I. Meaning
FOB is one of the most commonly used trade terms in international trade. It stands for “Free On Board.” When the FOB term is applied, the seller is responsible for loading the goods onto the buyer’s designated vessel at the specified port of shipment within the agreed time frame and must promptly notify the buyer. The risk of loss or damage to the goods transfers from the seller to the buyer once the goods are on board the ship.
II. Seller’s Responsibilities
Preparation and Loading of Goods
The seller has to ensure that the goods are loaded onto the buyer’s designated vessel at the contractually specified port and within the stipulated time period. For example, if a Chinese clothing manufacturing company is selling clothes under FOB Shanghai Port terms, it needs to hand over the goods to the freight forwarder who arranges the loading. The seller must ensure that the quantity and quality of the goods meet the contractual requirements and that the goods are properly packaged for sea transportation.
The seller also bears all costs associated with the goods up to the point of loading. This includes inland transportation costs to the port and port handling charges for loading the goods onto the ship. For instance, the clothing company has to pay for the transportation from its factory warehouse to the Shanghai Port and the port handling fees for loading the clothes onto the ship.
Export Customs Clearance
The seller is responsible for handling all export customs formalities, including obtaining export licenses and completing export declarations. For example, in the case of exporting electronic products, the seller has to accurately declare the product name, specifications, price, and other information to the customs authorities, pay any applicable export duties, and ensure that the goods can be exported smoothly.
Notification to the Buyer
After the goods are loaded onto the ship, the seller must send adequate notice to the buyer. This is crucial because the risk transfers to the buyer once the goods pass the ship’s rail. If the seller fails to notify the buyer in a timely manner and something happens to the goods during transportation, disputes over liability may arise. The notice should include details such as the time of loading, the name of the ship, and specific information about the goods.
III. Buyer’s Responsibilities
Chartering and Insurance
The buyer is responsible for chartering a ship or booking space on a vessel and must inform the seller of the ship’s name, the port of loading, and the required delivery time in a timely manner. For example, if an American importer is buying mechanical parts from China under FOB terms, the importer has to arrange for a shipping company and inform the Chinese seller about the specific ship name and loading time.
The buyer also has to purchase transportation insurance. Since the risk transfers to the buyer after the goods are loaded, the buyer needs to choose an appropriate insurance policy based on the value of the goods and the transportation risks involved, such as Free from Particular Average (FPA), With Average (WA), or All Risks. For instance, for high – value and easily – damaged precision instruments, the buyer might opt for All Risks insurance to obtain more comprehensive coverage.
Acceptance of Documents and Payment
The buyer is required to accept the relevant documents provided by the seller, such as the commercial invoice, packing list, and bill of lading. These documents are essential for the buyer to handle subsequent import customs clearance and payment settlement. At the same time, the buyer must make payment to the seller according to the agreed – upon payment method in the contract, such as a letter of credit or telegraphic transfer.
IV. Advantages and Disadvantages of the FOB Term
Advantages
For the seller, the risk transfers relatively early. Once the goods are loaded onto the ship, the seller can be less concerned about the transportation process. For example, for perishable goods, the seller doesn’t have to worry about the preservation during transportation, as these risks are mainly borne by the buyer.
For the buyer, there is more flexibility in choosing the transportation and insurance options. The buyer can select the most cost – effective shipping company and insurance policy based on their own needs and cost considerations.
Disadvantages
The seller has less control over the transportation process. Since the buyer is responsible for chartering the ship, the seller may not be able to ensure that the goods are transported under the most ideal conditions. For example, the shipping company chosen by the buyer may have poor service quality, leading to extended transportation times or increased risks of damage to the goods.
The buyer has less control over the goods before they are loaded onto the ship. If problems arise with the goods before loading, such as quality issues that do not meet the requirements, the buyer may not be able to detect and address them in a timely manner.
In actual international trade operations, the use of the FOB term requires careful negotiation of contract terms between the buyer and the seller to clarify their respective rights and obligations and to avoid trade disputes.
Post time: Jun-25-2025
