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Incoterms: Free on Board

Posted in Incoterms - 9 Apr 2018, 9:30 AM

Free on board is one of the trade terms that start with the word ‘free’ but have a different meaning compare to Free Carrier or Free Alongside Ship. It indicates whether there is a liability that either a seller or a buyer has for damaged or destroyed goods during the delivery. Based on International Chamber of Commerce or ICC, FOB means that the risks belong to the buyer during the shipping of the goods. The seller also bears the risks when the goods get to their destination or “FOB destination.” It still applies until the goods are sent to and accepted by the buyer.

Then, how does free on board or FOB work?

Imagine that you own a clothing company that produces jeans. You sell those jeans to retailers, like famous shops at the mall. If you ship those jeans to the shops by using the term “FOB shipping point,” the shops that buy your jeans has the liability for all potential loss while the goods are still in transit. Since anything – including bad ones – can happen while the goods are still in transit, it is the seller’s responsibility to purchase insurance. The insurance is for protection on the goods or shipment while they are still in transit.

However, if the shipment uses the “FOB destination point” policy, then it is the buyer’s responsibility to make sure that nothing bad happens to the goods while they are still in transit. It means, your company retains the risks and must purchase insurance to protect the shipment.

There are three obligations that a seller must fulfill, which include:

  • Providing goods and commercial invoice based on the agreed contract.
  • Finishing all export clearances and other obligations related to the government authority. The risks and costs are on the seller.
  • Handing over the goods to the carrier appointed by the buyer. Of course, since the goods must travel first by an inland transport to transit, as mentioned earlier, the seller is responsible for anything that might happen to the goods.

Then, what about the buyer? There are four obligations that a buyer must fulfill regarding free on board, which include:

  • Paying an amount of fee-based on the agreed contract regarding the shipping process.
  • Finishing all import clearances with their own risks and by their own costs.
  • Making a shipping contract with the carrier of their choice, also with their own risks and by their own costs.
  • Bearing all the risks regarding the shipment, starting from the critical point, which is after the transit and the goods have gone through the shipping gate.

To some buyers and sellers, free on board is considered almost equal regarding paying responsibilities. Border wise, the seller gets the first half from the origin or starting point until the critical point, which is the transit. After that, once the goods are delivered, everything has become the buyer’s responsibilities and no longer the seller’s. Perhaps it is not exactly a 50-50 share, but at least it is still close enough.

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