The two most common commodities transactions are FOB and CIF. However there can be other rarer types of transactions involving fuel products like TTO/Tanker take over or STS/ship to ship.
Basic obligations of the buyer and seller under FOB/Free on Board Transaction
- The seller must deliver the goods, loaded on board the buyer-designated vessel, at the designated port of shipment, within the agreed date or period.
- For the seller to fulfil obligation 1, the buyer must inform the seller, in a timely manner, of the specific place and point of delivery at the port and name of the vessel.
- The seller must deliver the goods as stated in point 1, on the agreed date or period in the sales contract and inform the buyer accordingly to enable delivery.
- The seller transfers the risk of loss or damage to the goods once obligations 1, 2 and 3 are fulfilled.
- Although the seller is not responsible for contracting the carrier, they must assist the buyer with any information in seller’s possession – including any transport-related security requirements – that buyer needs to arrange carriage, at buyer’s risk and cost. (This assistance is required under all Incoterms® rules of groups E and F).
- The seller must carry out any export formalities.
- The seller must provide timely notice to the buyer either that the goods have been delivered or that the vessel has failed to take delivery within the agreed period.
- The buyer must take delivery of the goods on board the vessel at the port of shipment, subject to the exceptions described above and in the sub-article B3 of FOB Incoterms® 2020.
- The buyer must contract the carrier and pay the transportation costs.
- The buyer must carry out any import formalities and, if applicable, customs procedures in any transit countries.
While the seller is obligated to load the goods on board the vessel at the agreed port and time, the buyer must inform the seller, in a timely manner, of the specific place and point within the port, and the vessel’s name.
If the buyer fails to do so, and the goods cannot be loaded as a result, the seller is no longer responsible for any loss or damage – the risk transfers to the buyer.
Likewise, if the seller cannot load the goods on board at the agreed time because no vessel is available and the nominated ship is delayed by days or weeks, the buyer bears the risk and cost of storage at the port until the vessel arrives.
A third scenario arises when the buyer gives late notice about the vessel, and the ship’s master closes for cargo earlier than the notified time. In this case. Although the goods are not yet loaded, risks and costs still pass to the buyer.
FOB requires the buyer to:
- Designate the carrier
- Establish a transport contract
- Pay freight to the port of destination.
FOB also means the buyer must handle any import customs formalities and, if needed, transit customs in other countries.
If the goods are containerized, the seller typically delivers them to the container terminal, not on board the vessel. Containers may stay at the terminal for several days before loading. This is a FAS/Free Alongside Ship Transaction.
Basic obligations of buyer & seller under CIF/Cost,Insurance, Freight transaction
1. Buyer Initiation: Issuance of ICPO: The buyer sends a formal and irrevocable purchase order (ICPO) along with their company registration details (such as a company registration certificate or trade license) to the seller.
Proof of Funds: The buyer provides proof of funds or a financial capability statement to show they can cover the cost of the transaction.
2. Seller’s Response and Contract
Draft Contract: The seller issues a draft Sales and Purchase Agreement (SPA) for the buyer to review and amend.
Contract Signing: The buyer reviews, signs, and returns the mutually agreed-upon contract to the seller.
Legalization: The seller then obtains the necessary registrations and legalizations for the contract from government ministries.
Product Documents: The seller provides commitment letters, product availability letters, and other relevant documentation to the buyer.
3. Payment Guarantee
Bank Instrument Issuance: The buyer’s bank issues a payment instrument, such as a Standby Letter of Credit (SBLC) or a Documentary Letter of Credit (DLC), in favor of the seller’s nominated bank to cover the value of the first shipment.
4. Shipment and Documentation
*Arrangement of Shipping and Insurance:*The seller arranges and pays for the shipping and insurance of the goods to the designated destination port.
Loading: The seller loads the product onto a vessel and provides the buyer with the shipping details and a Notice of Readiness to Load.
Shipping Documents: Upon shipment, the seller provides a set of essential shipping documents to the buyer’s bank, including the Bill of Lading.
5. Delivery and Final Payment
Inspection: When the vessel arrives at the destination port, independent inspectors (such as [SGS]) conduct an inspection to verify the quantity and quality of the goods.
Payment Release: Upon successful inspection and confirmation, the buyer’s bank releases the payment for the product to the seller.
Ownership Transfer: Title of product ownership is transferred to the buyer after the payment is settled.