Free on Board (FOB)

Free on Board Incoterms International Trade Shipping Terms Risk Transfer Ownership Transfer Logistics
Free on Board (FOB) is a term used in international commerce to distinguish the point at which the seller relinquishes all ownership, responsibility, and risk for the shipped goods.
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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.

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

  1. “Incoterms 2020 by the International Chamber of Commerce (ICC)” - ICC, Latest Edition.
  2. “International Trade and Customs Law” by Petros C. Mavroidis.
  3. “Global Supply Chain and Logistics Management” by John Mangan and Chandra Lalwani.

Fundamentals of Free on Board (FOB): International Trade Basics Quiz

### What does FOB stand for in international trade? - [ ] Free On Broadcasting - [x] Free On Board - [ ] Free Operational Budgeting - [ ] Free On Beneficiary > **Explanation:** FOB stands for Free On Board, referring to the point at which the seller relinquishes ownership and risk of the shipped goods. ### Who bears the risk of loss under FOB Origin? - [x] The buyer - [ ] The seller - [ ] The shipping company - [ ] The insurance provider > **Explanation:** Under FOB Origin, the buyer bears the risk of loss once the goods are shipped by the seller. ### Under FOB Destination, who is responsible for the shipping costs? - [ ] The buyer - [x] The seller - [ ] The intermediary - [ ] Jointly by buyer and seller > **Explanation:** In an FOB Destination agreement, the seller is responsible for the shipping costs until the point of delivery. ### FOB terms are commonly used in the transport of what type of goods? - [ ] Personal assets - [x] Commercial goods - [ ] Real estate properties - [ ] Intellectual property > **Explanation:** FOB terms are usually applied to shipping commercial goods in the context of international trade. ### Under which of the following conditions does the seller's responsibility end in FOB Origin? - [ ] When the purchase order is received - [ ] When the buyer inspects the goods - [x] When goods are loaded onto the shipping vessel - [ ] When the goods arrive at the buyer's premises > **Explanation:** In an FOB Origin agreement, the seller’s responsibility ends once the goods are loaded onto the shipping vessel. ### What entity publishes and maintains the Incoterms? - [ ] United Nations - [ ] World Trade Organization (WTO) - [ ] International Shipping Association (ISA) - [x] International Chamber of Commerce (ICC) > **Explanation:** The International Chamber of Commerce (ICC) publishes and maintains the Incoterms, including FOB. ### How does FOB Origin affect when the buyer must insure the goods? - [x] The buyer must insure the goods immediately upon shipment. - [ ] The buyer insures goods after arrival. - [ ] Insurance is shared between buyer and seller. - [ ] Insurance is not required under FOB Origin. > **Explanation:** Under FOB Origin, the buyer must insure the goods immediately once they are shipped, as they assume risk at that point. ### In what situation would a seller use an FOB Destination term? - [x] When the seller wants to retain risk and control until delivery - [ ] When the buyer prefers more responsibility - [ ] When the shipping distance is very short - [ ] When there are no shipping costs involved > **Explanation:** An FOB Destination term is used when the seller wishes to retain risk, control, and responsibility until the goods are delivered to the buyer. ### Does FOB apply to air freight shipping? - [ ] Yes, universally - [ ] No, never - [ ] Yes, but only within the continental boundaries - [x] No, typically it applies only to sea and inland waterway transport > **Explanation:** FOB traditionally applies to shipping by sea or inland waterways, not air freight. ### What needs clarification in an FOB agreement to avoid disputes? - [x] Specific point of risk transfer and responsibility - [ ] Quality of packaging - [ ] Time of year for shipping - [ ] Packaging material used > **Explanation:** The FOB agreement should clearly specify the point at which risk and responsibility transfer from seller to buyer to avoid disputes.

Thank you for learning about the details and intricacies of Free on Board (FOB) with us. Continue to broaden your commercial awareness and competence in international trade!

Wednesday, August 7, 2024
Free Port
Free Market
Cost and Freight (C&F) January 1, 1
CIF (Cost, Insurance, and Freight) January 1, 1
Cost, Insurance, and Freight (CIF) January 1, 1
Free In and Out (FIO) January 1, 1
Incoterms January 1, 1
Bill of Lading (B/L) January 1, 1
Bonded Goods January 1, 1
Cargo January 1, 1
Collect on Delivery (COD) January 1, 1
Foreign Trade Zone January 1, 1

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