Legal Definitions - free on board (FOB)

Free On Board (FOB) is a standard shipping term used in sales contracts to define the precise point at which the responsibility for goods, including the risk of loss or damage, transfers from the seller to the buyer. It also clarifies which party is responsible for paying the transportation costs.

Essentially, FOB clarifies the exact stage in the shipping journey where the seller's obligations regarding the goods end and the buyer's begin. This is a critical detail because it determines who bears the financial burden if something goes wrong during transit, such as goods being lost, damaged, or stolen.

• FOB Shipping Point (or FOB Origin): Under this agreement, the seller's responsibility for the goods ends once they are safely loaded onto the carrier (e.g., a truck, train, or ship) at the seller's location. From that moment, the buyer assumes all risk of loss or damage during transit and is typically responsible for paying the shipping costs.
• FOB Destination: With this term, the seller retains responsibility for the goods and covers the shipping costs 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 successfully delivered to that final location.

Examples of Free On Board (FOB) in Action:

• Example 1: FOB Shipping Point for Industrial Components

  A car manufacturer in Michigan orders a large batch of specialized engine components from a supplier in Ohio. Their purchase agreement specifies "FOB Supplier's Factory, Ohio." This means the Ohio supplier is responsible for properly packaging the components and loading them onto the designated freight truck at their factory. Once the components are on the truck, the risk of any damage or loss during the journey to Michigan immediately transfers to the car manufacturer. If the truck experiences an accident and the components are destroyed en route, the car manufacturer, not the supplier, would bear the financial loss and would need to file a claim with the shipping company. The car manufacturer would also be responsible for paying the freight charges from Ohio to Michigan.

• Example 2: FOB Destination for Online Retail Purchases

  An online clothing boutique sells a designer dress to a customer living in a different state. The boutique's standard terms of sale state "FOB Customer's Delivery Address." In this scenario, the online boutique is responsible for ensuring the dress safely reaches the customer's home. If the package is lost by the postal service or the dress is damaged during transit, the online boutique bears the financial risk. They would typically send a replacement dress or issue a full refund to the customer. The risk only transfers to the customer once the dress is successfully delivered to their specified address. The boutique also covers the shipping cost to the customer's door.

• Example 3: FOB Vessel for International Commodity Trade

  A wheat farmer in Canada sells a large quantity of grain to a food distributor in Egypt. Their international trade contract specifies "FOB Port of Vancouver, Canada." This means the Canadian farmer is responsible for transporting the wheat to the Port of Vancouver, covering all costs associated with getting it through Canadian customs, and loading it onto the cargo ship designated by the Egyptian distributor. Once the grain is securely loaded onto the vessel at the Port of Vancouver, the risk of any damage or loss during the long ocean voyage to Egypt transfers to the Egyptian food distributor. If the ship encounters severe weather and the wheat is spoiled at sea, the Egyptian distributor would be responsible for the loss, not the Canadian farmer. The distributor would also arrange and pay for the ocean freight and subsequent transportation within Egypt.