FOB (abbreviation for “Free on Board”) is a term in international trade that specifies the obligations, costs, and risks associated with the transfer of goods from the seller to the buyer according to the Incoterms standards.
1. What is FOB?
FOB (abbreviation for “Free on Board”) is a term in International commercial law that specifically defines the obligations, costs, and risks related to the transfer of goods from the seller to the buyer according to the Incoterms standard published by the International Chamber of Commerce (ICC).
When using the FOB condition, the seller is responsible for customs clearance for export and delivery when the goods are delivered on board the ship at the agreed port. This FOB term is only used for transport by sea or inland waterways. If both parties do not agree to deliver the goods on board the ship, the FCA condition is used.
2. Guide to using FOB – Incoterms 2020
2.1. Regarding the mode of transport
This condition is used for maritime and inland waterway transport when the parties deliver the goods by placing them on the designated ship. FOB is not suitable when the goods are delivered to the carrier before they are placed alongside the ship, for example, goods packed in containers, which are usually delivered at the port terminal. In such cases, the FCA condition should be used.
2.2. Transfer of goods and risk (FOB – Free On Board)
Delivery on board means that the seller delivers the goods on board the vessel designated by the buyer at the specified loading port or purchases the goods already delivered in the same manner. The risk of loss or damage to the goods passes when the goods are loaded onto the vessel, and the buyer bears all costs from this point onwards.
The seller must either deliver the goods on board the ship or repurchase the goods already delivered. The term “repurchase” here applies to the sale of goods multiple times during the transportation process (selling in chains), which is common in the trade of raw materials.
2.3. Export/Import customs clearance obligations
The FOB condition requires the seller to perform export customs clearance for the goods if necessary. However, the seller has no obligation to perform import customs clearance or customs clearance during transit in a third country that the goods must pass through, nor to pay import duties or costs associated with import customs procedures.
3. Expressing FOB – Incoterms in a foreign trade contract
The expression of the FOB condition in a foreign trade contract: FOB [specified port of delivery] Incoterms 2020
Example: FOB Ho Chi Minh Incoterms 2020
4. Obligations between the seller and the buyer
A. SELLER’S OBLIGATIONS
A1. General obligations of the seller
The seller must provide the goods and the commercial invoice in accordance with the sales contract and any relevant documents that may be mentioned in the contract.
Any documents provided by the seller may be in traditional paper form or in electronic form if agreed upon or customary.
A2. Delivery
The seller must deliver the goods by placing them on the ship designated by the buyer at the loading point, if any, designated by the buyer at the designated loading port or as repurchased goods. In both cases, the seller must deliver the goods on the agreed date or within the agreed period in the usual manner at the port.
If the buyer does not specify a specific loading point, the seller may choose the most suitable location at the designated loading port. If the parties agree to deliver the goods within a specific timeframe, the buyer has the right to choose the delivery date within that timeframe.
A3. Transfer of risk
The seller bears all risks of loss or damage to the goods until the goods are delivered according to point A2, except for any loss or damage specified in point B3.
A4. Transport
The seller has no obligation to the buyer regarding the conclusion of a transportation contract.
However, the seller must provide assistance to the buyer, at the buyer’s risk and cost, if requested by the buyer, in obtaining any necessary information or documents, including security information needed by the buyer for export or organization of the transportation of goods to the destination.
The seller may agree to assist the buyer or not, but if agreed, must assist the buyer in concluding a transportation contract based on customary terms applicable to that type of goods, and all risks and costs shall be borne by the buyer.
A5. Insurance
The seller has no obligation to the buyer regarding the conclusion of an insurance contract. However, the seller must provide the buyer, if requested by the buyer and at the buyer’s risk and cost, with any information needed to procure insurance.
A6. Delivery/Transportation documents
The seller, at its own expense, must provide the buyer with customary evidence that the goods have been delivered as specified in point A2.
Unless these documents are transport documents, the seller must assist the buyer, if requested by the buyer and at the buyer’s risk and cost, in obtaining transport documents.
