FOB (free on board) is a term in international commercial law specifying at what point respective obligations, costs, and risk involved in the delivery of goods shift from the seller to the buyer under the Incoterms standard published by the International Chamber of Commerce. FOB is only used in non-containerized sea freight or inland waterway transport. As with all Incoterms, FOB does not define the point at which ownership of the goods is transferred.
The term FOB is also used in modern domestic shipping within North America to describe the point at which a seller is no longer responsible for shipping costs.
Ownership of a cargo is independent of Incoterms, which relate to delivery and risk. In international trade, ownership of the cargo is defined by the contract of sale and the bill of lading or waybill.
Historical usage
The term "free on board", or "f.o.b." was used historically in relation to the transfer of risk from seller to buyer as goods are shipped.[1]
Under the Incoterms 2020 standard published by the International Chamber of Commerce, FOB is only used in sea freight and stands for "Free On Board". The term is always used in conjunction with a port of loading.[2]
Indicating "FOB port" means that the seller pays for transportation of the goods to the port of shipment, plus loading costs. The buyer pays the cost of marine freight transport, insurance, unloading, and transportation from the arrival port to the final destination. The passing of risks occurs when the goods are loaded on board at the port of shipment. For example, "FOB Vancouver" indicates that the seller will pay for transportation of the goods to the port of Vancouver, and the cost of loading the goods on to the cargo ship (this includes inland haulage, customs clearance, origin documentation charges, demurrage if any, origin port handling charges, in this case Vancouver). The buyer pays for all costs beyond that point, including unloading. Responsibility for the goods is with the seller until the goods are loaded on board the ship. Once the cargo is on board, the buyer assumes the risk.
Only the most enthusiastic lawyer could watch with satisfaction the spectacle of liabilities shifting uneasily as the cargo sways at the end of a derrick across a notional perpendicular projecting from the ship's rail.
In the modern era of containerization, the term "ship's rail" is somewhat archaic for trade purposes, as with a sealed shipping container, there is no way of establishing when damage occurred after the container has been sealed. The standards have noted this. Incoterms 1990 stated,
When the ship's rail serves no practical purpose, such as in the case of roll-on/roll-off or container traffic, the FCA term is more appropriate to use.
Incoterms 2000 adopted the wording,
If the parties do not intend to deliver the goods across the ship's rail, the FCA term should be used.[2]
The phrase passing the ship's rail is no longer in use, having been dropped from the FOB Incoterm in the 2010 revision.
Due to potential confusion with domestic North American usage of "FOB", it is recommended that the use of Incoterms be explicitly specified, along with the edition of the standard.[5][6] For example, "FOB New York (Incoterms 2000)". Incoterms apply to both international trade and domestic trade, as of the 2010 revision.
North America
In North America, FOB is written into a sales agreement to determine where the liability responsibility for the goods transfers from the seller to the buyer. FOB stands for "Free On Board". There is no line item payment by the buyer for the cost of getting the goods onto the transport. There are two possibilities: "FOB origin", or "FOB destination". "FOB origin" means the transfer occurs as soon as the goods are safely on board the transport. "FOB destination" means the transfer occurs the moment the goods are removed from the transport at the destination. "FOB origin" (also sometimes phrased as "FOB shipping" or "FOB shipping point") indicates that the sale is considered complete at the seller's shipping dock, and thus the buyer of the goods is responsible for freight costs and liability during transport. With "FOB destination", the sale is complete at the buyer's doorstep and the seller is responsible for freight costs and liability during transport.[7][8]
The two terms have a specific meaning in commercial law and cannot be altered. But the FOB terms do not need to be used, and often are not. In this case the specific terms of the agreement can vary widely, in particular which party, buyer or seller, pays for the loading costs and shipment costs, and/or where responsibility for the goods is transferred. The last distinction is important for determining liability or risk of loss for goods lost or damaged in transit from the seller to the buyer.[8][9]
For example, a person in Miami purchasing equipment from a manufacturer in Chicago could receive a price quote of "$5000 FOB Chicago", which would indicate that the buyer would be responsible for the shipping from Chicago to Miami. If the same seller issued a price quote of "$5000 FOB Miami", then the seller would cover shipping to the buyer's location.
