FOB: what it means and where the seller's responsibility ends
The FOB delivery basis, or Free On Board, is a term for sea and inland waterway carriage: the seller delivers the cargo to the port, clears it for export and loads it on board the vessel.
The seller's responsibility ends at the moment when the cargo is on board — from that point the risk passes to the buyer. Freight to the port of destination, cargo insurance and import clearance are borne by the buyer.
What the term means
The name of the term translates as "free on board". The word "board" is key here: the basis is tied to the vessel, not to a warehouse and not to a terminal. That is precisely why FOB applies only to sea and inland waterway carriage, and does not suit a truck or a railway.
The parties' obligations under FOB look like this.
| Stage of delivery | Seller | Buyer |
|---|---|---|
| Packing and marking | Yes | No |
| Delivery of the cargo to the port of shipment | Yes | No |
| Export clearance | Yes | No |
| Loading on board the vessel | Yes | No |
| Freight to the port of destination | No | Yes |
| Cargo insurance | No | Yes |
| Import clearance | No | Yes |
| Unloading at the port of destination | No | Yes |
In the term, the port of shipment is always named. The wording "FOB" without a port does not describe a delivery: the parties will have no common point at which the seller's obligations end.
It is useful to remember that Incoterms allocates costs, risks and delivery obligations, but does not describe the procedure for payment for the goods, the transfer of title, quality, warranties or penalties. All of these are terms of the contract, and the basis does not replace them.
Who pays for freight
Under FOB the freight is paid by the buyer. It is also the buyer that chooses the line or the shipowner and concludes the contract of carriage. In this scheme the seller is responsible only for ensuring that the cargo is on board within the agreed time and in the condition in which it was accepted for carriage.
This allocation gives the buyer control over the carriage. The buyer sees the freight rate directly, can choose a carrier to suit its own schedule and can combine several deliveries into one shipment. For regular purchases this is a noticeable advantage: logistics becomes manageable rather than hidden in the price of the goods.
The flip side is the burden on the buyer. It is necessary to book space on the vessel in advance, agree the timing of delivery of the cargo to the port and pay for possible demurrage. If the vessel has arrived but the cargo is not ready, the costs will fall on the buyer, because loading and delivery to the port are still the seller's area, while waiting for the vessel no longer is.
There is also a subtlety with loading. Under FOB the seller loads the cargo on board, and this is part of its obligations. If at the port the loading is performed by a stevedoring company on a separate invoice, the parties must agree in advance who pays it: Incoterms allocates the obligation, while the specific organisation of the work and the invoices are fixed in the contract.
Risks and the passing of risk
The risk passes from the seller to the buyer at the moment when the cargo is placed on board the vessel at the port of shipment. Before that moment losses and damage are the seller's concern, after it the buyer's.
| Situation | Who bears the risk | What this means in practice |
|---|---|---|
| Cargo damaged during delivery to the port | Seller | The seller settles the matter with the carrier for its own leg |
| Cargo damaged during loading | Seller | Until the cargo is on board, the seller is responsible |
| Cargo lost at sea | Buyer | The claim goes to the carrier and the buyer's insurer |
| Cargo held up at import | Buyer | Import clearance is the buyer's area |
| The vessel was late | Buyer | Waiting and demurrage are the buyer's costs |
Hence the practical conclusion: under FOB cargo insurance is the buyer's concern. The seller does not arrange insurance. If the buyer does not take it out, the risk in transit remains unsecured, even if the carriage is carried out by all the rules.
Another point is documents. The seller hands the buyer the documents confirming the shipment and the transfer of the cargo on board. Without them the buyer will not be able to collect the cargo at the port of destination, so the composition and the deadlines for handing over the documents are best described directly in the contract.
When to choose FOB
FOB is suitable when the buyer wants to control the carriage and has its own carrier or a contract with a line. Typical cases: regular purchases by sea, large batches, working through one's own freight forwarder, the need to combine deliveries from different sellers into one shipment.
FOB is not suitable in two cases. The first is container shipment. A container is handed in at the terminal long before loading on board, and the point at which risk passes under FOB becomes blurred. For containers FCA is used: it ties the passing of risk to the handing over of the cargo to the carrier, not to the board of the vessel. The second case is road haulage, rail and air: there the terminal does not exist at all.
What to specify in the order. The basis and the mode of transport are set before the trade and are carried into the trade without renegotiation, so write precisely: "FOB, Incoterms 2020, port of shipment". Remember the limits of an order: one commodity, one currency, one unit of quantity, and the delivery points of matching orders must overlap. The shipment week is an ISO week, and it must match exactly.
Frequently asked questions
What is the FOB delivery basis
It is a sea delivery basis under which the seller delivers the cargo to the port, clears it for export and loads it on board the vessel. After that freight, insurance and import clearance are the buyer's. The risk passes at the moment of loading on board.
Who pays for freight under FOB
The buyer. It chooses the carrier, concludes the contract of carriage and pays for delivery to the port of destination. The seller pays for delivery to the port of shipment, export clearance and loading on board.
When does the risk pass under FOB
At the moment when the cargo is placed on board the vessel at the port of shipment. Before that the seller bears the losses, after it the buyer. Damage to the cargo at sea is the buyer's risk, and claims are made to the carrier and the insurer.
Can FOB be used for road haulage
No. FOB describes loading on board a vessel, and when delivering by truck or by rail no such moment arises. For these modes of transport FCA, CPT or CIP are used.
Is FOB suitable for a container
Usually not. A container reaches the terminal before loading on board, and the point at which risk passes becomes uncertain. For container shipments FCA is used, and if delivery needs to be included in the price, CPT or CIP.
Is insurance required under FOB
The seller does not arrange insurance; this is the buyer's concern. If the buyer does not take out cover, the risk in transit remains unsecured. The parties agree the scope and terms of insurance in the contract.
What to specify in an order with the FOB basis
The term, the edition of the rules and the exact place: "FOB, Incoterms 2020, port of shipment". The basis and the mode of transport are fixed in the order in advance and pass into the trade without renegotiation.
What to do next
- Incoterms 2020: delivery bases in plain words — all 11 terms in one table.
- CIF: price with delivery and insurance — the same point at which risk passes, but the seller pays the freight.
- EXW: self-collection from the seller's warehouse — the opposite pole of the allocation of obligations.
- How the exchange works — how the basis is carried from the order into the trade.
- Open an account — registration is free, specify the basis and the port in the order.