Legal Definitions - free on board

FOB stands for Free On Board.

FOB is a standard term used in commercial contracts for the sale of goods. It defines the point at which the responsibility for the goods, including the cost of transportation and the risk of loss or damage, transfers from the seller to the buyer during shipping. This term is crucial because it clarifies who pays for shipping and who is financially responsible if something goes wrong with the goods while they are in transit.

There are two primary types of FOB terms:

• FOB Shipping Point (or FOB Origin): Under this arrangement, the seller's responsibility ends, and the buyer's responsibility begins, once the goods are loaded onto the carrier (e.g., a truck, train, or ship) at the seller's location. The buyer typically pays for the transportation costs from that point and assumes the risk of any loss or damage that occurs during transit.
• FOB Destination: With this arrangement, the seller retains responsibility for the goods and pays for transportation until the goods arrive at the buyer's specified destination. The risk of loss or damage transfers to the buyer only when the goods are delivered to their final location.

Here are some examples to illustrate how "Free On Board" works in practice:

• Example 1 (FOB Shipping Point - Domestic Business-to-Business):

  A technology company in California (the seller) sells a bulk order of computer components to a manufacturing plant in Texas (the buyer). Their contract specifies "FOB Seller's Warehouse, California." Once the components are loaded onto the freight truck at the California warehouse, the Texas company becomes responsible for them. If the truck carrying the components is involved in an accident on the way to Texas, the manufacturing plant (buyer) would bear the financial loss for any damaged goods and would need to file a claim with their own insurance or the shipping carrier. The Texas company also pays for the shipping costs from California to Texas.

  This example illustrates FOB Shipping Point because the risk and cost of transport transfer to the buyer as soon as the goods leave the seller's premises.

• Example 2 (FOB Destination - E-commerce Consumer Sale):

  An online bookstore (the seller) ships a new novel to a customer (the buyer) at their home address. The bookstore's shipping policy is "FOB Customer's Address." If the package containing the book is lost or damaged by the postal service before it reaches the customer's mailbox, the online bookstore is responsible for sending a replacement book or issuing a refund. The bookstore also covers the shipping fee. The customer only becomes responsible for the book once it has been successfully delivered.

  This example demonstrates FOB Destination because the seller maintains responsibility for the goods and the shipping costs until they arrive safely at the buyer's specified location.

• Example 3 (FOB Shipping Point - International Trade):

  A clothing retailer in Canada (the buyer) orders a large shipment of sweaters from a textile manufacturer in Bangladesh (the seller). The terms of their agreement are "FOB Port of Chittagong, Bangladesh." After the sweaters are manufactured, they are transported to the port and loaded onto a cargo ship. At the moment the container of sweaters is loaded onto the ship in Chittagong, the Canadian retailer assumes ownership and the risk of any damage or loss during the ocean voyage. The Canadian retailer is also responsible for paying the ocean freight, customs duties, and all further transportation costs to their warehouse in Canada.

  This example highlights FOB Shipping Point in an international context, where the transfer of risk and cost occurs at the port of loading in the seller's country.