Incoterm : Free On Board

Overview

It is often not realised that the term FOB should NOT be used for sea shipments in shipping containers. The term FOB dates back to sailing ship days when goods were taken to the wharf and the seller could witness their goods physically being loaded "across the ship's rail". In modern times this term is largely no longer relevant and should be replaced in almost all circumstances by the term FCA (Free Carrier). The preface to FOB in "Incoterms 2000" ICC publication 560 states "If the parties do not intend to deliver the goods across the ship's rail, the FCA terms should be used." The earlier publication, "Incoterms 1990", ICC publ 460, was clearer in this regard, stating "When the ship's rail serves no practical purpose, such as in the case of roll-on/roll-off or container traffic, the FCA term is more appropriate to use."

So in reality, FOB is the most commonly used term yet the most common incorrectly-used term in international trade. This is because probably more than 99% of traders internationally have not read the official ICC guidelines (Incoterms 2000), and simply work on what someone else told them or what they think sounded reasonable at the time.

As an Incoterm, FOB can only be used for cross-border trade where Customs authorities are involved. However it has been adopted as a term for trade internally within various countries and each has its own common usage outside of those published in Incoterms. For example, in the USA it is still used as a left-over of the long-discontinued "Foreign Trade Definitions" of 1941, with at least four different versions which can lead to confusion.

Domestically within the United States and Canada, the term is used in two common phrases, "FOB shipping point" and "FOB destination," to distinguish when the title of goods passes from the seller to the buyer. Under the terms of "FOB shipping point," the title of the goods passes to the buyer at the shipping point. Similarly, under the terms of "FOB destination", the title of the goods passes to the buyer when the goods arrive at their destination. The distinction is important because it determines who pays for the shipping costs of the merchandise: whoever holds the title to the merchandise at the time of its shipping pays for its transportation costs unless otherwise noted (e.g., freight prepaid or freight collect). Also, it is important that if the shipment is damaged while traveling the owner must file the freight claim.

Note that this usage is inconsistent with the official Incoterm definitions, and should not be used for international shipping. North American FOB definitions correspond to Incoterm approximately as follows:

    * FOB shipping point or FOB shipping point, freight collect: FCA shipping point

    * FOB shipping point, freight prepaid: CPT destination

    * FOB destination or FOB destination, freight prepaid: DDU destination

    * FOB destination, freight collect: not commonly used, no Incoterm equivalent

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