What is the full form of FOB

FOB: Free on Board

FOB stands for Free on Board. It is a term associated with the shipping of goods from one place to another. It indicates that the price quoted by the seller includes the charges of transferring goods from the production unit to a ship at a port, as mentioned by the buyer. FOB is used in non-containerized sea freight.

Type of FOB Contract

1. FOB Destination
2. FOB Origin

1) FOB Destination

It is the standard and commonly used FOB contract. It indicates that the seller is the owner of goods until the goods are placed on the ship, as mentioned by the buyer, and the seller is responsible for damage or loss during transport. Once the goods reach the destination, the buyer becomes the owner of the goods, and thereafter the buyer is responsible for any loss or damage.

2) FOB Origin

When there is no FOB term or language discussed in the purchase contract, then as per the guidelines of the Uniform Commercial Code (UCC), the purchase contract will be treated as a FOB Origin contract. It makes the buyer the owner of the goods at the time and places the goods originate in the production unit. In this contract, the buyer is responsible for the loss or damage during transport, not the seller.

How it Works

Let us understand it with the following example:

Suppose you are a dry-fruits dealer 'ABC', and you ordered 1000 jars of almonds from a company 'XYZ' established in Himachal Pradesh in India. You sell dry fruits at your store in New Delhi. If your purchase contract includes "FOB Destination" New Delhi, ABC warehouse," this means the company 'XYZ' will pay the transportation charges to ship the 1000 jars of almonds from its unit in Himachal Pradesh to your warehouse in New Delhi. The jars will become your property after arriving at your warehouse; it means if the jars are lost, damaged, or stolen during transportation, the company XYZ is liable because it still owns the goods until the goods reach their destination. Likewise, if the goods are damaged or lost after arriving at your warehouse, you will be legally responsible for the loss.

Scope of FOB

International trade is covered by FOB, and it applies to all forms of transportation, including road, rail, air, and sea. In contracts between buyers and sellers, the word "FOB" is frequently used to specify when the title and obligation for the items are transferred. It defines the obligations and hazards related to the movement of products, making it a key concept in the logistics chain. FOB clarifies the point of transfer and the responsibilities of each party, regardless of whether the items are being carried by land, air, or sea freight or containers.

FOB and the Purchasing/Selling Process

In international trade, the buyer-seller relationship is significantly influenced by FOB. It establishes the time at which ownership of the products passes from the seller to the buyer and the risks and obligations involved.

1. Ownership Transfer: When items are sold FOB, ownership normally passes from the seller to the buyer at a predetermined place, frequently the port of shipping or the area where the products are loaded onto the transport vessel. The products are regarded as being in the buyer's ownership and control once they are on board.
2. Implications for Risk and Responsibility: The transfer of risk and accountability for the items is also decided by FOB. Seller assumes all risk and liability for loss or damage up to the items put aboard the transport vessel. The risk of loss or damage during transport passes to the customer as soon as the items are loaded onto the ship.

Buyer's Perspective:

From the viewpoint of the buyer, acquiring goods on FOB terms has various advantages.

• Control: FOB gives the customer more freedom to choose the carriers and the mode of shipping.
• Cost savings: The consumer may bargain for lower delivery costs and choose the most economical shipping options.
• Risk management: The purchaser has the ability to evaluate and control the risks involved in the shipping of products, including doing so by setting up insurance coverage.

When deciding on FOB, the buyer should take into account elements such as the location of the products, the cost of transportation, the level of insurance, and the dependability of the seller and transportation companies.

Seller's Perspective:

Selling products on FOB terms has additional implications for the seller, as follows:

• Competitive Advantage: By offering FOB terms, the seller can attract more customers, particularly those who like to have more say in the transportation arrangement.
• Limited Liability: As soon as the merchandise is placed aboard the transport vessel, the seller's liability is reduced, lowering the risk and possible expenses of transit-related damage or loss.

However, the seller still has obligations under FOB, including providing the relevant export documents, guaranteeing adequate packing and documentation, and delivering the items to the agreed-upon site for loading.

FOB promotes an open and advantageous interaction between buyers and sellers in global commerce by providing precise rules for ownership transfer, risk allocation, and obligations.

INCOTERMS and FOB

Within the Incoterms framework, which is a collection of universally acknowledged guidelines outlining the obligations of buyers and sellers in international trade contracts, FOB is one of the regularly used phrases. For FOB to be used effectively in international transactions, it is crucial to comprehend how it relates to Incoterms.

A. Overview of Incoterms:

International Commercial Terms, or Incoterms, is a collection of uniform regulations developed by the International Chamber of Commerce (ICC). They establish who is accountable for various expenses, risks, and responsibilities at each stage of the transportation process, as well as the rights and obligations of buyers and sellers in the delivery of products. In international trade, Incoterms reduce misunderstandings and disagreements.

B. Within Incoterms FOB:

1. FOB as a Rule of Incoterms:

One Incoterms regulation, FOB, is peculiar to marine transportation, whether it is by sea or inland rivers. It means "Free on Board," which means that the seller meets their commitments by loading the products onto the vessel that the customer has chosen at the specified port of shipping. The point at which risk and accountability are transferred from the seller to the buyer is known as FOB.

