FOB Incoterms 2020 – what does the Free On Board rule mean?

International trade is governed by its own rules, and one of the most important ones is the precise definition of the terms of delivery of goods between the seller and the buyer. To avoid misunderstandings and clearly indicate who bears the costs and risks at each stage of transport, a set of rules known as Incoterms has been developed. Among them, FOB – Free On Board, a rule used primarily in maritime and inland transport, is of particular importance.

In today’s supply chain, knowledge of FOB Incoterms 2020 is not only a formal requirement, but also a practical tool for effective transaction management. It is this rule that determines when the seller delivers the goods and when the risk passes to the buyer.

In the following sections of this article, we will take a closer look at what exactly the FOB rule means, how the responsibilities of the parties are distributed, and why a proper understanding of these rules can protect businesses from losses and delivery delays.

FOB (Free On Board) – definition and meaning of the rule

FOB (Free On Board) according to Incoterms 2020 means that the seller is responsible for delivering the goods on board the ship at the designated port of loading. From the moment the goods cross the ship’s rail, all risks and costs are transferred to the buyer.

A key element of the Free On Board rule is the clear definition of the moment of loading. This moment occurs when the goods cross the ship’s rail. It is then that the formal transfer of responsibility takes place.

In practice, this means that the seller delivers the goods to the port, organises the export formalities and bears the costs associated with loading, while from the moment the goods are on board the ship, the buyer is responsible for further transport, insurance of the goods and any damage to the goods, as well as the costs of import clearance.

FOB (Free On Board) allows for a simple division of responsibilities between the seller and the buyer. On the one hand, the seller delivers the goods in accordance with the contract and ensures export customs clearance, and on the other hand, the buyer organises the transport and collection of the goods at the port of destination. Thanks to this, the FOB rule facilitates the planning of sea transport costs and minimises the risk of misunderstandings.

Rule for sea and inland waterway transport

FOB applies only to sea or inland waterway transport.

This means that FOB delivery terms are intended for transport by ships, barges or ferries. This rule does not apply to air, road or rail transport, so its use in such cases would be incorrect. In practice, FOB is often used in bulk trade, e.g. in the transport of coal, grain or metal ores, where the moment of loading the goods on board the vessel designated by the buyer is crucial.

In the case of containerised cargo, experts recommend the FCA (Free Carrier) rule, as containers usually arrive at the container terminal before being loaded onto the ship.

Point of risk transfer in FOB: when and where?

In the FOB rule, the point of risk transfer occurs exactly when the goods cross the ship’s rail at the designated port of loading.

This means that the moment of loading the goods onto the ship cannot be treated contractually – it is a clearly defined boundary from which the responsibility and risk of loss or damage to the goods passes to the buyer. Until that moment, the seller is responsible for delivering the goods, clearing them through export customs, bearing all costs related to preparation and the risk of possible damage to the goods during loading.

Once the goods cross the ship’s rail, i.e. are on board the ship designated by the buyer, the risk is transferred and the buyer is responsible for the further course of transport.

In practice, the point of risk transfer is crucial because it clearly indicates the party responsible for insuring the goods. If the goods are damaged or lost after being loaded on board, the seller no longer bears any consequences – full responsibility lies with the buyer.

Obligations of the seller and buyer in FOB Incoterms 2020

In the FOB rule, the obligations of the parties are clearly defined – the seller is responsible for the goods until they are on board the ship at the designated port of loading, and from that moment on, all obligations pass to the buyer.

This division ensures transparency and avoids disputes over liability, as in Incoterms FOB the boundary is clear and based on the physical loading of the goods onto the ship.

On the seller’s side (FOB)

The seller delivers the goods to the designated port of loading and arranges all export formalities, including export customs clearance.

In practice, the seller is responsible for:

delivering the goods to the port of loading,
bearing the costs of customs clearance and export-related fees,
preparing the relevant documents (e.g. commercial invoice, bill of lading),
loading the goods onto the ship designated by the buyer.

The seller is also responsible for all costs related to the storage and preparation of the goods prior to loading. Only when the goods cross the ship’s rail is the seller released from further responsibility.

Buyer’s obligations (FOB)

The buyer bears full responsibility from the moment the goods are on board the ship at the designated port of loading.

This means that the buyer bears:

the costs of sea transport and any transhipments,
the cost of insuring the goods and the risk of loss or damage during transport,
the costs of import clearance, customs duties and taxes in the country of destination,
the organisation of the transport of goods from the port of destination to the place of destination.

It is the buyer who must ensure that the carrier and the ship are ready to receive and transport the cargo. The goods handed over to the carrier become his full responsibility at that moment.

Summary

FOB Incoterms 2020, or the Free On Board rule, is one of the most important tools in international maritime and inland trade.

It clearly states that the seller is responsible for delivering the goods and export customs formalities until the goods cross the ship’s rail at the designated port of loading. From that moment on, the risk of loss or damage to the goods and all costs are transferred to the buyer.

Thanks to this precise division of responsibility, the FOB rule avoids misunderstandings, facilitates maritime transport planning and increases the security of the entire transaction. The seller delivers the goods and takes care of export formalities, while the buyer takes control of transport, insura

Frequently asked questions

What does FOB mean?

FOB (Free On Board) in Incoterms 2020 means that the seller delivers the goods to the ship at the designated port of loading, and from that moment on, the risk passes to the buyer. This is a classic trade rule, mainly used in sea and inland waterway transport.

How does FOB differ from EXW?

FOB differs from EXW primarily in the scope of the seller’s obligations – in FOB, the seller is responsible for delivering the goods to the port and loading them onto the ship, while in EXW, their role ends at the place of production or warehouse.

This means that in EXW, most of the risk and costs are borne by the buyer from the outset.

What is the difference between CIF and FOB?

CIF (Cost, Insurance and Freight) also includes the costs of sea transport and insurance of the goods to the port of destination in the price, while FOB ends when the goods are loaded onto the ship.

In practice, CIF gives the buyer greater security because the seller organises transport and insurance, but at the same time limits the buyer’s control over the transport.

Is FOB suitable for containers?

FOB is not recommended for containerised cargo because the goods are usually located at a container terminal before being loaded onto the ship. In such cases, the FCA (Free Carrier) rule is a better option as it better reflects the actual moment of risk transfer.

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