FOB

What it means

FOB, Free on Board, is the Incoterms rule for sea and inland waterway transport under which the seller loads the goods onto the vessel nominated by the buyer at the port of shipment. Risk passes to the buyer once the goods are on board, and further costs are the buyer's.

The seller pays for transport to the port, loading and export clearance. The buyer books and pays for sea freight, insurance, unloading and import. Under CIF, by contrast, the seller also pays freight and insurance to the port of destination.

FOB is one of the best-known rules and is often used where it does not fit, such as for containers. These are handed over at a terminal before loading onto the ship, so for container shipping FCA is generally recommended instead.

How it works in practice

The buyer should notify the seller in good time of the vessel name, loading date and place. If the vessel does not arrive on time, risk and additional costs may pass to the buyer, as the contract and the FOB rule provide.

After loading, the seller receives a bill of lading confirming that the goods are on board. With payment by letter of credit this document is essential, as the bank will not pay the seller without it.

When importing goods from Asia on FOB terms, a Slovak company arranges sea freight itself or through a forwarder. It gains better control over freight costs and schedules but bears the risk throughout the voyage, so cargo insurance is important.

What to watch out for

With containers, several days may pass between handover at the terminal and loading onto the ship, during which the seller bears the risk under FOB although the goods are no longer under its control. This mismatch is the main reason FCA is recommended for containers.

In American business practice the abbreviation FOB is also used with a different meaning under domestic rules. When trading with the US, state expressly that Incoterms 2020 apply to avoid confusion over the passing of risk and costs.