FOB
Also known as: Free on Board
FOB, Free on Board, means the seller brings the goods, export-cleared, on board the ship. Once they are on board, costs and risk pass to the buyer. FOB applies only to sea and inland waterway.
Who arranges what under FOB?
The seller brings the goods on board the ship nominated by the buyer and files the export declaration. The buyer concludes the contract of carriage for the sea voyage, insures the cargo and handles the import. The seller pays the pre-carriage up to and including loading; the buyer pays the sea freight and everything after that. The buyer must give ship, loading place and loading window in good time. If they do not, they bear the risk from the agreed date. The cargo can then stand ready without a ship, with storage and demurrage as a result. Who bears those costs belongs in the contract, because FOB does not allocate them of its own accord. FOB applies only to sea and inland waterway. For containers, air, road and rail FCA is the term that puts the transfer point where the goods actually change hands as to risk. FOB remains widely used even so, mainly because banks and buyers know the three letters.
Where does the risk pass under FOB?
At the moment the goods are on board the ship. Since Incoterms 2010 that is on board and no longer at passing the ship's rail. The rail has gone, but it still turns up in templates and explainer videos. Anyone writing FOB under Incoterms 2020 means on board, not the rail. The costs follow the same point, with the exception of terminal charges that according to the contract of carriage have already been billed to the buyer. That is a standing source of double charging: the line bills origin terminal handling to the buyer (because they hold the booking), while the seller thought FOB covered those costs up to on board. Name the port of shipment, not the port of destination. FOB Rotterdam on a shipment from Shanghai puts the risk point on the wrong side of the voyage. FOB Shanghai (Incoterms 2020) is the wording; the destination belongs in the buyer's contract of carriage, not in the Incoterm.
Why is FOB unsuitable for containers?
A container is handed in at the terminal days before departure. From that moment the seller has no influence left on the cargo, while under FOB they keep the risk until the container is on board. Damage in the stack, a missed cut-off or a terminal error in that period falls on them. The ICC therefore recommends FCA for container traffic. FOB remains widely used in practice, mainly because banks and buyers are used to it. Since Incoterms 2020 the buyer under FCA can instruct their carrier to issue an on-board bill of lading to the seller, so the documentary-credit argument falls away. Anyone who still keeps FOB for containers must record in the contract who bears the terminal costs between gate-in and loading, and who takes the risk in that period. If you do not, you have an FOB term with an FCA operation, and at the first damage two parties pointing at each other.
What does FOB mean for the customs value?
The FOB value is the goods price including everything up to and including loading at the port of shipment. For the customs value on import into the EU the sea freight and the insurance to the external border must be added. That is the classic add-back, and it is why declarants under FOB routinely ask for the freight invoice. If that is missing at filing, the declaration cannot be completed. On regular flows an agreed freight rate per container is therefore often used, with a correction afterwards if the actual costs differ. An estimate is only allowed if the actual costs cannot yet be known, not if the invoice has simply not been asked for yet. On the import declaration the named place is the port of shipment, in the country of export. FOB Shanghai on an IMA to Rotterdam means an add-back of the sea voyage. FOB Rotterdam on that same shipment would suggest a place in the EU, and that is the wrong port.
What do you agree under FOB?
Name the port of shipment and not the port of destination. FOB Rotterdam on a shipment from Shanghai is a common error that puts the risk point on the wrong side of the voyage. Add the edition: FOB Shanghai (Incoterms 2020), so nobody reads the rail from before 2010 back in. Also record who bears the terminal costs at the port of shipment. Those are billed by the line sometimes to the seller and sometimes to the buyer, depending on the contract of carriage the buyer concludes. Without an agreement a double charge or a gap arises, and both only come to light when the invoice is there. Give ship, quay and loading window in good time, as buyer. If the buyer does not, the risk passes on the agreed date while the goods are not yet on board. The seller then stands with cargo on the quay, the risk with the buyer, and without an agreement on storage a cost nobody budgeted.
How does FOB appear on the import declaration?
On the import declaration you enter FOB as the delivery term, with the port of shipment. That port lies in the country of export. Customs reads from that that the invoice price stops on board, and that sea freight and insurance to the EU border still have to be added. The freight invoice or the charter-party amount belongs with the file, plus the insurance to the external border if the buyer has taken that out themselves. On liner trades the freight per container is often known. On bulk it is a voyage amount. In both cases the part to the EU border counts, and the part after may come off if it appears separately, which under FOB rarely arises because the price does not contain the sea voyage. FOB is the term under which the add-back is most routine. Declaration systems therefore often ask for an FOB amount and a freight amount, to reach a CIF equivalent. If either is missing, the IMA is not complete.
Which documents and pitfalls belong with FOB?
The seller supplies invoice, packing list, export declaration and proof of loading, usually an on-board bill of lading. The buyer has the booking, the freight invoice, the insurance and later the import documents. The bill of lading under FOB is the document that records the transfer on board, and it is what a bank wants to see under a letter of credit. The first pitfall is FOB for containers, with risk between gate-in and loading on the seller. The second is naming the wrong port, destination instead of shipment. The third is terminal handling that is paid twice or nowhere, because FOB says up to on board and the line bills origin THC to the booking party. For containers FCA is the term the ICC recommends, with since 2020 the option of an on-board bill of lading for the bank. For bulk and conventional cargo that is actually hoisted on board, FOB remains the term that follows the quay. Use it there, and not as a synonym for sea freight in general.