An FOB sale is an international trade term used to describe the terms of sale and delivery of goods. "FOB" stands for "Free On Board," and it defines the respective obligations of the seller and the buyer in the sale and delivery process.
According to Article 131 of the UAE Commercial Transactions Law, a sale on FOB (Free On Board) terms is one in which the seller undertakes to deliver the sold goods to the buyer at the port of shipment by placing them on board the vessel designated by the buyer. The buyer assumes the risk of loss or damage to the goods from the moment they are loaded on board, as ownership is deemed to have transferred to the buyer at that point.
Under FOB terms, the seller is not, in principle, obligated to conclude the carriage contract or arrange for insurance on the shipped goods. These responsibilities fall upon the buyer. However, if the seller does arrange for insurance and has received full payment for the goods, then the insurance contract is deemed to be concluded on behalf of the buyer. In this case, the buyer is considered the insured party, as they alone bear the risk of loss or damage to the goods during transit. The seller, in this scenario, enters into the insurance contract solely as part of the shipping process.
Conversely, if the seller has not yet received payment for the goods and has agreed with the buyer that payment will be made upon presentation of the bill of lading at the port of destination, then any insurance arranged by the seller is for their own benefit. In this instance, the seller retains a lien over the goods and may claim compensation from the insurance company in the event of loss or damage to the insured goods during the sea voyage.
FOB Sale Terms
- Delivery of Goods: The seller is obligated to deliver the goods on board the vessel at the specified port of shipment.
- Seller's Responsibility: The seller bears responsibility for the goods until they are loaded onto the vessel.
- Buyer's Responsibility: The buyer assumes responsibility for the goods once they have been loaded onto the vessel.
- Costs: The seller bears the shipping costs up to the port of shipment, while the buyer bears all costs from the port of shipment to the final destination.
Advantages of FOB Sale
- Clarity of Responsibilities: FOB terms clearly define the obligations of both the seller and the buyer.
- Risk Mitigation for Seller: The seller's risk is reduced once the goods are delivered on board the vessel.
- Facilitation of Trade: FOB terms streamline international trade by clearly outlining the terms of sale and delivery.
Disadvantages of FOB Sale
- Risk Assumption by Buyer: The buyer bears the risk of loss or damage to the goods after they are loaded on board.
- Additional Costs: The buyer may incur extra expenses, such as insurance premiums and sea freight charges.
Conclusion
FOB is a widely used trade term in international commerce. It clearly delineates the responsibilities of the seller and the buyer, thereby reducing the seller's risk after shipment. However, the buyer may bear increased risks and additional costs following the loading of the goods onto the vessel.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
