FOB (shipping)

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Under the Incoterms 2010 standard published by the International Chamber of Commerce, FOB is only used in non-containerized Sea Freight and stands for "Free On Board".

Incoterms

Under the Incoterms 2010 standard published by the International Chamber of Commerce, FOB is only used in Sea Freight and stands for "Free On Board", and always used in conjunction with a port of loading.^[1] Indicating "FOB port" means that the seller pays for transportation of the goods to the port of shipment, plus loading costs. The buyer pays 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.

The use of "FOB" originated in the days of sailing ships. When the ICC first wrote their guidelines for the use of the term in 1936,^[2] the ship's rail was still relevant as goods were often passed over the rail by hand. In 1954 in the case of Pyrene Co. Ltd. v. Scindia Navigation Co. Ltd.,^[3] Justice Devlin, ruling on a matter relating to liability under an FOB contract, described the situation thus:

"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."^[1] The criterion passing the ship's rail is no longer in use, having been dropped from the FOB Incoterm in the 2010 revision.

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.

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.^[4][5] For example, "FOB New York (Incoterms 2000)". Incoterms apply primarily to international trade, not domestic trade within a given country.

North America

FOB Responsibility for freight costs is determined by the suffix "Origin" or "Destination" after "FOB". "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 individual or organization buying the goods is responsible for freight costs/liability. With "FOB Destination", the sale is complete at the buyer's doorstep and the seller is responsible for freight costs/liability.^[6] Specific terms of the agreement can vary widely, in particular which party (buyer or seller) pays for which shipment and loading 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. 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:

Within the United States, the term FOB is commonly used when shipping goods to indicate who pays loading and transportation costs, and/or the point at which the responsibility of the goods transfers from shipper to buyer.

"FOB shipping point" or "FOB origin" indicates the buyer pays shipping cost and takes responsibility for the goods when the goods leave the seller's premises. "FOB destination" designates the seller will pay shipping costs and remain responsible for the goods until the buyer takes possession.^[7]

Previously, under the Uniform Commercial Code, both "FOB origin" and "FOB destination" left the seller responsible for paying costs of loading goods on board the carrier; hence "free on board". When the buyer was responsible for loading costs as well, the UCC term was "FAS", "free alongside".^[8] Currently, the UCC has removed FOB and FAS leaving the definition of these terms up to the interpretation of the parties or the applicable state's law. Many states have wholly or in part adopted the UCC terms without realizing that the UCC has abandoned the definitions.^[9]

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.

Colloquially, FOB is often stated to mean 'freight on board' as a clarification. However this can actually be confusing and should be avoided as it is not conforming with specified terminology of the UCC.

Sometimes FOB is used in sales to retain commission by the outside sales representative. It is unclear where this originated.

Accounting and auditing (FOB)

In the past, you would be able to determine when title transferred for goods based on the FOB point. 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 buyers 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".

References