What is Free On Board (FOB)?
Free on board (FOB) is a contractual term that refers to the requirement that the seller deliver goods at the seller's cost via a specific route to a destination designated by the buyer.
How Does Free On Board (FOB) Work?
To understand how FOB terms work, let's look at an example.
Assume that you're a jelly dealer and you purchase 10,000 jars of jelly from Company XYZ. Company XYZ manufactures the jars of jelly in Japan and you sell them in your store in California. If your purchase contract says 'FOB, San Francisco, ABC warehouse,' this means Company XYZ will pay the loading and shipping costs to get the 10,000 jars of jelly from its Japanese factory to the ABC warehouse in San Francisco. The jelly becomes your 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're in transit. Likewise, if they are lost, destroyed, or stolen after they reach the ABC warehouse, you are liable.
Why Does Free On Board (FOB) Matter?
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.
Our example illustrates the concept of FOB Destination, which is the standard and most common FOB term. But some contracts use FOB Origin, whereby the buyer becomes the owner at the time and place the product originates (in the Japanese factory, in our example). Buyers may prefer FOB Origin terms if they feel they can get a better deal on shipping than the seller can. It is important to note that the Uniform Commercial Code (UCC) generally assumes a transaction's terms are FOB Origin if a purchase contract has no specific FOB language in it. This makes the buyer responsible for freight and damaged goods.