What is FOB? Transfer of risk and the container mistake

What FOB means

FOB (Free On Board) is a delivery term meaning the goods are delivered on board the vessel at the named port of loading. The seller loads the goods onto the vessel nominated by the buyer; the seller’s delivery obligation ends there.

The Incoterms 2020 set contains eleven rules. Seven of them suit any mode of transport (EXW, FCA, CPT, CIP, DAP, DPU, DDP). Four are specific to sea and inland waterway transport only: FAS, FOB, CFR and CIF. FOB belongs to this second group. FOB is not a suitable rule for air, road, rail or containerised intermodal transport.

When writing the rule, the port of loading is named: for example, “FOB Mersin Incoterms 2020”. FOB says nothing at all about the destination side.

Where cost and risk transfer

Under some rules, cost and risk change hands at different points. Under FOB these two points coincide, but they still need to be assessed separately.

Transfer of risk: the risk of damage and loss passes to the buyer the moment the goods are loaded on board the vessel at the port of loading. Any damage before that point is the seller’s. There is one exception: if the buyer fails to nominate the vessel in time, fails to notify the vessel’s name and loading time, or the nominated vessel fails to take the goods, risk can pass to the buyer from the agreed date or, if no date was agreed, from the date notified by the seller within the agreed period or, failing such notice, from the end of the agreed delivery period. This requires that the goods have been clearly set aside as the contract goods.

Transfer of cost: the seller bears the costs up to loading the goods on board, plus export customs costs. Everything after that point is the buyer’s: main freight, port-of-destination costs, import customs, and inland distribution.

Terminal charges (THC) are the item most often disputed. Which party is invoiced for this charge depends on the carrier and the freight contract; if it is not written explicitly into the sales contract, it results in either double payment or an orphaned item.

Incoterms rules only allocate cost, risk and the obligation to carry out formalities. They do not govern when ownership passes, the method of payment, the applicable law, or where disputes are resolved. These are agreed separately in the sales contract.

Seller’s obligations

• Prepare, package and mark the goods in conformity with the contract.
• File the export customs declaration; obtain export permits and documents.
• Bring the goods to the port of loading.
• Load them on board the vessel nominated by the buyer within the agreed date or period.
• Provide the usual document evidencing delivery; in practice often a mate’s receipt or a receipt of delivery. Because the buyer contracts for carriage, the bill of lading is issued by the buyer’s carrier.
• Give the buyer sufficient notice once loading is complete.

The seller has no obligation to take out insurance.

Buyer’s obligations

• Nominate the vessel, contract for carriage and pay the main freight.
• Notify the seller of the vessel’s name, loading place and time in good time.
• Bear all risk and cost after the goods are loaded on board.
• Carry out import customs formalities and pay duties and charges.
• Pay the price under the contract.

There is no insurance obligation for the buyer either. Because the buyer bears the risk, cargo insurance is in practice taken out by the buyer. The claim that “under FOB insurance belongs to the seller” is wrong.

Item	Seller	Buyer
Packaging and marking	Yes	—
Inland carriage in the country of export	Yes	—
Export customs formalities and documents	Yes	—
Loading on board (up to the moment of delivery)	Yes	—
Vessel nomination and carriage contract	—	Yes
Main carriage (freight)	—	Yes
Insurance	Not compulsory	Not compulsory; usually taken out by the buyer since it bears the risk
Terminal costs at the port of loading	Varies by carrier and contract	Varies by carrier and contract
Discharge at the port of destination	—	Yes (per the carriage contract)
Import customs and duties	—	Yes
Inland distribution in the country of destination	—	Yes

The difference between FOB, CFR and CIF

Under all three rules, risk passes at the same point: when the goods are loaded on board the vessel at the port of loading. The difference is on the cost side.

Rule	Who pays main freight	Insurance obligation	Where risk passes
FOB	Buyer	None	On board at the port of loading
CFR	Seller, to the port of destination	None	On board at the port of loading
CIF	Seller, to the port of destination	Seller’s	On board at the port of loading

Under CIF, the seller must take out cargo insurance for at least 110% of the contract price, in the contract currency, at the minimum level of cover (Institute Cargo Clauses (C) or similar clauses). The fact that, under CFR and CIF, the seller pays the freight while risk still passes at the port of loading is the classic example of cost and risk being split apart. Under FOB the port of loading is named; under CFR and CIF the port of destination is named.

