Free On Board (FOB) is an International Commercial Term (Incoterm) that indicates that the seller fulfills their responsibility when the goods are loaded onto the ship at the port of departure. The risk and cost transfer from the seller to the buyer once the goods pass over the ship’s rail. What this means is that once the parties are agreed on the sale, the seller will ensure the goods are available according to the agreed specifications and that the buyer has communicated the preferred carrier of the goods on its behalf, with date and time of departure among other details.
It is very important for the parties to exchange this information as part of performance of the agreement as well as to prove that parties have actually discharged their contractual obligations.
The seller will be responsible for delivery of the goods to the appointed vessel and loading same. After this point, the buyer is responsible for the transportation, insurance, and any additional costs.
FOB means that the seller arranges and pays for the shipment to the named port of departure, and the buyer takes over from there, covering costs and risks associated with the onward transportation, including loading, unloading, and any potential damage or loss during transit. The buyer therefore, must be alive to the fact that once the goods pass the ship’s rail, they become the property and responsibility of the buyer. In the event that there is a calamity along the way and the goods are damaged or lost, the insurance cover taken out and any other mitigatory measures should be able to atone for the loss.
Cost, Insurance, and Freight, (CIF) is the Incoterm where the seller is responsible for delivering the goods to the port of destination and paying for the transportation cost and marine insurance. The risk and cost transfer from the seller to the buyer when the goods are loaded onto the ship at the port of departure.
Whereas, the seller is responsible for arranging and paying for the transportation of the goods, obtaining marine insurance against the buyer’s risk of loss or damage during transit, and delivering the goods to the port of destination, the risk associated with the actual transportation and delivery pass on to the buyer once the goods are loaded successfully on the ship accompanied with the insurance and freight documentation.
It is important for parties to be alive to the location of the risk at all times and how it impacts issues such as contract pricing, for example.
Having such knowledge will help parties guage their exposure to risks so that they can put in place measures to mitigate or avoid the risks.
There is a plethora of litigation cases where parties are embroiled in determining who is responsible for what in these contracts and the decisions help us to be cautious and/or clearer in future.
Lastly, live healthy and sustainably!
