Incoterms 2020 rules are the latest revision of international trade terms published by the International Chamber of Commerce (ICC). They are recognized as the authoritative text for determining how costs and risks are allocated to the parties conducting international transactions.
Incoterms 2020 rules outline whether the seller or the buyer is responsible for, and must assume the cost of, specific standard tasks that are part of the international transport of goods. In addition, they identify when the risk or liability of the goods transfer from the seller to the buyer.
In this article, we’re discussing the Incoterm FOB, also known as Free On Board.
There are 11 trade terms available under the Incoterms 2020 rules that range from Ex Works (EXW), which conveys the least amount of responsibility and risk on the seller, to Delivered Duty Paid (DDP), which places the most responsibility and risk on the seller. The Incoterms 2020 Rules: Chart of Responsibilities and Transfer of Risk summarizes the seller and buyer responsibilities under each of the 11 terms.
For a summary of Incoterms 2020 and a short definition of each of the 11 terms, read The Beginner's Introduction to Incoterms.
Free On Board Responsibilities and Risk
Under the Incoterms 2020 rules, FOB means the seller has fulfilled its obligation when the goods are loaded on the vessel nominated by the buyer at the named port of shipment. With FOB, the seller is responsible for loading the goods on the transport, while the buyer is responsible for everything else necessary to get the goods to the final destination.
The risk or liability for the goods transfers from the seller to the buyer when the goods are on board the vessel, and the buyer bears costs from that point forward.
Free On Board Transportation Options
The ICC has divided the 11 Incoterms into those that can be used for any mode of transportation and those that should only be used for transport by “sea and inland waterway.” That’s because companies were choosing Incoterms where risk and responsibilities transferred at a point that made no sense in a non-ocean journey.
Under Incoterms 2020, FOB should only be used for sea and inland waterway transport.
Using Free On Board
Because the seller is responsible for the goods until they are loaded on the vessel, they need to ensure the goods arrive at the vessel. Since most goods are now delivered to container yards rather than right to a particular vessel, FOB is normally used only in a few instances with containers at smaller ports.
If FOB is the agreed upon term, both buyer and seller must agree upon exactly what “loaded on board” means in the sales contract, because it can vary for different types of vessels and commodities.
Incoterms vs. Uniform Commercial Code
Companies in the United States that are new to exporting and importing often get tripped up with the use of Incoterms for their international transactions after years of using traditional domestic terms of sale that usually include some variation of FOB, such as FOB Origin or FOB destination.
These terms establish the contractual rights and responsibilities between a buyer and seller for delivery, risk of loss, title, and payment of freight charges. The definition of these terms, as well as a few others, derive from a combination of (1) the provisions of the Uniform Commercial Code, Article 2 (the UCC), (2) the National Motor Freight Classification (NMFC), and (3) industry usage.
When it comes to international trade, however, companies using best practices will switch to Incoterms 2020 rules in quotations, purchase orders, contracts, commercial invoices, and other commercial documentation when dividing the responsibilities for risk transfer, costs and responsibility for carrier selection between the buyer and the seller.
In the case of FOB, it's common for shipper's to use this trade term for their domestic shipments. It's not common, and frequently not appropriate, to use FOB for their international shipments.
Learn More about Incoterms 2020 Rules
If you are regularly involved in international trade, you need to understand the risks and responsibilities for each of the Incoterms 2020 rules, not just pick the term you always use. Start by getting a copy of ICC's Incoterms® 2020 Rules book.
For a more detailed understanding of which term or terms make the most sense for your company, register for an Incoterms® 2020 Rules seminar or webinar offered by International Business Training. If you don't want to attend a half-day class, you can get the book provided at these seminars and webinars: Incoterms® 2020 for Importers and Exporters.
If history is any indication, the Incoterms 2020 rules will be around for at least a decade. Now seems like the perfect time to make sure you understand each of the terms, so you can make sure you’re speaking the same language as your international trading partner.
This article was first published in January 2017 and has been updated and revised based on the changes made with the release of the Incoterms 2020 rules.