Free on Board

The dry-cargo shipping market is closely identified with letters of credit and these documents frequently influence charterparty terms and conditions and the manner in which ‘bills of lading’ are worded and released, and in which freight is paid. It is therefore vital that those engaged in this part of the international shipping industry have a good basic knowledge of all aspects of international trade. The International Chamber of Commerce publishes a standard set of terms for the international sale of goods known as INCOTERMS 2000 (replacing the older 1990 version) which establish the respective responsibility of the seller and buyer for each stage of the transportation process. The starting point is that the merchant sells his goods where they are at his place of business, that is ‘ex works’ (Incoterm EXW) and the Buyer will have to make arrangements for storage of the goods, transportation to the carrying vessel and eventual loading. More commonly free on board (FOB) terms are used under which the Seller will arrange delivery to the port and loading the cargo on board. Note that the actual point at which responsibility for the cost of handling and transport moves from the Seller to the Buyer is at the ships rail. The Buyer is thus responsible for any stowage, lashing and securing costs. However in most places there is a ‘custom of the port’ by which the separation of the costs is made. The Buyer also has to arrange the chartering of a vessel, payment of freight, insurance of the goods and delivery at the port of discharge. Variations may be ‘FCA’ (‘free carrier’) and ‘FAS’ (free alongside ship), under both of which terms a Seller undertakes to deliver goods to the loading place, leaving loading procedures and costs to be arranged by the Buyer. Where a Seller arranges a sale ‘CFR’ (cost and freight), goods are sold on the basis that the Seller himself arranges carriage and delivery to the Buyer ‘CIF’ (cost, insurance and freight) stipulating that in addition the Shipper arranges and pays for insurance.