This article will help you understand FOB vs CIF, which are extensively employed in our international trade operations.
FOB
“FOB” stands for “Free on Board (…named port of shipment).” It means that the seller is responsible for getting the goods to a specific port and onto the buyer’s chosen ship. Once the goods are on the ship at that port, the seller has finished their job of delivering the items. This term is used mainly for goods transported by sea or river.
The seller’s main responsibilities:
- They’re responsible for delivering the goods to the buyer’s chosen ship on time and letting the buyer know promptly.
- They must get the necessary documents (like inspection certificates or certificates of origin) and take care of all the customs procedures required for exporting the goods.
- The seller pays for all the expenses and risks until the goods are on the buyer’s nominated ship at the port of shipment.
- They’re responsible for providing the commercial invoice and typical documents showing that the goods are delivered on board the ship (the shipped bill of lading). If both parties agree to use electronic communication, all documents can be replaced with electronic data interchange (EDI) messages.
The buyer’s main responsibilities
- They must accept the goods as per the sales contract and pay for them.
- They’re responsible for renting or booking cargo space on a ship, paying the freight, and informing the seller promptly about the name of the ship, the loading location, the delivery time.
- The buyer takes on the risk and expenses, gets the necessary import permits or official documents, and handles all the customs procedures required for importing the goods.
- The buyer bears all the expenses and risks after the goods are on their nominated ship at the port of shipment.
Risk Transfer and Responsibilities
- Five situations can make the buyer take on risks earlier:
(1) If the buyer’s ship is late, causing extra fees or damage to goods at the dock, the risk moves to the buyer.
(2) Even if the ship arrives on time but needs to wait at the dock, the seller’s risk transfers to the buyer.
(3) If the buyer’s ship arrives after the agreed shipment time without an exact time, the risk shifts to the buyer when the shipment time ends, even if the buyer’s ship hasn’t arrived.
(4) If the buyer’s ship is on time but can’t load goods for various reasons, the risk goes to the buyer.
(5) If the ship’s on time but the seller can’t load due to the buyer not allowing enough time, the buyer is responsible.
- The seller needs to be careful in giving the right documents on time, as the buyer can’t usually be there in person to receive goods and relies on paperwork.
- Under FOB, it’s best if the seller is the shipper to avoid problems if the buyer and carrier cooperate to take goods without paying.
- The seller must handle export permits and customs procedures unless the buyer faces problems, following different rules from U.S. trade practices. To prevent misunderstandings, it’s better to specify these terms in the contract.
Preventing Risks in FOB Contracts
- According to FOB rules, the seller hands goods to the shipping company, which is usually reliable. But often, buyers choose overseas freight forwarders, which may not have the same trust. To prevent fraud, sellers should check the freight forwarder’s reputation or ask for guarantees.
- To protect themselves, sellers in FOB contracts set the time for the buyer to send a ship and state that any extra costs or risks due to delays or not choosing a ship are the buyer’s responsibility. Buyers need to inform sellers about the ship’s name and arrival time.
- Sellers in FOB contracts don’t have to get cargo insurance; buyers should. But if buyers refuse goods due to bad market conditions and skip getting insurance, sellers might end up losing money and goods. If no letter of credit is used, sellers should insure their interest locally.
CIF
CIF stands for “Cost, Insurance, and Freight (…port of destination).” It means that when you buy something using CIF, the seller is responsible for paying the cost to send the item, getting insurance for it, and making sure it’s put on the ship. Once it’s on the ship, the seller’s job is finished. However, if something happens to the item or extra costs occur after it’s on the ship, you (the buyer) have to take care of those.
The seller’s main responsibilities:
- Deliver the agreed goods to the ship at the port of shipment within the contract period, bound for the specified destination port, and notify the buyer about the loading.
- Manage the export procedures for the goods, obtain export permits, or other approved documents (like certificates of origin, inspection certificates).
- Arrange for ship booking or cargo space and cover the sea freight costs to the destination port.
- Arrange for cargo transportation insurance and cover the insurance costs.
- Cover all expenses and risks of the goods until they cross the ship’s rail at the port of shipment.
- Provide regular transportation documents, commercial invoices, and insurance certificates for the goods’ transport to the specified destination port, or their electronic equivalent.
The buyer’s main responsibilities
- Handle the import procedures to obtain import permits or other approved documents.
- Cover all expenses and risks after the goods cross the ship’s rail at the port of shipment.
- Receive the goods delivered by the seller according to the contract and accept the documents matching the contract terms.
Risk Transfer and Responsibilities
- Misconceptions: In CIF and FOB, once goods are on the ship at the port of shipment, seller responsibilities end, and risks become the buyer’s. Sellers give insurance docs to buyers, so any claims become the buyer’s issue.
- Unloading Costs: Buyers pay costs at the destination port in CIF contracts, but the costs at the origin port are the seller’s responsibility.
Preventing Risks in CIF Contracts
- Booking Freight: Sellers book ships themselves under CIF. They usually pick good shipping companies and agree on freight, not using buyer-specified forwarders for shipment.
- Insurance Handling: Sellers organize insurance at the port of shipment, deciding on details and handing over insurance docs to buyers.
- Ship Booking Issues: Sellers select suitable ships for the cargo. If there’s no added trouble or cost, they agree. The seller arranging shipment must ensure the ship fits the cargo.
- Port and Route Matters: In CIF contracts, the destination port is strict. Changing it needs both parties’ agreement. The port of shipment is a warranty and is usually separately specified in contracts.
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