The FOB Free On Board Incoterm is said to be the most misused and misunderstood Incoterm in the history of Incoterms. FOB was never meant for containerized ocean freight; it was never meant for anything other than ocean freight. Let’s have a look at the history of this Incoterm to understand why.
FOB Free On Board: the misunderstood Incoterm
The box that changed the world, the container, was invented in the 1950s by Malcolm McLean. Before the introduction of the containers, the goods, and more generally the so-called commodities, were often delivered using maritime terms, such as FOB (literally on board the ship).
These terms were already used at the end of the 19th century well before the introduction of the containers. Until the 1950s, therefore, the legitimate use of this term was widespread, in line with the logistics of the time.
With the introduction of the containers, and therefore with the development of intermodal transport, there was no longer the need to use maritime terms. The containers, in fact, cannot be delivered on the ship, as the FOB would require, but are positioned in the container yard of a port.
What must be delivered are the goods, certainly not the containers that contain them! Therefore, it is completely incorrect to use the maritime terms such as FOB for goods traveling in containers!
This term, currently, is in fact intended only for operators who buy by bulk commodities such as iron ore, grains, coal, oil, etc.
For example, companies dealing with the wholesale trading of agricultural commodities.
Traders who buy manufactured cargoes should use multimodal terms, preferring the term FCA Free Carrier, for example (we will discuss this in more detail later).
Risks and obligations under FOB Free On Board
After this brief historical view of FOB Free On Board, let’s move on to explain what this Incoterm actually is. The FOB Incoterm is the last Incoterm of the F group. The common feature of this group of Incoterms is that, for all of them (FCA, FAS, FOB) the place of delivery will be, for sure, somewhere at origin.
Let us have a look at how the FOB Incoterm is written:
FOB Free On Board (named port of shipment)
As per FAS Free Alongside Ship, even FOB is quite self-explanatory: in fact, delivery takes place at the port of shipment when the goods are loaded on board the buyer’s nominated carrier (vessel).
All costs and risks beyond that point are for the buyer, whereas export clearance and inland freight charges up to the delivery point are for the seller’s account.
Even if it is not mandatory, the FOB, being a maritime term even before being an Incoterm, is intended for ocean and inland waterway transportation only, as it was the case for the FAS Free Alongside Ship.
A better alternative for containerized freight: FCA Free Carrier
We just wrote that FOB should be used only by traders engaged in the bulk purchase of commodities.
We also wrote that this term is not suitable for containerized cargo.
In such case, FOB should be substituted with the FCA Free Carrier Incoterm.
One note here: it would be incorrect to use the term FCA indicating, for example, FCA Rotterdam Port Incoterms 2020 as a container is loaded on the ship in the port of Rotterdam, and not the goods.
It is therefore necessary to identify the place where the goods (the goods, not the container) are delivered to the carrier. If a seller is using FCA instead of FOB, it is likely that they are in charge of the inland transportation up to the port of shipment, i.e. up to the place within the port where the goods will be containerized. In that case, the FCA should indicate the container yard of the port, not the port only.
So, if the goods to be containerized are delivered to the Rotterdam port under FCA, it would be: FCA Free Carrier (Container Yard Rotterdam Port). That would be the place of delivery under a correct use of Incoterms.
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