Commodities

Free On Board - FOB

Gayathri G | Updated on January 23, 2018

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A contractual term that requires the seller to deliver goods on board a vessel designated by the buyer. The goods are delivered at the seller’s cost via a specific route to a destination designated by the buyer.

When used in trade terms, the word ‘free’ means the seller has an obligation to deliver goods to a named place for transfer to a carrier. Contracts involving international transportation often contain abbreviated trade terms that describe matters such as the time and place of delivery and payment, when the risk of loss shifts from the seller to the buyer, as well as who pays the costs of freight and insurance.

FOB terms indicate when the risk of loss shifts from the seller to the buyer. They are very important to participants in international transactions and particularly for contracts involving delicate items or items that are vulnerable to theft.

For example, a pepper dealer purchases 10,000 tonnes of pepper from Company XYZ in India to sell them at his store in the US. If the purchase contract says “FOB, San Francisco, ABC warehouse,” this means Company XYZ will pay the loading and shipping costs to get the 10,000 tonnes of pepper from its Indian factory to the ABC warehouse in San Francisco. The pepper becomes the dealer’s property in San Francisco, meaning that if the jars are lost, destroyed, or stolen on the way to San Francisco, Company XYZ is liable because it still owns the goods while they are in transit. Likewise, if they are lost, destroyed, or stolen after they reach the ABC warehouse, the dealer is liable.

The above example illustrates the concept of FOB Destination, which is the standard and most common term. But some contracts use FOB Origin, whereby the buyer becomes the owner at the time and place the product originates.

This makes the buyer responsible for freight and damaged goods.

Published on August 19, 2015

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