Incoterms 2010 – Changes to Free On Board (FOB)

Free On Board (FOB) is one of those phrases/buzzwords in International Trade that a lot of people recognise, and a surprising amount use in their international contracts, but struggle to define accurately.

Essentially FOB means that all the responsibilities, risks and costs involved in getting the goods to the seagoing vessel are for the account of the buyer, including packing, handling, loading, export customs control, all export documentation, licences and permissions, and all transport charges to the port.  It also includes any customs inspection costs at the port and any costs which the shipping company deems to be a FOB responsibility. All costs relating to these factors should be included in the FOB price.  However, once the goods are loaded on the vessel, all the responsibilities, risks and costs from this point onwards until the goods have arrived at their final destination, passes to the buyer.  This includes any carriage/transport contracts and goods in transit insurance.

This last point is an important one to bear in mind if the method of payment is an Irrevocable Documentary Credit.  In which case, the Buyer should not be asking the seller to provide any Bills of Lading relating to the shipment since the “shipper” in this respect is the buyer.

This division of responsibility when using the FOB Incoterm is well understood.  So much so that in many transport contracts the phrase, FOB charges (which are used in all sorts of transport contracts, including airfreight and courier) has come to mean all those charges relating to the movement of the goods from the point of origin to a port or frontier post of export.  Interestingly therefore, that although there were not that many changes in the 2010 revision of Incoterms by the International Chamber of Commerce (ICC), two of them (which I would like to discuss in this article) are related to the FOB term.

The concept of Free on Board has been around for a very long time.  It was one of the original terms in the ICC’s first version of Incoterms in 1936, but conceptually its been in use for centuries.  The great Merchant Houses of the late Middle Ages were probably the first to use a version of this concept.  Owners of vessels would hire out space in their ships to merchants wishing to trade their products for exotic goods, and hopefully making a huge profit when the ship came back and they could sell the bartered goods in their local markets.  These merchants would rely on the Ship’s Master to look after their goods whilst they were on the ship and to negotiate good deals for them.

Therefore, there had to be an easily recognisable point at which the responsibility for the goods passed from the Merchant to the Ship’s Master.  What developed was the tradition that once the goods were swung over the ship’s rail, this was deemed to be the point when the goods were “delivered” into the care of the Ship’s Master.  From this point on the Master would be responsible for the goods and would take care of any costs or risks that subsequently occurred.  However, until that point, namely the goods being delivered over the ship’s rail, the Master was “free” of any responsibility for the goods.  Any costs, risks or responsibilities for getting the goods to the port and loaded over the ship’s rail was in the hands of the merchant or the merchant’s representative.

This is where the expression, Free on Board, comes from.  The Ship’s Master was free of any responsibility or cost relating to the goods until they were loaded “On Board” his vessel by being swung over the ship’s rail.  I labour this point because the word “Free” has in the past been taken to mean free of costs for the shipper.  I would like to stress this is not, and has never been, the case.

This concept that the goods passed from one sphere of responsibility to another once they physically moved over the ship’s rail was very serviceable for centuries, but became rather problematic when the architecture of ships started to change rather dramatically in the 20th Century.  The huge container vessels that are now so representative visually of international trade movements do not have ship’s rails. And even if they did, a number of insurance claims showed that identifying the exact point where the goods were when an incident happened (hence influencing who was responsible for the goods at that point) was rather difficult when they were swinging physically to and fro over a metaphorical point of reference.

So the ICC decided to change this place of delivery in their 2010 revision of the FOB Incoterm.  The responsibility for the goods passes once the goods are actually physically loaded on board the vessel, not whilst they are hanging in the air.  In theory this has made the point at which the buyer is now responsible for the goods a bit easier to determine.  Or has it?  If all the goods are being shipped in one piece then there is no problem.  However, if the goods being loaded consist of more than one piece, or is a liquid bulk cargo, of oil for example, at which point is the “shipment” deemed to be fully loaded?  Is it possible to have a consignment which, if a problem occurs, is partially still the responsibility of the seller, but the remainder is in the control of the buyer?  Or are the goods deemed to be loaded when the first item in the consignment is loaded or when the last item is loaded.  This is a rather tricky question and one which the parties involved in the contract should resolve at the negotiation stage and write into the contract.

The other change that the ICC made was to recommend that the FOB, FAS, CFR and CIF Incoterms were only used in sea or inland waterway shipments where the goods were actually delivered to the carrier either beside or on board the vessel.  This does not include container shipments since the goods loaded into containers are usually delivered to a terminal.  Hence the 2000 rules which indicated that these four terms should only be used with sea shipments, but that this did include container shipments, has now been changed to exclude container shipments.  Therefore, if shipping goods in containers, or by any other method of shipment or even where there are different methods of shipment in the transit chain, the more appropriate Incoterm to use is Free Carrier (FCA).

Maria Narancic from Point to Point Export Services is an independent international trade adviser who assists organisations world wide with their international trade projects, documentation, Documentary Credits and import/export training.  She is based in the United Kingdom.  If you require any further assistance with the matters mentioned above, please do contact us by e-mail on info@point-point.com or check out the Point to Point Export Services website at www.point-point.com for more articles on International Trade.
 

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