Free on Board (FOB) is an international commercial law term that specifies at which point the seller transfers ownership of goods to the buyer and who pays the transportation costs. It determines when the responsibility for the goods, including payment of transportation and insurance, shifts from the seller to the buyer.
FOB is commonly used in international shipping agreements and is always followed by a specified location, typically a port. For instance, “FOB New York” means that the seller retains responsibility for the goods until they are delivered to the port in New York. Once the goods are on board the ship at that port, the responsibility transfers to the buyer.
The specified FOB location is crucial as it determines:
Who pays for the transportation of the goods to the specified location.
Who bears the risk if the goods are lost or damaged before reaching the specified location.
FOB is essential for businesses and traders to understand as it affects costs, risks, and responsibilities in international trade. It’s one of the many Incoterms (International Commercial Terms) that standardize shipping and freight responsibilities.
If a contract specifies “FOB Los Angeles,” it means the seller is responsible for transporting the goods to the port in Los Angeles and loading them onto the ship. Once the goods are on board, the buyer assumes responsibility for any risks, costs, or damages.
A company in China selling electronics to a retailer in the US with terms “FOB Shanghai” would be responsible for getting the goods to the Shanghai port and loading them. After that, the US retailer takes over responsibility.
Incoterms, CIF (Cost, Insurance, and Freight), EXW (Ex Works), International Trade
What’s the difference between FOB Destination and FOB Shipping Point?
“FOB Destination” means the seller retains responsibility and bears the shipping costs until the goods reach the buyer’s location. “FOB Shipping Point” (or “FOB Origin”) means the buyer takes responsibility and pays the shipping costs once the goods leave the seller’s location.
How does FOB affect pricing?
FOB determines who bears the shipping costs and risks. Depending on the FOB terms, the seller might include shipping costs in the product’s price or list them separately.
Is FOB used for all modes of transportation?
Traditionally, FOB was used for sea and inland waterway transport. However, in modern trade, it’s sometimes used more broadly. It’s essential to specify the mode of transport in the agreement to avoid confusion.
How does FOB differ from CIF?
While FOB determines when responsibility transfers from seller to buyer, CIF (Cost, Insurance, and Freight) means the seller also pays for the cost, insurance, and freight to transport the goods to the buyer’s specified location.
Why is it essential to specify a location with FOB?
The specified location in FOB terms determines the exact point where ownership and risk transfer from the seller to the buyer. It’s crucial for clarity in contracts and to avoid disputes.
