Case Background
- Seller: A clothing manufacturer in Qingdao, China (Company C)
- Buyer: A retailer in London, UK (Company D)
- Goods: 5,000 pieces of summer clothing (value: GBP 100,000)
- Transportation: Sea freight (Qingdao Port, China → London Port, UK)
- Trade Term: FOB Qingdao (applied under Incoterms® 2020)
Operational Process
1. Contractual Agreement
The sales contract stipulates FOB Qingdao, which means:
- Seller (Company C) is responsible for:
- Loading the goods onto the vessel at the port of shipment (Qingdao Port) and clearing the goods for export.
- Providing the necessary documents for the buyer to take delivery of the goods.
- Buyer (Company D) is responsible for:
- Chartering the vessel and paying the freight.
- Arranging insurance for the goods during transit.
- Handling import customs clearance and paying import duties, VAT, etc. at the port of destination.
2. Seller’s Responsibilities (Company C)
(1) Goods Preparation & Export Clearance
- Produces and inspects 5,000 pieces of summer clothing, packages them in cartons, and attaches shipping labels.
- Declares the exports to Chinese customs, pays the export duties (if any), and obtains the export licenses and relevant customs documents.
(2) Loading the Goods onto the Vessel
- Delivers the goods to the appointed loading area at Qingdao Port as per the buyer’s shipping instructions.
- Loads the goods onto the vessel designated by the buyer. The risk of the goods transfers from the seller to the buyer once the goods pass the ship’s rail.
(3) Document Provision
- Provides the buyer with the commercial invoice, packing list, and other necessary documents, such as the bill of lading (if issued in the seller’s name, it needs to be endorsed to the buyer).
3. Buyer’s Responsibilities (Company D)
(1) Chartering the Vessel & Paying Freight
- Contracts with a shipping company to book a suitable vessel for transporting the goods.
- Pays the freight charges to the shipping company. Informs the seller of the vessel’s arrival time and loading arrangements at the port of shipment.
(2) Arranging Insurance
- Purchases marine insurance for the goods, covering the transit from Qingdao Port to London Port. The insured value is usually 110% of the goods’ value (GBP 110,000), and the specific coverage (such as FPA, WPA, or All Risks) is determined according to the contract or the buyer’s needs.
(3) Import Clearance & Goods Pickup
- Upon the arrival of the goods at London Port, exchanges the bill of lading for a delivery order.
- Declares the imports to the UK customs, pays the duties (10% tariff: GBP 10,000) and VAT (20%: GBP 22,000), and picks up the goods after the customs clearance.
4. Risk & Cost Allocation
- Risk Transfer Point: The risk of the goods transfers from the seller to the buyer when the goods pass the ship’s rail at the port of shipment (Qingdao Port). For example, if the goods are damaged by heavy rain while waiting to be loaded onto the ship, the seller bears the loss. But if the goods are damaged by a storm at sea after loading, the buyer needs to file a claim with the insurer.
- Cost Allocation:
- Seller: Production costs, packaging costs, and export – related fees (GBP 80,000 + GBP 5,000 + GBP 3,000 = GBP 88,000).
- Buyer: Freight, insurance premiums, import duties, VAT, and other costs at the destination port (GBP 12,000 + GBP 1,000 + GBP 10,000 + GBP 22,000 + other fees = GBP 45,000 + other fees).
Key Insights into FOB
1. Seller’s Core Obligations
- Focuses on loading the goods onto the ship and handling export formalities. Does not bear the cost of freight and insurance.
- Must ensure the goods are in compliance with the contract and properly loaded onto the vessel within the specified time.
2. Buyer’s Core Obligations
- Responsible for all aspects of transportation and insurance arrangements, as well as import – related matters.
- Needs to closely coordinate with the seller regarding the shipping schedule to avoid delays and additional costs.
3. Insurance Consideration
- The buyer is responsible for purchasing insurance, so it is crucial to clearly define the insurance terms and coverage in the contract to avoid potential disputes.
- The buyer should consider the nature of the goods and the transportation route to select appropriate insurance coverage.
Risk Warnings
1. Seller Risks
- If the goods do not meet the contract requirements and are rejected by the buyer after loading, the seller may face losses.
- Delays in loading the goods due to the seller’s reasons may lead to claims from the buyer for damages.
2. Buyer Risks
Delays in chartering the vessel or improper insurance arrangements may result in losses if the goods are damaged or lost during transit.
Changes in shipping costs and insurance premiums may affect the overall cost of the goods.