the goods are loaded onto the shipping vessel. This makes it inappropriate for containerized cargo, which is often dropped off at container terminals days prior to loading.
This creates a grey area during which the merchandise within the container could be damaged, whether it is sitting at the container or during transportation or loading. Since the cargo remains enclosed within the container until arrival and pickup, in the event of damages, it makes it difficult to pinpoint the exact moment the damage occurred and identify the party liable. That said, when shipping containerized cargo, be it from China or anywhere else in the world, FCA is the suggested alternative to FOB. If you still have doubts, we recommend downloading our free ebook on how to choose the best Incoterm. You may also contact us. Our import and export agents will be glad to help you out.