FOB stands for “Freight On Board” or “Free On Board”. It’s a term typically used for international shipping. It indicates who is responsible for goods destroyed or damaged during shipping as well as other obligations, costs, and risks during the delivery.
History of the Term
Before, FOB referred to the transfer of title and liability between the buyer and the seller, and it used to be associated only with transported goods via ship. Eventually, the term expanded, and it now refers to all types of transportation.
What is FOB
The FOB incoterm means that the exporter or the seller is mainly responsible for shipping the goods from the warehouse and loading them onto the vessel for export. The seller will also be responsible for clearing the customs in the country of origin.
As soon as the cargo crosses the ‘ships-rails’, which is the ship’s threshold, the risks and obligations then get transferred to the buyer or importer. From this point onwards, the buyer will pay for the insurance and transportation costs and clear the customs in the country of import.
Terms and Conditions
There are some variations in terms of FOB terms; namely “FOB Origin” and FOB destination.
FOB Origin
If the term of sale is FOB Origin, the seller’s obligation to deliver the goods ends when the seller hands them over to the carrier, which is also called a ‘shipment contract’.
The buyer then assumes of responsibility of the goods as soon as the hauler or carrier picks up and signs for the cargo. There’s also the term ‘freight collect, which means the buyer is liable for the shipment charges and responsible for filing insurance claims.
FOB Destination
If the term of sale is FOB Destination, the seller has the duty to deliver the product to a specified location.
If the term is FOB Destination, freight collect, the seller then has the ownership and control of the shipment until it’s delivered to the agreed destination, but the buyer will be responsible for the freight charges.
If the term is FOB Destination, freight prepaid, the seller holds the title and control of the products until delivered, given there are no insurance claims, and the seller will also take care of the freight charges.
It’s crucial to understand these FOB terms to know what to expect. Also, keep in mind the dating. Some sellers offer longer payment terms, but the start date will be based on the FOB date. That will affect the cost of goods.
Overall, the buyer and the seller will agree which will be the FOB point. FOB terms are important since it helps bring clarity to the whole transaction. It determines which party is accountable for the freight during shipping. Both parties should be clear about the FOB terms and who should be responsible for the cargo at each stage of the shipment. Every buyer-seller transaction should have the FOB terms clearly spelled out as this will save both parties the trouble and the cost down the road.