A7. Export/Import customs clearance
a) Regarding export customs clearance
If necessary, the seller must complete and bear all costs related to export customs formalities stipulated in the exporting country, such as:
- Export license;
- Security checks on exported goods;
- Inspection of goods for export; and
- Any legal requirements.
b) Assistance with import customs clearance
If necessary, the seller must assist the buyer, if requested by the buyer and at the buyer’s risk and cost, in obtaining the necessary documents/information for customs transit/import clearance, including security information and goods inspection, as stipulated in the transit country or importing country.
A8. Inspection – Packaging – Marking
The seller must bear the costs of necessary inspections (such as quality inspection, weighing, measuring, counting) required for delivery as specified in point A2.
The seller must pack the goods and bear the costs of packaging, unless the customary practice of the trade specifically requires sending unpackaged goods. The seller must pack and mark the goods appropriately for the mode of transport, unless the two parties have explicitly agreed on the method of packaging and marking when the contract is signed.
A9. Allocation of costs
The seller must bear:
a) All costs related to the goods until they are delivered to the buyer as specified in point A2, except for costs borne by the buyer under point B9;
b) The cost of providing evidence to the buyer as specified in point A6 that the goods have been delivered;
c) If necessary, export customs clearance, export duties, and any other related costs as stipulated in point A7(a); and
d) Reimbursement to the buyer for all costs and charges related to assisting the seller in obtaining the necessary documents and information as specified in point B7(a).
A10. Notice to the buyer
The seller must notify the buyer of any necessary information to enable the buyer to take delivery as specified in point A2 or if the carrying vessel has not received the goods within the specified time.
B. BUYER’S OBLIGATIONS
B1. General obligations of the buyer
The buyer must pay the purchase price as stipulated in the sales contract.
Any documents provided by the buyer may be in traditional paper form or in electronic form if agreed upon or customary.
B2. Taking delivery
The buyer must take delivery of the goods when they have been delivered as specified in point A2.
B3. Transfer of risk
The buyer bears all risks related to the loss or damage of the goods from the time of delivery as specified in point A2.
If:
a) The buyer fails to give the notice as required under point B10; or
b) The carrying vessel designated by the buyer under B10 does not arrive on time to take delivery as specified in point A2, or cannot take delivery or ceases loading operations before the time notified under point B10.
The conditions being that the goods are identified as goods of the contract, the buyer must bear all risks of loss or damage to the goods from the stipulated date or the last day of the period specified for delivery.
B4. Transport
The buyer is responsible for concluding a transportation contract or arranging transportation at its own expense to transport the goods from the time of taking delivery, unless a transportation contract is concluded by the buyer as specified in point A4.
B5. Insurance
The buyer has no obligation to the seller regarding the conclusion of an insurance contract.
B6. Proof of delivery
The buyer must accept the evidence, delivery documents provided according to point A6.
B7. Export/Import customs clearance
a) Assistance with export customs clearance
If necessary, the buyer must assist the seller, at the risk and cost of the seller, in obtaining any documents/information related to export customs clearance, including security information or pre-export goods inspections stipulated by the exporting country.
b) Import customs clearance
If necessary, the buyer must complete and bear the costs related to customs clearance as stipulated in the transit country and importing country, such as:
- Import license or any necessary permits for transit;
- Security checks for import and transit;
- Inspection of goods; and
- Any legal requirements.
B8. Inspection – Packaging – Marking
The buyer has no obligations to the seller.
B9. Allocation of costs
The buyer must:
a) Pay all costs incurred in relation to the goods from the time of delivery as specified in point A2, from the costs borne by the seller under point A9;
b) Reimburse the seller for all costs and fees incurred by the seller in assisting the buyer as specified in points A4, A5, A6, or A7(b);
c) If specified, pay all taxes, fees, and other costs, as well as customs clearance costs for transit and import as stipulated in point B7(b);
d) Bear all costs arising from the following reasons:
(i) The buyer fails to give the notice as required under point B10; or
(ii) The carrying vessel designated by the buyer under B10 does not arrive on time, cannot take delivery, or ceases loading operations before the time notified under point B10.
The conditions being that the goods are identified as goods of the contract.
B10. Notice to the seller
The buyer must notify the seller of the name of the vessel, the loading point, and, if necessary, the chosen delivery time within the agreed delivery period.
