Free on Board -FOB
Time and place of delivery, costs related to freight, insurance, and risk are some of the considerations which have to be sorted out before entering into any contract which is beyond your territory. The global markets have expanded the reach of the business houses, and thus it is imperative that there are such terms that do not harm the interest of either of the party and work in the best interest for maximum profit and minimum loss.
To bring uniformity and ensure an in-depth understanding of how the price is quoted and who bears the risk of transfer of goods and till what place, International Chamber of Commerce has come up with 11 Incoterms and Freight on Board / Free on Board happens to be the most used amongst these.
What Is FOB?
Who stands responsible in case the goods are damaged in case of transit? Who will pay the cost? To make things simpler and easier, Free On Board is an agreement by which the sellers load the goods to the port of shipment and post that all the costs and responsibility of the buyer.
FOB is mostly used in tandem with shipping contracts both inland and international.
It stands suitable where the seller has to deliver non-containerized goods and has direct access to the vessel for loading
Under FOB agreements, the following terms need to be understood to have a clear understanding of who becomes responsible at what time:
- Place of Origin: If the contract mentions for a place of origin it means the ownership lies on the buyer the moment the goods are loaded,
- Place of Destination: Seller has the ownership and responsibility till the goods reach the destination.
- Freight Collect: Once the goods are at the port, the person who receives the goods is responsible for the charges
- Freight prepaid: Seller stands responsible for freight charges
Thus FOB defines clearly the obligations on the part of the consignor (exporter) and consignee (importer).
It becomes necessary to understand the mathematics which goes behind in arriving at a cost which is quoted to the buyer. This price is called FOB Price which is arrived at:
Ex Works Price of the Goods + Cost of transportation till the vessel = FOB Price.
- The buyer will assume the responsibility once the goods have been successfully loaded at the point of origin.
- Export license, export duty, and loading costs have to be paid by the seller
- Freight, unloading costs, and the price as quoted in the contract has to be paid by the buyer.
- Shipping documents and the valid invoice has to be furnished by the seller.
- The title to the property passes on to the buyer once the goods are transferred to the vessel. Along with this, the risk also gets transferred.
If you happen to be new in International Trade, contracts under FOB are most logical and simple to understand because you can easily arrive at the cost of the contract and also make sufficient room for contingencies.