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Essential Knowledge for Sellers Under FOB Terms in Freight Forwarding: These Unexpected Costs Are Borne by the Shipper

Published:2026-10-21 02:35
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According to statistics, FOB transactions account for 70% of China's exports. However, experts point out: FOB poses greater risks for exporters and may result in the loss of both goods and payment.

 

 

Currently, the proportion of China's export contracts concluded on FOB price terms is increasing. Moreover, it is less common for the consignee to designate a shipping company and more common for them to designate an overseas freight forwarder, which does not align with the meaning of the FOB term.

 

 *  01 What are the drawbacks of concluding export contracts on FOB price terms?

 

 *  02 Why is the proportion increasing?

 

 *  03 How should exporters respond?

 *  04 Why is the trend of exporting on FOB terms on the rise?

 

In the 1980s, China implemented a state-controlled foreign trade policy. Except for a few foreign-invested enterprises, foreign trade rights were limited to central and provincial-level specialized foreign trade companies, and only expanded to city/county-level foreign trade companies and key manufacturing enterprises by the end of the 1980s. At that time, China's shipping market had not yet opened up, and COSCO's ocean-going liner capacity was far from sufficient to meet the demands of foreign transportation, with a large volume of export goods having to be transshipped via Hong Kong. To protect the national fleet and the insurance industry, the state advocated CIF for exports and FOB for imports, which became the standard for negotiating transport clauses in foreign trade at the time. However, due to multiple transshipment points along the export route, the second-leg vessel information provided to buyers was often inaccurate, and vessel names were sometimes changed repeatedly. Additionally, to prevent sellers from issuing advanced or anti-dated bills of lading, some buyers insisted on FOB terms and designated their own shipping companies.

Since the opening of China's shipping market in the 1990s, various foreign liner companies have rushed to establish a presence in major coastal ports, especially Shanghai. The entry of foreign shipping companies provided conditions for overseas buyers to designate shipping companies. Meanwhile, with the vigorous development of foreign-invested enterprises and the state granting import/export rights to manufacturing enterprises and research institutes, the landscape shifted from a monopoly held by specialized foreign trade companies to a broader foreign trade framework. Furthermore, as international trade transitioned from a seller's market to a buyer's market, while state-owned enterprises retained some traditional influence in exporting on CIF terms, other enterprises followed market trends, leading to a certain increase in the volume of FOB exports.

As overseas shipping companies entered the Chinese market, overseas freight forwarders also swarmed in. The activity of these overseas forwarders caused a sharp rise in the volume of FOB exports with designated agents. Moreover, since 1997, liner companies have raised freight rates repeatedly, with unprecedented frequency, magnitude, and short notice, turning previously marginally profitable freight operations into losses or even negative returns. Some foreign trade professionals, seeking to avoid freight rate risks, proactively opted for FOB terms. Consequently, the volume of FOB exports has soared in recent years, with some foreign-invested enterprises reaching over 80%, and the trend continues upward.

 

Under FOB terms, the buyer should designate the shipping company.

Why are overseas freight forwarders being designated instead?

 

Under the FOB trade term, the division of responsibility is based on the goods passing the ship's rail, meaning the seller delivers the goods to the shipping company. In current FOB practice, it is rare for a shipping company to be designated; the vast majority of cases involve the designation of an overseas freight forwarding company. According to the International Chamber of Commerce's Incoterms 1990 and 2000, when an overseas freight forwarder is designated under FOB, the FCA term should be used, i.e., the goods are delivered to the carrier designated by the buyer at a named place, and the division of responsibility and costs is not based on passing the ship's rail. Although the FCA term has been published for 10 years, its actual use is minimal. This is mainly due to the trading parties' awareness of FCA and their preference for customary practices. From the seller's perspective, using the FCA term still means accepting a forwarder's bill of lading, which does not confer title to the goods. This may explain why the FCA term is not widely applied, while a "modified" practice of the FOB term has been used for a long time.

So, under the FOB term, why do buyers designate freight forwarders? From the buyer's perspective, there are several considerations. Some require the forwarder to handle customs clearance, consolidation, logistics, and other services; some want the forwarder to provide accurate information on delivery and shipment status; some can obtain preferential freight rates through the forwarder. Of course, it cannot be ruled out that a few unscrupulous traders use forwarders, or collude with them, to defraud sellers of their goods. From the above, it is clear that the designated overseas forwarder serves the buyer as the "master." In a buyer's market, sellers proceed "knowing there is a tiger ahead, yet venturing into the tiger's den," as they have no better alternative.

 
 

What should the buyer do if delivery of goods occurs without the original bill of lading?

