There are several trade agreements out there, and if you are not careful, you may agree to wrong terms and invariably burn your fingers. In this article, my focus would be on Free on Board (FOB), one of the most common trade agreement in international trade.
What is FOB Trade Agreement?
Free on Board (FOB) defines a contract in which a seller’s responsibility ends after loading a consignment into a vessel for onward shipment to a buyer.
In this type of trade agreement, the buyer is responsible for insurance to cover the goods from the port of loading to the final destination. Also, he is responsible for the cost of marine freight as well as an inland carriage cost in his home country. Note that the inland freight includes other countries he chooses as the port of discharge.
In other words, FOB means that the price quoted by a seller includes the cost of transporting goods to port as well as loading same into a vessel. However, the buyer bears marine freight cost, insurance and other needful expenses to ship the cargo to its final destination.
Also, the free on Board trade agreement places more responsibilities on seller compare to what is obtainable in an Ex Works (EXW) agreement.
Furthermore, the Free on Board (FOB) agreement does not transfer responsibility to the buyer until the seller loads cargo into the consignee’s designated vessel. Risks pass to the buyer as soon as goods are on board the nominated ship.
For example, let us assume a Spanish company chooses to buy petroleum products from Tank Farm Nigeria with a Free on Board FOB (Lagos Port) trade agreement. It is our responsibility to bring products to the agreed port and load the same into the vessel the buyer nominated.
All things being equal, the risk passes to the Spaniard after Tank Farm Nigeria discharges product into his tanker.
Do not just accept any Incoterms trade agreement without contacting your business attorney. Always make sure you protect your interest in any business transaction.