International shipments typically use "FOB" as defined by the Incoterms standards, where it always stands for "Free On Board". Domestic shipments within the United States or Canada often use a different meaning, specific to North America, which is inconsistent with the Incoterms standards.
North American FOB usage corresponds to Incoterms approximately as follows:
North America
Incoterms
FOB shipping point or FOB shipping point, freight collect
A related but separate term "CAP" ("customer-arranged pickup") is used to denote that the buyer will arrange a carrier of their choice to pick the goods up at the seller's premises, and the liability for any damage or loss belongs to the buyer.
Although FOB has long been stated as "Freight On Board" in sales contract terminology, this should be avoided as it does not precisely conform to the meaning of the acronym as specified in the UCC.[8]
Sometimes FOB is used in sales to retain commission by the outside sales representative. It is unclear where this originated.
Accounting and auditing
Container ship loading
In the past, the FOB point determined when title transferred for goods. For example, at year- and period-end goods in transit under "FOB destination" (North American usage) appear on the seller's balance sheet but not in the buyer's balance sheet, as the risk and rewards of ownership change to the buyer at the "destination" port.
It is much easier to determine when title transfers by referring to the agreed upon terms and conditions of the transaction; typically, title passes with risk of loss. The transfer of title may occur at a different time (or event) than the FOB shipping term. The transfer of title is the element of revenue that determines who owns the goods and the applicable value.
Import fees when they reach the border of one country to enter the other country under the conditions of FOB destination are due at the customs port of the destination country.[10]
With the advent of e-commerce, most commercial electronic transactions occur under the terms of "FOB shipping point" or "FCA shipping point".
"Freight On Board"
Some sources claim that FOB stands for "Freight On Board". This is not the case. The term "Freight On Board" is not mentioned in any version of Incoterms, and is not defined by the Uniform Commercial Code in the USA.[8] Further to that, it has been found in the US court system that "Freight On Board" is not a recognized industry term.[11] Use of the term "Freight On Board" in contracts is therefore very likely to cause confusion.
Freight transport is the physical process of transporting commodities and merchandise goods and cargo. The term shipping originally referred to transport by sea but in American English, it has been extended to refer to transport by land or air as well. "Logistics", a term borrowed from the military environment, is also used in the same sense.
Containerization is a system of intermodal freight transport using intermodal containers. Containerization is also referred as "Container Stuffing" or "Container Loading", which is the process of unitization of cargoes in exports. Containerization is the predominant form of unitization of export cargoes, as opposed to other systems such as the barge system or palletization. The containers have standardized dimensions. They can be loaded and unloaded, stacked, transported efficiently over long distances, and transferred from one mode of transport to another—container ships, rail transport flatcars, and semi-trailer trucks—without being opened. The handling system is completely mechanized so that all handling is done with cranes and special forklift trucks. All containers are numbered and tracked using computerized systems.
The Uniform Commercial Code (UCC), first published in 1952, is one of a number of Uniform Acts that have been established as law with the goal of harmonizing the laws of sales and other commercial transactions across the United States through UCC adoption by all 50 states, the District of Columbia, and the Territories of the United States.
Geographical pricing, in marketing, is the practice of modifying a basic list price based on the geographical location of the buyer. It is intended to reflect the costs of shipping to different locations. There are several ways to apply the cost of shipping to the prices.
The Incoterms or International Commercial Terms are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) relating to international commercial law. They are widely used in international commercial transactions or procurement processes and their use is encouraged by trade councils, courts and international lawyers. A series of three-letter trade terms related to common contractual sales practices, the Incoterms rules are intended primarily to clearly communicate the tasks, costs, and risks associated with the global or international transportation and delivery of goods. Incoterms inform sales contracts defining respective obligations, costs, and risks involved in the delivery of goods from the seller to the buyer, but they do not themselves conclude a contract, determine the price payable, currency or credit terms, govern contract law or define where title to goods transfers.
Intermodal freight transport involves the transportation of freight in an intermodal container or vehicle, using multiple modes of transportation, without any handling of the freight itself when changing modes. The method reduces cargo handling, and so improves security, reduces damage and loss, and allows freight to be transported faster. Reduced costs over road trucking is the key benefit for inter-continental use. This may be offset by reduced timings for road transport over shorter distances.
