When purchasing goods from overseas, you will likely be using a free on board (FOB) agreement. However, you might struggle to understand specific terms within the agreement or even what each party may be liable for. Essentially, FOB is a term used to indicate whether the seller or the buyer is liable for goods that might suffer damage during shipping. Regardless of who bears the liability for the damage of goods during shipping, it is important to consider certain key areas to avoid making mistakes.
This article will outline some mistakes that you can avoid and the key areas that will help you understand how a FOB agreement may affect how your business operates.
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Misunderstanding Risk
If it is your responsibility to oversee the transfer of goods in a shipping agreement, you will likely be responsible for any damage. This liability will include damage to the goods during storage and transport. The buyer may be responsible for the goods when they transfer them to you. Although, this will depend on the terms of your FOB agreement. Additionally, depending on the terms, you may bear the risk regardless of whether you collect the goods or the supplier delivers them to you.
In a commercial transaction, you will likely bear the risk of damage to the goods. If your agreement specifies a FOB shipping point or FOB origin, you must consider what insurance policies you need. These policies should cover you when risk transfers from the supplier to you.
Regardless of who bears the liability for damage of goods during shipping, to avoid mistakes in your agreement, you should consider:
- how risk affects your international trade arrangement;
- the meaning of other Incoterms® or international commercial terms developed by the International Chamber of Commerce;
- whether any of your contractual terms may be inconsistent with any Incoterms®; and
- your broader obligations under the general law when it comes to importing goods into Australia (such as prohibited imports).
Overlooking Other Incoterms®
A contract that deals with the international sale and purchase of goods will likely contain more Incoterms® than a FOB clause. Incoterms® set out the obligations, risks, and costs for both parties at various delivery stages. Although, you should note that using Incoterms® is not mandatory in international trade agreements. However, they can ease the process of transferring goods between countries since they are a set of standardised concepts acknowledged by different countries.
You must understand the implications of these terms, or you risk failing to fulfil your obligations under your specific trade agreement. Generally, the obligations and costs that Incoterms® outlines will vary according to what terms you use. For example, for sea or waterway transportation, Incoterms® you may use include:
- free alongside ship (FAS), which means that the buyer bears the risk as soon as the seller places the goods on a quay or a barge as nominated by the buyer;
- cost and freight (CFR), which generally requires the seller to pay for the costs and freight necessary to bring the goods to the named port of destination; and
- cost insurance and freight (CIF), in addition to freight costs, the seller also contracts for minimum insurance cover against the buyer’s risk of loss during shipment.
If your contract includes any Incoterms®, it should refer to the current version of the terms (currently the Incoterms® 2020). Additionally, you must ensure that other contractual clauses are consistent with the Incoterms® used.
Furthermore, it is critical to understand that Incoterms® only deal with the delivery of goods. In this sense, your commercial contract should include terms that relate to other aspects of the provision of the goods, such as:
- security requirements;
- a force majeure event; and
- the payment process.
Not Complying With The Law
Although contracts allow you to undertake an infinite amount of obligations, the law limits this. Your contractual rights and obligations must be consistent with the law, or you run the risk of facing legal repercussions. Regarding your FOB agreement, you should consider the laws that regulate how you can import goods to Australia. Currently, the general law affects:
- what goods you can and cannot bring into Australia;
- how your goods are labelled;
- what information you must provide to the Australian Border Force in an import declaration statement; and
- what duties and taxes you must pay, including import processing charges, customs import duty and goods and services tax.
You can find a more detailed guide for importing goods into Australia here.
Key Takeaways
Free on board (FOB) is a term used to indicate whether the seller or the buyer is liable for goods that may suffer damage during shipping. To avoid mistakes when entering into a FOB agreement, you must be aware that:
- you, as the buyer, typically bear the risk of damage to your goods during shipment;
- other Incoterms® can affect your rights and obligations under the agreement; and
- FOB agreement must comply with Australian laws concerning the import of goods.
If you have any questions about a FOB agreement, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
If a party cannot perform their contractual obligations due to an event outside their reasonable control, a force majeure clause relieves them from their obligation during this period.
Incoterms® is a set of standardised, international commercial terms developed by the International Chamber of Commerce that contracting parties can use when drafting their agreements.
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