2. Other Incoterms Frequently Used with FOB:

To cover extra parts of the transaction, FOB can be used in conjunction with other Incoterms rules. When combined with FOB, the following Incoterms are frequently used:

• FCA (Free Carrier): This abbreviation is frequently used when the seller must transport the products to a place other than the port of shipping. When commodities must first travel by other means (such as truck or air) before arriving at the port, they may be utilized.
• CIF (Cost, Insurance, and Freight): This term is used when the seller is in charge of not only loading the products onto the ship but also making arrangements for and covering the expenses of insurance and freight to the specified destination port.
• CFR (Cost and Freight): Like CIF, CFR lays the burden of insurance arrangements and payment on the buyer, while the seller covers the expenses of shipping the goods to the designated destination port.
• The right Incoterm must be chosen, including FOB, depending on the particular needs and facts of the transaction. The selected Incoterm should be compatible with the degree of control, distribution of risk, and roles that the buyer and seller both desire.
• The ability to comprehend FOB within the larger framework of Incoterms enables parties participating in international trade to set clear expectations and obligations, allowing more efficient transactions and lowering the possibility of misunderstandings or conflicts.

Shipping and FOB procedures

The term FOB (Free on Board) significantly affects the shipping procedure by defining the obligations of the buyer and seller in the movement of goods. Let's investigate how FOB affects the various shipping stages:

A. Pre-Shipment Phase:

1. Getting Items Ready for Shipping: The Seller must use all reasonable efforts to ensure that the Goods are packed, labeled, and prepared for transit in accordance with the specifications agreed to and any applicable legal requirements.
2. Required Paperwork and Documentation: To help the buyer meet customs and import standards, the seller must supply the required paperwork, such as commercial invoices, packing lists, and export permits. Normally, the transfer of the necessary paperwork takes place before the cargo is placed aboard the transport vessel.

B. Loading and Transport:

1. Buyer and Seller Responsibilities: The seller is in charge of transporting the items to the designated port of export and making arrangements for their loading onto the selected transport vessel. In most cases, the risk is passed on to the buyer once the products have been loaded.
2. Risks and Insurance Considerations Related to Transport: The risk of loss or damage during transit belongs to the buyer starting at the moment of loading. Therefore, it is advised that the buyer obtain suitable insurance coverage to safeguard the items while they are being transported. Unless otherwise specified, the buyer is normally responsible for making insurance arrangements.

C. Arrival and Further:

1. Unloading and Customs Clearance: When the goods arrive at the destination port, it is the buyer's duty to make arrangements for their unloading from the transport vessel and subsequent customs clearance. The purchaser is responsible for adhering to import laws that may apply and for paying any related fees or taxes.
2. Buyer's Responsibilities Upon Receiving Goods: The buyer acquires ownership and responsibility for the subsequent transport, storage, and distribution of the products in accordance with their business requirements once the commodities have been unloaded and cleared through customs.

The specifics of the shipping procedure may differ based on the mode of transportation selected (sea, air, rail, or road), as well as any extra agreements or contractual clauses between the buyer and seller.

FOB offers a foundation for effective coordination and collaboration between the buyer and seller throughout the shipping process by specifying the transfer of ownership and associated obligations in detail. In order to guarantee prompt and successful delivery of products to their intended destination, effective communication and adherence to the agreed-upon terms are essential.

Cost Allocation and FOB

In international trade, the cost distribution between the buyer and seller is affected by FOB (Free on Board). It establishes who is accountable for particular expenses related to the transportation of commodities. Let's investigate the impact of FOB on cost allocation:

A. Freight and FOB charges:

1. Making distinctions among FOB and CIF:

When goods are sold FOB, the seller is normally in charge of all expenses and hazards related to shipping them to the port and loading them into the transport vessel. The cost of freight from the port of shipping to the ultimate destination is borne by the customer.

Contrarily, in CIF (Cost, Insurance, and Freight) terms, the seller is in charge of organizing and paying for the international freight necessary to convey the products to the destination port in addition to the costs associated with delivering the items to the port of shipment.

2. Determining Who Is Responsible for Freight Expenses: When utilizing FOB, it is essential to specify in the contract who is responsible for organizing and paying for freight expenses outside of the port of shipment. Prior to the transaction, this freight charge distribution should be agreed upon.

B. Extra Charges & Costs:

1. Cost Distribution Among the Buyer and the Seller:

In addition to the freight rates, there could be other taxes and costs involved in transporting the products, such as insurance, export/import tariffs, customs clearing costs, and terminal handling fees. Depending on the terms that the buyer and seller have agreed upon, different charges may be allocated.

2. Handling Potential Conflicts:

It is crucial that the buyer and seller specify in the contract which is accountable for each specific cost and expense in order to avoid disagreements. This guarantees openness and avoids miscommunications or unanticipated costs during the shipping process.

The precise cost allocation in FOB transactions might change based on the parties' negotiating strength and business customs. To guarantee a just and mutually agreed-upon division of costs, it is advised for both buyers and sellers to carefully analyze and comprehend the conditions of the FOB contract, including the cost obligations.

For both the buyer and the seller in international commerce, effective communication and a thorough grasp of cost allocation under FOB conditions assist in creating a transparent and dependable financial structure.