Cargo consists of bulk goods conveyed by water, air, or land. In economics, freight is cargo that is transported at a freight rate for commercial gain. Cargo was originally a shipload but now covers all types of freight, including transport by rail, van, truck, or intermodal container. The term cargo is also used in case of goods in the cold-chain, because the perishable inventory is always in transit towards a final end-use, even when it is held in cold storage or other similar climate-controlled facility. The term freight is commonly used to describe the movements of flows of goods being transported by any mode of transportation.
A letter of credit (LC), also known as a documentary credit or bankers commercial credit, or letter of undertaking (LoU), is a payment mechanism used in international trade to provide an economic guarantee from a creditworthy bank to an exporter of goods. Letters of credit are used extensively in the financing of international trade, when the reliability of contracting parties cannot be readily and easily determined. Its economic effect is to introduce a bank as an underwriter that assumes the counterparty risk of the buyer paying the seller for goods.
Purchasing is the process a business or organization uses to acquire goods or services to accomplish its goals. Although there are several organizations that attempt to set standards in the purchasing process, processes can vary greatly between organizations.
The modern terms short-sea shipping, marine highway, and motorways of the sea, and the more historical terms coastal trade, coastal shipping, coasting trade, and coastwise trade, all encompass the movement of cargo and passengers mainly by sea along a coast, without crossing an ocean.
Rail freight transport is the use of railroads and trains to transport cargo as opposed to human passengers.
A freight rate is a price at which a certain cargo is delivered from one point to another. The price depends on the form of the cargo, the mode of transport, the weight of the cargo, and the distance to the delivery destination. Many shipping services, especially air carriers, use dimensional weight for calculating the price, which takes into account both weight and volume of the cargo.
A freight forwarder, or forwarding agent, is a person or company that organizes shipments for individuals or corporations to get goods from the manufacturer or producer to a market, customer or final point of distribution. Forwarders contract with a carrier or often multiple carriers to move the goods from one country to another.
Freight companies are companies that specialize in the moving of freight, or cargo, from one place to another. These companies are divided into several variant sections. For example, international freight forwarders ship goods internationally from country to country, and domestic freight forwarders, ship goods within a single country.
Drayage is the transport of goods over a short distance in the shipping and logistics industries. Drayage is often part of a longer overall move, such as from a ship to a warehouse. Some research defines it specifically as "a truck pickup from or delivery to a seaport, border point, inland port, or intermodal terminal with both the trip origin and destination in the same urban area". Port drayage is the term used when describing short hauls from ports and other areas to nearby locations. It can also refer to the movement of goods within large buildings such as convention centers. Drayage is a key aspect of the transfer of shipments to and from other means of transportation. The term drayage is also used for the fee paid for such services.
Sale of Goods Acts regulate the sale of goods in several legal jurisdictions including Malaysia, New Zealand, the United Kingdom and the common law provinces of Canada.
Transloading, also known as cross-docking, is the process of transferring a shipment from one mode of transportation to another. It is most commonly employed when one mode cannot be used for the entire trip, such as when goods must be shipped internationally from one inland point to another. Such a trip might require transport by truck to an airport, then by airplane overseas, and then by another truck to its destination; or it might involve bulk material loaded to rail at the mine and then transferred to a ship at a port. Transloading is also required at railroad break-of-gauge points, since the equipment can not pass from one track to another unless bogies are exchanged.
International Commercial Law is a body of legal rules, conventions, treaties, domestic legislation and commercial customs or usages, that governs international commercial or business transactions. A transaction will qualify to be international if elements of more than one country are involved.
Affreightment is a legal term relating to shipping.
A bill of lading is a document issued by a carrier to acknowledge receipt of cargo for shipment. Although the term historically related only to carriage by sea, a bill of lading may today be used for any type of carriage of goods. Bills of lading are one of three crucial documents used in international trade to ensure that exporters receive payment and importers receive the merchandise. The other two documents are a policy of insurance and an invoice. Whereas a bill of lading is negotiable, both a policy and an invoice are assignable. In international trade outside the United States, bills of lading are distinct from waybills in that the latter are not transferable and do not confer title. Nevertheless, the UK Carriage of Goods by Sea Act 1992 grants "all rights of suit under the contract of carriage" to the lawful holder of a bill of lading, or to the consignee under a sea waybill or a ship's delivery order.
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