In our ongoing series on Incoterms® 2020, we explore the crucial aspects of international trade terms that define the responsibilities of buyers and sellers in global transactions. Building on our previous discussions, this installment focuses on two critical terms used exclusively for sea and inland waterway transport: Free Alongside Ship (FAS) and Free on Board (FOB). Understanding these terms is essential for stakeholders to negotiate effectively, optimize cost management, and mitigate risks.

FAS (Free Alongside Ship)

What is FAS?

Free Alongside Ship, abbreviated as FAS, obliges the seller to deliver the goods alongside the vessel at the named port of shipment. The risk of loss or damage transfers from the seller to the buyer once the goods are placed alongside the ship. The buyer then assumes responsibility for loading the goods onto the vessel and all subsequent costs, including ocean freight, insurance, and import duties.

Common Mistakes:

1. Incomplete Delivery Understanding: Sellers must ensure that the goods are delivered precisely alongside the vessel, not on the dock or terminal. Misinterpretation of this requirement can lead to disputes and additional costs.
2. Export Formalities: Although the buyer handles the main carriage, the seller is responsible for export clearance. Failure to comply with export regulations can cause delays and penalties.
3. Coordination Issues: Proper coordination between the seller and the buyer’s nominated ship is critical. Miscommunication regarding the vessel’s arrival time and docking location can result in charges and logistical complications.

FOB (Free on Board)

What is FOB?

Not to be confused with the UCC’s commonly known version of “FOB,” which differs, under Incoterms® 2020, Free on Board, or FOB, extends the seller’s responsibilities beyond FAS. The seller must deliver the goods on board the vessel at the named port of shipment. Risk transfers to the buyer once the goods pass the ship’s rail. The buyer covers all costs from that point forward, including ocean freight, insurance, and import duties.

Common Mistakes:

2. Confusion with UCC term: Parties may inadvertently confuse Uniform Commercial Code (UCC) FOB with Incoterms® FOB. For example, under the UCC, FOB terms can indicate either FOB origin (seller is responsible for delivering to the carrier) or FOB destination (where the seller retains responsibility until the goods reach the buyer’s location). In contrast, Incoterms® FOB strictly refers to the transfer of risk and responsibility once the goods are loaded onto the vessel at the port of shipment. Parties should clearly specify which FOB term is being used to avoid confusion.
3. Loading Responsibilities: Sellers under FOB are responsible for loading the goods onto the vessel. Neglecting this obligation can lead to significant disputes and financial consequences.
4. Transfer of Risk: Buyers must understand that risk transfers once the goods are on board. Any damage occurring thereafter is the buyer’s responsibility, even if the seller still holds the bill of lading.
5. Export Documentation: While FOB requires sellers clear goods for export, the term does not obligate them to clear goods for import or transit through third countries.

Conclusion:

Mastering Incoterms® 2020 FAS and FOB is vital for parties engaged in sea and inland waterway transport. These Incoterms delineate clear boundaries for risk transfer and cost responsibilities, making them indispensable for negotiating favorable terms and managing logistics efficiently.

As we continue to navigate the complexities of international trade, understanding appropriate Incoterms can lead to more secure and streamlined transactions. Our next installment will delve into CIF (Cost, Insurance, and Freight) and CFR (Cost and Freight).

Consulting with a specialist in international trade law is advisable to ensure contracts are tailored to your specific needs and comply with applicable laws and regulations. Please contact your Miller Johnson attorney if you have any questions about this blog post.