FOB: Free On Board

FOB is an abbreviation for Free On Board or Freight On Board. Generally, FOB deals with the shipping of goods. It specifies which party (buyer or seller) pays for which shipment and loading costs, and/or where responsibility for the goods is transferred. The last distinction is important for determining liability for goods lost or damaged in transit from the seller to the buyer. Precise meaning and usage of "FOB" can vary significantly. International shipments typically use "FOB" as defined by the Incoterm standards. Domestic shipments within the US or Canada often use a different meaning, specific to North America.

Under the Incoterm standard published by the International Chamber of Commerce, FOB stands for "Free On Board", and is always used in conjunction with a port of loading.Indicating "FOB port" means that the seller pays for transportation of the goods to the port of shipment, plus loading costs. The buyer pays cost of marine freight transport, insurance, unloading, and transportation from the arrival port to the final destination. The passing of risks occurs when the goods pass the ship's rail at the port of shipment.

For example, "FOB Vancouver" indicates that the seller will pay for transportation of the goods to the port of Vancouver, and the cost of loading the goods on to the cargo ship. The buyer pays for all costs beyond that point (including unloading). Responsibility for the goods is with the seller until the goods pass the ship's rail. Once loaded on to the ship, the buyer assumes risk.

Due to potential confusion with domestic North American usage of "FOB", it is recommended that the use of Incoterms be explicitly specified, along with the edition of the standard. For example, "FOB New York (Incoterms 2000)". Incoterms apply primarily to international trade, not domestic trade within a given country.

This use of "FOB" originated in the days of sailing ships. When the ICC first wrote their guidelines for use of the term in 1936, the ship's rail was often still relevant, as goods were often passed over the rail by hand. In the modern era of containerization, the term "ship's rail" is somewhat archaic for trade purposes. The standards have noted this.

Incoterms 1990 stated, "When the ship's rail serves no practical purpose, such as in the case of roll-on/roll-off or container traffic, the FCA term is more appropriate to use." Incoterms 2000 adopted the wording, "If the parties do not intend to deliver the goods across the ship's rail, the FCA term should be used.".

CIF: Cost, Insurance and Freight

Cost, Insurance and Freight (CIF) is a common term in a sales contract that may be encountered in international trading when ocean transport is used. It must always indicate the port of destination, ie "CIF Shanghai."

When a price is quoted CIF, it means that the selling price includes the cost of the goods, the freight or transport costs and also the cost of marine insurance. CIF is an international commerce term (Incoterm).

CIF is identical in most particulars with Cost and Freight (CFR), and the same comments apply, including its applicability only to conventional maritime transport.

Risk of loss of, or damage to, the goods is for the buyer, just as with CFR. However, in addition to the CFR responsibilities, the seller under CIF must obtain in transferable form a marine insurance policy to cover the buyer's risks of transit with insurers of repute. The policy must cover the CIF price plus 10 per cent and where possible be in the currency of the contract.

Note that only very basic cover is required equivalent to the Institute "C" clauses, and buyers should normally insist on an "all-risk" type of policy such as that under the Institute "A" clauses.

The seller's responsibility for the goods ends when the goods have been delivered on board the shipping vessel. In the guidelines for CIF published in Incoterms 2000 the term "carrier" does not appear and it clearly states "the seller must deliver the goods on board the vessel at the port of shipment" which makes CIF the incorrect term to use where the seller wishes their responsibility to end when they deliver the goods into the hands of a carrier prior to the goods passing the ship's rail at the port of loading. In the great majority of transactions the more correct term is CIP.

This term is only appropriate for conventional maritime transport, not ro/ro or international container movements.