Free On Board / FOB – what does this shipping term mean?

Shipping Terminology – FOB = Free On Board.

Free On Board, typically shortened to FOB, is a common shipping and sales term.

Free On Board refers to a type of agreement between the exporter (shipper or seller) and the importer (buyer or consignee). The exporter is responsible for the delivery of the goods to the shipping line or freight consolidator. At that stage responsibility and liability are transferred to the importer.

There can be many costs involved with international shipping. It is important to clearly understand what charges will be included with the price of goods purchased (or sold). You can then be aware of what charges are your responsibility (or may become your responsibility).

When FOB is not FOB.

In the case of FCL (full container load), strictly speaking, the exporter is responsible for all the pre-shipment cartage, port costs and export documentation.

In the case of LCL (less than container load) cargo, often the exporter will simply deliver to the nominated export consolidation depot. They believe that is the end of their responsibility. But what about any export documentation, export Customs clearance and port charges?

Exporter and consignee’ expectations of services and costs can differ quite dramatically. This often leaves the freight forwarder or freight consolidator in the middle of the two, “holding the bag”.

As part of any price and service negotiations, it is imperative that all parties know who is paying and being responsible for what.

It is very common for the sale terms to be Free On Board. The exporter then thinks the buyer is responsible for the payment of the ocean freight and transit insurance. This is not always the case.

Who is Responsible For Freight Charges With Free On Board.

Regardless of when or where the ocean freight is paid, the fee is earned by the shipping line as soon as the cargo is loaded onboard the vessel.

If for any reason, the consignee doesn’t pay, the ocean carrier has every right to claim charges from the exporter. This not only refers to the freight costs but destination port, handling, storage and disposal/return costs.

Why Might Shipping Charges Not Be Paid?

There can be numerous reasons why the buyer or consignee may refuse to pay shipping costs or other fees. Factors include;

• Supply delays making the cargo worthless.
• Changes in government rules and restrictions.
• Containers falling overboard and not arriving at the destination.
• Weather delays/events.
• Disagreements over supposed cargo quality.
• Financial standing of the purchaser.
• Any number of other unforeseen reasons.

The end result is, you might have to pay when you think you don’t. It is important to be aware of what every transaction includes and what cheap shipping may really be costing you.

A Case Study of Free On Board – The Risks and Outcomes

This case study is about a business that consequently became a customer of ours after the following situation. It highlights some of the risks associated with FOB terms

• They (the seller/exporter) shipped a container of mixed foodstuffs from here to another country on FOB terms.
• The purchaser refused to take delivery of the cargo citing that one of the products was not up to specification.
• There were some heated discussions between the seller and the supposed buyer. Whilst the real reason they would not take delivery of the container is only conjecture, the end result was the same. This seller had a container of product in another country that was not going to be paid for.
• The seller had already purchased the goods in Australia and had arranged the shipping as per the supposed purchaser’s requirements. They were then stuck with a container load of product in another country.
• Because the goods had already been transported, the shipping line then came back to the seller demanding freight payment in accordance with their terms and conditions.
• Whilst this was going on, the container at destination continued to accrue enormous storage charges. As a result of the supposed consignee’ actions, the goods were finally disposed of in the other country. All of this was at the seller’s expense.

What made the situation more difficult is the time-sensitive nature of the goods (being foodstuffs). It was not a viable option to even return them or ship them onwards to another buyer.

Unfortunately, this was an expensive lesson to learn for the exporter. Their earlier choice to use us as a freight forwarder could have saved them substantial money and stress.

Know Your Shipping Terms and Conditions

It is vital to understand the full conditions of FOB terms as these can vary considerably from one agreement to another. We can assist with this.

Even just knowing common acronyms and shipping terminology can help immensely. Knowing the shipping terms and conditions clearly will help you avoid uncertainties or misunderstandings.

Whilst the above situation and other similar are not common, the expense and impact on your business can be immense. Understanding the shipping terms and protecting against them is important (which is where we come in). Getting appropriate freight insurance cover would also be a good step.

International freight shipping can be complicated, but it doesn’t need to be hard. If you are a business that imports or exports goods and want peace-of-mind, come and speak with us. You’ll sleep easier.