Currently, except for some internationally renowned freight forwarders, the credentials of most overseas forwarders are difficult to verify. Although delivery without the original bill of lading is an act perpetrated by a few with malicious intent, its shadow constantly looms over shippers. Unscrupulous traders collude with overseas forwarders, often starting with small-value trial orders to make the shipper feel secure about settlement, and then defraud them with larger-value orders. The key issue here is that the forwarder's bill of lading is only provided to the seller for negotiation purposes and is not a document of title. The actual document of title—the shipping company's bill of lading—is held by the forwarder. The forwarder uses the shipping company's bill of lading to take delivery of the goods, while the buyer does not go to the bank to redeem the documents, resulting in the seller losing both goods and payment. Therefore, sellers are constantly anxious when dealing with forwarders designated under FOB, never knowing when disaster might strike. To prevent fraud by forwarders, various foreign trade enterprises have adopted several preventive measures, such as conducting credit investigations through international consulting agencies, purchasing export credit insurance (though this type of risk is generally excluded), requesting the buyer's cooperation to have the overseas forwarder issue a guarantee, and strengthening internal review and control. However, it is still difficult to completely avoid the occasional mishap.
Now, the Ministry of Foreign Trade and Economic Cooperation, through relevant foreign trade and economic cooperation commissions (departments, bureaus), has issued a "Notice on Avoiding the Risk of Delivery Without Original Bill of Lading" to all foreign trade enterprises and freight forwarding companies. Foreign trade professionals can convey this to clients, requesting them not to designate forwarders; they can also request a letter of guarantee from the domestic freight forwarder issuing the bill of lading. Both are good approaches. The former is somewhat more difficult to implement because overseas forwarders may obstruct the process, and buyers often do not heed the seller's advice. The latter is arguably the best approach currently, as these overseas forwarders, when establishing offices in China, must have a domestic freight forwarder act as their sponsor. Logically, the sponsoring domestic forwarder should be responsible for the overseas forwarder's creditworthiness, but current Chinese regulations impose no requirements on the sponsor, and the sponsored party does not necessarily conduct its agency business through the sponsor.
This notice from the Ministry of Foreign Trade and Economic Cooperation now requires that bills of lading issued by overseas freight forwarders must be issued by domestic freight forwarders, who shall retain control over the goods and provide a letter of guarantee to the shipper, thereby safeguarding the shipper’s title to the goods. This also compels domestic freight forwarders to assess the qualifications of overseas freight forwarders before they dare to assume such responsibility. At the same time, if an overseas freight forwarder cannot find a domestic freight forwarder to act as its agent, it will be unable to fulfill the role designated by the buyer, and the buyer will naturally have no grounds to blame the seller for not accepting its nominated agent. The provisions of this notice are a boon to shippers in our country. Whether they can be effectively implemented depends on the level of oversight exercised by government authorities at all levels over the freight forwarding industry. Additionally, the Ministry of Transport should issue a circular to shipping companies stipulating that all bookings by overseas freight forwarding enterprises must be made through domestic freight forwarders. Only in this way can the business activities of overseas freight forwarder representative offices be effectively blocked.

Before the implementation of this notice, the only recourse in cases where overseas freight forwarders release goods without presentation of the original bill of lading is to file a lawsuit in court, while closely monitoring the activities of the overseas freight forwarder’s representative office. Often, once such freight forwarders succeed in their fraudulent schemes, they vanish without a trace. Even if the court rules in favor of the plaintiff, winning the case does not guarantee recovery of the money. Typically, however, when sellers encounter such situations, their first step is to seek recourse from the buyer. Legal professionals caution that if inappropriate legal language is used when pursuing the buyer, or if the buyer insincerely proposes a repayment plan to stall for time before the matter goes to court, the outcome may well be a loss rather than a victory.

 

Under FOB Terms, Are Shippers Responsible for These Unexpected Costs?

We all know that FOB (Free On Board) refers to delivery on board the vessel at the port of shipment. In transactions conducted under FOB terms, the buyer is responsible for arranging the vessel to take delivery of the goods, while the seller must load the goods onto the vessel nominated by the buyer within the stipulated shipment period and at the designated port of shipment, and promptly notify the buyer. The risk transfers from the seller to the buyer once the goods are loaded onto the nominated vessel at the port of shipment.

 

 

So, what costs does the shipper have to bear under FOB terms?

 
 

1. Routine Payable Costs

 

We all know that under FOB conditions, the shipper is generally only responsible for costs at the port of origin, i.e., expenses incurred before loading onto the vessel, including: pickup fees, packing charges, port miscellaneous charges, port security fees, bill of lading fees, manifest data entry fees, Terminal Handling Charges (THC) or Origin Receiving Charges (ORC), seal fees, customs clearance fees, etc.

 

It is particularly important to note that costs for manifest declarations such as AMS for the United States and ENS for the European Union, which are filed before loading at the port of origin, are also expenses incurred "before shipment" and should generally be borne by the shipper. Of course, this excludes cases where the customer agrees to cover these costs.

