F.O.B. vs. FOB

by Catherine J. Petersen           2/7/2017

Each time I make a presentation on Incoterms® rules, there is a question about Free on Board (FOB) and how it is interpreted in international trade. Often, there is confusion because the term FOB is used in both Incoterms® 2010 (published by the International Chamber of Commerce or ICC), and in U.S. domestic trade. The fact is, this single term has significantly different meaning depending on its application to international or domestic trade.

So, let’s do a comparison between FOB as a domestic and as an international term; the misuse of FOB can result in misunderstandings between, and extra costs for, the seller and the buyer.

FOB: Incoterms® 2010 (International)

FOB: Domestic

Apply to the transaction when it is a maritime shipment: vessel, barge, etc.

Use for any mode of shipment.

ICC recommends use of FOB when the product is bulk (coal, grain) or oversized products.

Use for any type of product.

Risk transfers from seller to buyer when goods are loaded as agreed on board the vessel.

Risk transfers from the seller to the buyer either at origin or destination.

Seller is to prepay freight charges until secured on board the vessel. Freight charges to port of unloading are collect.

FOB Origin indicates charges are collect. FOB Destination indicates charges are prepaid.

Transfer of ownership is not determined by application of the term FOB.

Transfer of ownership is determined by application of FOB then supplemented with Origin or Destination.

FOB is to be supplemented with a place, i.e. FOB Port of Loading, City, State, Country

FOB is supplemented, i.e. FOB Origin or FOB Destination. Both are locations in the U.S.

Necessary to reference: “Subject to Incoterms 2010” in the supporting agreement.

Unnecessary to indicate a reference to rules.

The differences between FOB under Incoterms® 2010 and FOB Origin or Destination in a transaction are significant. Choose wisely, then be explicit in your offer, contract and supporting commercial documentation about the term that you’ve agreed to with your customer.

My advice:  use Incoterms® 2010 whenever possible in international trade.