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The purpose of this article is to provide a basic understanding of the term FOB (Free on Board), which is one of the key terms in international trade. We will also examine how FOB is applied and what responsibilities are placed on the parties to a contract. FOB remains one of the most popular and widely used delivery terms in maritime shipping.
General Meaning of FOB
FOB means that the seller is responsible for delivering the goods on board the ship at the specified port of departure. Once the goods are on board, all risks and costs are transferred to the buyer. Under FOB contracts, the seller does not charter the vessel or insure the goods, but only loads them onto the vessel nominated by the buyer.
Buyer’s Responsibilities under FOB Contracts
We begin with the buyer’s responsibilities, as usually under FOB, the performance of the contract starts with the buyer fulfilling their obligations. Moreover, as will be seen below, if the buyer does not fulfil their part on time, the seller may refuse to load the goods onto the vessel, terminate the contract, and claim damages.
The buyer under a FOB contract is obliged to:
- Nominate a Vessel: the buyer must select a vessel that can receive the goods within the time frame and at the location specified in the contract.
- Present the Vessel for Loading: the buyer is responsible for the timely arrival of the vessel at the port and its readiness for loading.
- Pay for Goods and Accept the Documents: the buyer must pay for the goods and accept the documents that comply with the terms of the contract.
Let us examine these responsibilities in more detail.
Vessel Nomination
Vessel nomination is the process by which the buyer provides the seller with information about the vessel on which the goods will be loaded. This is an important part of FOB contracts, as the seller needs to know which vessel will be used to prepare the goods and arrange all necessary documentation. Vessel nomination is also referred to as “pre-advice”. The buyer’s nomination must be valid.
What is a Valid Nomination?
A valid nomination must comply with all the conditions of the contract. It usually includes information about the vessel, the estimated arrival date at the loading port, as well as the quantity of cargo to be loaded onto the vessel.
Typically, contracts specify that the buyer must nominate the vessel a certain number of days before it arrives at the loading port. An incorrect nomination can result in losses or refusal to load the cargo.
Presenting the Vessel for Loading
Under Incoterms rules, an FOB contract typically contains a single delivery period (for example, 1-31 March). The buyer is obligated to provide a vessel and notify the seller so that the seller can load the goods during this same period.
However, different sectors of international trade apply FOB differently and interpret the concept of “delivery period” in various ways. For instance, under Gafta contracts, the delivery period in FOB contracts refers to the time during which the vessel must arrive at the port ready for loading. It is important to note that such contracts usually do not contain a separate deadline for vessel presentation, and the term “delivery period” specifically means the “delivery” of the vessel, not the cargo. Under Gafta contracts, if the vessel is presented within the delivery period, the seller continues loading even after the period expires. The timeframe for loading cargo is flexible and determined by the loading rates established in the contract (for example, 5,000 tonnes per day).
In the context of Gafta proformas, the buyer’s fulfilment of their obligation is usually confirmed by a Notice of Readiness (NOR) – a notification from the vessel’s master under the charter party, confirming that the vessel has arrived at the port and is ready for loading.
Nevertheless, having a valid NOR is not decisive. In Soufflet Negoce v Bunge SA [2009] EWHC 2454 (Comm), the seller claimed that the NOR was invalid due to coal dust contamination in the vessel’s holds. The court of first instance, whose decision was subsequently upheld by the Court of Appeal, ruled that the buyer had nonetheless fulfilled their obligation to provide a vessel.
The court stated that the phrase “presented at the loading port in readiness to load” in the context of the Gafta 49 contract merely means that the vessel must be physically and legally capable of receiving cargo – that is, it must be possible and lawful for the seller to carry out the loading, rather than the vessel being technically ready to present a valid NOR under the charter party. The Court of Appeal emphasised that the NOR conditions were specifically included in the contract solely for calculating laytime and demurrage.
Extension of the Delivery Period
If the vessel does not manage to arrive at the loading port within the delivery period, the buyer may request an extension. Usually, in return, the buyer is obliged to compensate the seller for any costs associated with storage. I wrote more about how the extension clause works in this article.
Seller’s Responsibilities under FOB Contracts
When entering into an FOB contract, the seller assumes the following obligations:
Delivering Goods on Board the Vessel
The seller must deliver goods of proper quality and in the correct quantity, and load them onto the vessel according to the buyer’s instructions. The contract may specify either a delivery period for the goods or a loading rate (for example, 5,000 tonnes per day).
The seller bears all expenses related to loading the goods onto the vessel, including:
- Costs of inspection, packaging, and marking of goods
- Port and terminal fees
- Transportation costs to the vessel
- Freight forwarder fees
- Loading operations until the goods cross the ship’s rail
- Export duties and customs fees (if applicable)
Notably, under Gafta rules (for example, Gafta Form 49), if the vessel was presented at the loading port within the delivery period, the seller must complete loading even after the delivery period expires:
Provided the vessel is presented at the loading port in readiness to load within the delivery period, Sellers shall if necessary complete loading after the delivery period and carrying charges shall not apply.
Providing Shipping Documents
The seller must provide the buyer with necessary documents confirming delivery of the goods. This set of documents may vary depending on contract requirements but typically includes:
- Bill of Lading – a key transport document that:
- Confirms loading of goods onto the vessel
- Serves as evidence of the contract of carriage
- Functions as a document of title
- Can be transferred to third parties by endorsement (if issued as an order bill)
- Commercial Invoice – contains information about:
- Value of the goods
- Quantity and description of the goods
- Seller’s and buyer’s details
- Delivery and payment terms
- Packing List – details the contents of each package
- Certificates – depending on the type of goods, these may include:
- Certificate of Origin
- Quality Certificate
- Phytosanitary/Veterinary Certificate
- Weight Certificate
- Inspection Certificate
- Export Documents – all necessary permits and licences for exporting the goods from the country of export
The seller must ensure timely preparation and transfer of all these documents to the buyer in accordance with the contract terms, as payment for the goods is often based on these documents (especially when using documentary letters of credit).
The contract may also stipulate additional seller obligations, such as advance notification of goods readiness for shipment, special packaging or marking requirements, and other conditions.
Transfer of Risks and Ownership
Risk Transfer
All risks associated with the goods are transferred from the seller to the buyer at the moment the goods cross the ship’s rail at the port of departure. This means that any damage or loss that may occur after this point becomes the buyer’s problem.
Transfer of Ownership
Ownership of the goods typically passes at the moment of full payment for the goods, but this may depend on the terms of the contract.
Conclusion
FOB remains one of the most popular terms in international trade due to its simplicity and clear allocation of responsibilities and risks between the parties. To successfully use FOB, it is important to understand all aspects of this term and to correctly draft contracts, taking into account all the nuances of trade.
If you have any questions or need assistance with an FOB contract, please contact me by email, Telegram, or WhatsApp. I provide legal support at every stage of concluding and performing the contract.