 
 
 
 

2. Costs Arising from Contingencies

 

1) Costs Due to Improper Coordination Between Vessel and Cargo

 

Under FOB, the coordination between vessel and cargo is critical. If the container is not packed and delivered to the port in time to catch the vessel, resulting charges such as dead freight and demurrage will be borne by the shipper. Conversely, if the goods are packed and delivered too early, charges for extended container usage and storage will also fall on the shipper. Therefore, under FOB, it is essential to repeatedly confirm the shipment period and port of loading, and maintain close communication to ensure seamless coordination between vessel and cargo.

 

2) Costs Arising from Unclaimed Cargo at the Destination Port

 

For various reasons, if the consignee fails to take delivery of the goods or pay the freight after the cargo arrives at the destination port, the carrier not only cannot recover the freight in a timely manner but also faces situations where the goods may be auctioned by local customs or incur substantial demurrage charges. Consequently, the carrier may first seek payment from the consignee, and if unsuccessful, will then turn to the shipper.

 

  • Ocean Freight: In principle, this should first be borne by the consignee. If the goods are unclaimed, it may revert to the shipper;

 

  • Taking Delivery: First, notify the consignee to take delivery. If unclaimed, notify the shipper to arrange disposal, such as return shipment or resale;

     

  • Destination Port Container Detention Charges and Port Storage Charges: Unclaimed goods will incur container detention and port storage charges. In cases where the value of the goods does not cover these charges, the shipper may be required to bear them.

 

3) High Fees from Nominated Agents

 

Fees quoted by nominated freight forwarders are often significantly higher than those from regular forwarders. This is because the forwarder is nominated by the consignee, meaning the transport contract is between the consignee and the forwarder, not the seller. The forwarder is responsible to the consignee.

 

There is generally no direct contractual relationship between the shipper and the forwarder, leaving little to no room for negotiation. Therefore, the series of charges at the port of origin quoted by the nominated forwarder tend to be relatively higher than those from a standard forwarder. Unless the difference is excessive, the shipper often has to reluctantly accept these high charges to ensure the smooth shipment of goods.

 

4) Compensation for Cargo Damage

 

If cargo damage is discovered upon container unpacking and inspection at the destination port, under FOB terms, the consignee generally bears the responsibility. Moreover, the consignee usually has insurance and can file a claim for compensation. However, if insurance was not arranged, the consignee may still seek to negotiate a settlement with the shipper.

 

If the cargo damage resulted from the shipper's inadequate packaging, careless container inspection, or other specific circumstances prior to loading, the shipper bears a degree of responsibility and must negotiate a settlement, bearing the corresponding compensation. If it can be proven that the damage is not the shipper's fault, evidence such as loading photos, packing lists, or other supporting documents can be provided to enable the consignee to claim against the carrier.

 

5) Losses from Release of Goods Without Original Bill of Lading

 

Under FOB terms, shippers more frequently deal with nominated freight forwarders rather than nominated shipping lines. However, since nominated forwarders typically maintain close business relationships with the consignee, there is a high risk that they may release the goods directly to the consignee without obtaining the original bill of lading—a practice known as "release without original B/L." This can result in the shipper holding the bill of lading but losing both the goods and the payment, ultimately leading to significant losses.

 

6) The "Hidden Pitfalls" of Letters of Credit

 

Soft clauses in a letter of credit are terms set by the applicant within the L/C. Such clauses can threaten the beneficiary's secure receipt of payment while granting the applicant advantages such as transactional control or the ability to fraudulently obtain goods or advance payments. These clauses are often concealed.

 

If the shipper is not vigilant and the documents presented do not comply with the L/C terms, payment may be refused. Once the goods have been shipped, the shipper is placed in a passive and difficult position, potentially suffering losses on the cargo value.

 
 
 
 

3. Summary

 

Therefore, when shipping goods by sea, it is imperative to maintain a strong awareness of risk control.

  1. Whenever possible, opt for CIF or CFR terms instead of FOB.

  2. Whenever possible, use a carrier’s bill of lading instead of a freight forwarder’s bill of lading.

  3. When accepting a nominated freight forwarder, carefully verify their qualifications and credentials.

  4. Always maintain control over the title to the goods.

  5. Exercise great caution when issuing the bill of lading. Do not accept the counterparty as the shipper on the bill of lading. Also, avoid using a straight bill of lading or one made out to the order of the consignee whenever possible; instead, use a bill of lading made out to the order of the shipper .

  6. Purchase inland transit insurance to eliminate the insurance coverage gap between the shipper’s warehouse and the port of loading.

  7. Carefully review the contract and letter of credit to avoid any soft clauses, and strictly comply with the contract and L/C requirements when preparing all documents.

  8. Purchase relevant export credit insurance to mitigate and transfer risks.