FOB (Free On Board)
From Supply Chain Management Encyclopedia
Russian: FOB (Free On Board) – FOB Франко борт (...названный порт отгрузки)
FOB Франко борт (...названный порт отгрузки)
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General Provisions
In accordance with rules of Incoterms® 2010,[1] the FOB (Free On Board) rule is to be used only for sea or inland waterway transport. However, in practice, there is often a sort of misusing the FOB rule by sellers/buyers for a land transportation. Nevertheless, they have to remember, FOB rule does not mean loading goods onto a truck or train at the seller’s place of business. The FOB rule means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment onwards. The seller is required either to deliver the goods on board the vessel or to procure goods already so delivered for shipment. The reference to "procure" here caters for multiple sales down a chain ('String Sales'), particularly common in the commodity trades. The FOB may not be appropriate where goods are handed over to the carrier before they are on board the vessel, for example goods in containers, which are typically delivered at a terminal. In such situations, the FCA (Free Carrier) rule should be used. The FOB rule requires the seller to clear the goods for export, where applicable. However, the seller has no obligation to clear the goods for import, pay any import duty or carry out any import customs formalities. The key document in FOB transactions is the On Board Bill of Lading.
Summary on Buyer's and Seller's Resposibilities under FOB Incoterms® 2010
Seller's Responsibilities (in brief) | Buyer's Responsibilities (in brief) | |
Goods - Payment |
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Licenses, Security, and Customs Formalities |
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Carriage |
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Insurance |
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Delivery - Taking Delivery |
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Risk Transfer |
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Costs |
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Notice to the Buyer - Notice to Seller |
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Delivery and Transport Documents - Proof of Delivery |
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Checking, Packing, Marking - Inspection(s) |
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Other |
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Examples [5]
- FOB, AAA Shipping Line, Vessel BBB, Norfolk, United States
- FOB, ZZZ Shipping Line, Vessel YYY, Novorossiysk, Russia
Notes
- According to Incoterms rules, seller and buyer have reciprocal responsibilities only. The "no obligation" term often used in the rules of Incoterms means that one party has not obligation to the other party. In this case (Art. А.3.А - Incoterms® 2010) the seller has obligation neither to arrange nor to pay the contract on carriage. The same way, the "no obligation" term concerning the contract on carriage applied to the buyer (Art. В.З.А - Incoterms® 2010) describes the buyer’s position, where the latter has not responsibility to the seller for the contract on carriage. Therefore, in accordance with the EXW rule, no one from the contract parties has responsibility to the second contract party. The "no obligation" term has the same understanding for the both parties in the case of insurance. However, the "no obligation" term being applied to the second party does not mean that the task performance is out of the first party’s interests. So, for the case of the FOB rule, despite the fact that the seller has not responsibility to the buyer for the contract on carriage, it is clear, that the seller has an interest to have such a contract on carriage that will deliver the goods to the buyer’s place of destination safely and in the time stipulated.
- The «on standard industry terms» term, in the Incoterms context, demands the buyer to be careful, because these multiple «standard» terms are usually defined by the buyer’s lawyers on the base of prototypes elaborated by trade associations so numerous and powerful in the United States. They say, an application of the «standard industry terms» is not so well developed and understandable in the United Kingdom in comparison with the United States, while understanding these terms is very important not only for contracts on carriage, but to define insurance coverage and other terms and conditions of insurance contracts.[2]) Therefore, business consultants are well advising contract parties to clear, agree, and formalize these and other terms presented in Incoterms in generalized forms. It helps to avoid problems and disputes in the future; e.g., in an arbitration court.[3]
- The seller’s option to "procure goods already so delivered", existing now in a number of Incoterms® 2010 rules, is concerned to the sale, and successive resale, of a single shipment of goods while en route from place of shipment to final destination (so named string sales). This is common in the commodity trade (futures trade), where oil, grain, and ore shipments are sold and resold before the vessel arrives in port.
- The previous FOB risk/cost transfer formula, - Risk transfer from the seller to the buyer when the goods pass the ship's rail, - is cancelled because for the modern ship the rail is something image and so poorly identified for any disputes and arbitrations.
- The examples given hereto are to illustrate purposes concerning the syntax of Incoterms® 2010 rules and could conform with any real data occasionally only.
- Delivery document term used as the heading to article A8 (Incoterms® 2010) means a document used to prove that delivery has occurred. For many of the rules of Incoterms® 2010, the delivery document is a transport document or corresponding electronic record. Nevertheless, [4] with EXW, FCA, FAS and FOB rules, the delivery document may simply be a receipt. A delivery document may also have other functions, for example as part of the mechanism for payment declaration: refers to comply with customs regulations and have met some of the requirements, including the notes, Enron, information or physical inspection of the obligation. Such requirements are particularly common in construction contracts with large contractors, government entities, and major corporations.
References
- ↑ Incoterms® 2010: ICC rules for the use of domestic and international trade terms – ICC Publication No 715E
- ↑ Getting to Market | http://www.locations4business.com/europe/uk/business-information/commercial-law/getting-to-market/
- ↑ http://www.oesa.co.uk/hedge-fund-services/isda-agreements/
- ↑ Financial terminology | http://financialterminology.info/2011/06/incoterms-2010-international-edition-b/