Free On Board (FOB) is a transportation term used in international and domestic trade to indicate that the seller delivers goods to a specified location at their expense. Once the goods reach this location, the buyer is responsible for any further costs, including shipping, handling, and transportation charges. For instance, “FOB our Newark warehouse” implies that the seller covers the costs of delivering goods to their warehouse in Newark, where after the buyer incurs all subsequent costs associated with transporting the merchandise to its final destination.
Implications in Shipping
Transfer of Ownership
In an FOB contract, the title and risk associated with the goods generally pass from seller to buyer at the FOB point. The precise point at which this transfer occurs is critical for determining liability, insurance, and responsibility for the goods.
The transfer of ownership is documented through a Bill of Lading (BoL), a legal document issued by a carrier to acknowledge receipt of cargo for shipment.
Cost Responsibilities
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Seller’s Costs:
- Delivery to the specified FOB point.
- Loading of goods onto the freight carrier.
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Buyer’s Costs:
- Freight and transport charges from the FOB point.
- Insurance once the goods have been delivered to the FOB point.
- Any customs, duties, or tariffs if applicable.
Types of FOB
FOB Shipping Point
In FOB Shipping Point, the buyer takes ownership and liability of the goods as soon as they leave the seller’s premises. The buyer is responsible for shipping costs and claims related to damages or loss during transit.
FOB Destination
In FOB Destination, the seller retains ownership and bears all risks and costs until the goods are delivered to the buyer’s specified location. Only upon delivery does the buyer take ownership.
Special Considerations
Insurance Requirements
The party responsible for the goods during transit must secure adequate insurance. For FOB Shipping Point, the buyer should ensure the goods. Conversely, for FOB Destination, the seller is responsible for insuring the goods during transit.
Customs and Duties
In international trade, the FOB term specifies that the seller is responsible up to the point of shipment. The buyer must be prepared for any import duties, taxes, or customs clearance required at the destination country.
Examples
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FOB Newark Warehouse:
- The seller delivers the goods to their Newark warehouse.
- The buyer assumes all further costs and risks from this point onward.
-
FOB Shanghai Port:
- The goods are delivered onto a vessel at the Shanghai port.
- The buyer must arrange and pay for shipping from Shanghai to the final destination.
Historical Context
The term FOB originated from maritime trade, specifically from the practice of loading goods onto ships. Over time, its use has expanded to cover various types of transportation, including rail and truck.
Comparisons with Related Terms
Free Alongside Ship (FAS)
FAS is another shipping term where the seller is responsible for transporting and delivering goods alongside the vessel, but not loaded onto the ship. The buyer then handles loading, transportation, and subsequent costs from that point onward.
Related Terms
- Bill of Lading (BoL): A legal document between a shipper and carrier detailing the type, quantity, and destination of goods.
- Free Alongside Ship (FAS): A maritime trade term where the seller must deliver goods alongside a vessel at a nominated port.
FAQs
What is the main difference between FOB Shipping Point and FOB Destination?
- FOB Shipping Point: Buyer takes ownership when goods leave the seller’s location.
- FOB Destination: Seller retains ownership until goods reach the buyer’s location.
Who pays for shipping under FOB terms?
How does FOB affect insurance?
References
- Incoterms® rules by the International Chamber of Commerce.
- “International Trade and Carriage of Goods” by John F. Wilson.
- The Chartered Institute of Logistics and Transport (CILT).
Summary
Free On Board (FOB) is a crucial term in shipping and logistics that determines cost responsibilities and ownership transfer between buyers and sellers. Understanding the specifics of FOB Shipping Point and FOB Destination helps in mitigating risks and clarifying obligations in trade transactions. Familiarity with related terms like Free Alongside Ship (FAS) and the proper use of documentation like the Bill of Lading enhances the efficiency and security of supply chain operations.