When it is the right choice

• For bulk and conventional cargo: grain, ore, coal, scrap, timber, steel, heavy pieces. In these cargoes the goods are physically loaded on board the vessel, so the transfer of risk matches the physical reality.
• When the buyer has its own carriage contract or contracted line, and the buyer negotiates freight better.
• For deals based on vessel chartering.
• Where the seller can handle export customs itself and the buyer can manage the destination side.

When it is the wrong choice

Container cargo. This is the most common and most expensive mistake. A full container load (FCL) is stuffed and sealed at the exporter’s premises or loading place and arrives at the terminal already sealed; the seal is not applied at the terminal. Only groupage (LCL) cargo is delivered to the CFS, where stowing and sealing in the container are done by the carrier or its agent. The container is then taken into the yard. Loading on board may not happen the same day; it can occur several days later, sometimes later still if the vessel changes. Under FOB, risk stays with the seller until loading on board. Yet during that period the seller has no actual access to the goods, cannot inspect them at the terminal, and cannot intervene in handling. If the container is held up due to a terminal fire, a tip-over, flooding, or the vessel sailing full, the loss is at the seller’s risk. On top of that, the seller’s cargo policy often ends with delivery to the terminal, while the buyer’s policy has not yet started — leaving an uninsured gap. A documentation problem is added to this: when the carrier takes receipt of the container, it issues a document recording receipt, while an on-board bill of lading is only issued after loading.

The correct rule is FCA. Under FCA, the seller’s delivery obligation ends as follows: if the named place is the seller’s premises, when the goods are loaded onto the means of transport provided by the buyer; if it is another place, when the goods are placed at the disposal of the carrier or another person nominated by the buyer on the seller’s arriving vehicle, ready for unloading. Risk passes to the buyer at that moment. Incoterms 2020 allows that, if the parties agree, under FCA the buyer can instruct the carrier to issue the seller with a bill of lading bearing an on-board notation. This arrangement eases the old objection raised against FCA in letter-of-credit transactions but does not remove it entirely: the carrier is not obliged to agree to issue such a document, and the document is issued days after delivery.

In the Turkish market, FOB is habitually used for container cargo. The delivery term written on the quotation, the invoice and the declaration is FOB, while the physical delivery actually happens at the terminal. The difference is invisible until damage occurs. Switching to FCA in the contract creates no extra cost; it simply requires the point of delivery to be defined correctly.

FOB is not suitable for air, road or rail transport. Although expressions such as “FOB airport” or “FOB factory” can be written into a contract, they have no equivalent in Incoterms 2020; the delivery point is left undefined and disputes arise. The correct rule for those situations is FCA. FOB is also unsuitable where the seller cannot take on export customs.

Common mistakes

• Naming the port of destination. When a port of destination is written next to FOB, the rule conflicts with the parties’ actual intent. The rules based on the port of destination are CFR and CIF.
• Not stating the Incoterms version. “FOB Mersin” on its own is incomplete; “Incoterms 2020” should be added. Older versions do not automatically lapse — whichever version the parties refer to is the one that applies.
• Neither party taking out insurance. FOB places no insurance obligation on either party. If neither arranges it, the cargo travels uninsured.
• Assuming import duty will be lower. For imports, customs value includes the cost of transport, loading and handling, and insurance up to the port or place of entry into the Turkish Customs Territory (Customs Law No. 4458, Art. 27/1-(e)). Even on an FOB purchase, freight and insurance are added to the value, and the tax base is calculated accordingly.
• Leaving loading costs undefined. Whether the freight contract is on liner terms or FI/FIOS terms determines who bears the loading and stowage cost. If additional wording such as “FOB stowed and trimmed” is to be used, the contract must state explicitly whether it shifts only cost or risk as well.
• Neglecting the notice obligation. If the buyer gives vessel information late, both extra cost and an earlier transfer of risk can result.
• Treating FOB as a type of price. The phrase “FOB price” is common, but FOB is not a pricing item — it is a delivery term; what it determines is where cost and risk change hands.

When the choice of rule for sea transport, the customs process and cargo insurance are designed together, most of these mistakes are prevented at the contract stage.